Taking Stock

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By Tony Crowell
By Tony Crowell

Bad News Gets Higher Ratings

“Don’t sell on strike news” is one of Wall Street’s oldest adages. This appeared in the 1880’s, reflecting a period when the newspapers put labor disputes in bold headlines. The slogan persisted until about fifty years ago as strikes against automakers, coal miners and steel companies faded from the headlines. Before then, developing labor disputes made for dramatic stories. Events like actual strikes often resulted in upticks in stock prices as investors bought in relief that the bad news was behind them.

The principle is still with us. Stock investors invariably focus on well-publicized “story” stocks like Tesla (TSLA-$302), ignoring an unsung stock like Magna (MGA-$39). This Canadian manufacturer of automobile components is down 5% since it reported record earnings a month ago that missed analyst estimates by a few pennies a share. Earnings for this year will be in a range of $5.50-$5.75 a share, a current valuation of only seven times earnings. Its dividends offer a 2.8% yield now with increases for the last seven straight years.

Stock market price action rides in the short-term on investor perceptions of future events, Tesla being a particular example. These perceptions hope to forecast how these events will be received by other investors, as in the “beauty contest” strategy described by John Maynard Keynes.

Lord Keynes developed an analogy to a (fictional) newspaper contest in which the players chose six of the most attractive faces from a field of a hundred photographs. The winners would be those who picked the most popular faces.

A naïve strategy for this pleasant activity would be to choose the player’s picks for the six best. The odds would improve by attempting to predict what the majority perception would be by assessing public perceptions from observation and even media chatter, as some pick stocks today. This could be taken to another level by taking into account assessments of what other players might choose as their own perceptions of public perceptions.

No wonder many investors give up and stick with CD’s even though long-range stock returns have always beaten fixed-rate strategies. The reactions to news events provide insights to group perceptions.

Election results in November that defied almost all predictions came as a surprise that could have derailed the markets. Instead, stocks began a continuing rally with the S&P 500 still up 4% this year despite pausing over the past few weeks. This week, the new Administration launched cruise missiles toward an airbase in Syria and dropped a huge bomb directed toward ISIS strongholds in eastern Afghanistan.

These are major military actions that revive memories of the Cuban missile crisis. The stock markets then stayed flat for the famous “thirteen days” of suspense, and then resumed their long-range uptrend. Even with an upcoming three-day market holiday, investors seem unruffled and stocks continue to mark time.

Apogee Enterprises (APOG-$51), a new buy, overreacted to news. The Minnesota-based company is a leading manufacturer of glass walls, windows and film coatings for institutions, commercial buildings and electronic displays. It announced quarterly earnings of $.60 a share, up 16% from 2016, and forecasts sales growth of 10% this year and earnings per share of $3.35 to $3.55, up 30%. Sales are $1.1 billion and dividend yield is 1.0% with increases for five straight years.

The investor credited with “Don’t sell on strike news,” Addison Cammack, was a legendary Wall Street “bear” known as “Ursa Major.” He tacked against publicized news events, and took positions on important but slower moving forces like crop reports.

Although hardly a slow moving field, Artificial Intelligence (AI) is complex and not as dramatic as bombing countries. Among current buys, Amazon (AMZN-$885), Apple (AAPL-$141) and Nvidia (NVDA-$95) combine brains with strong management and finances. IBM ($169), a potential buy, is betting the company on AI and is a good bet now for patient investors.


Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622


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