‘The Times They Are a Changin’
Tariffs on steel and aluminum were followed by $60 billion of targeted tariffs against China, whom Mr. Trump has labeled an “economic enemy.” After a record period of serenity beginning in late 2016, THIS accumulation of disturbing news events rattled investor nerves. Stocks were off sharply for two straight days, dragging the S&P 500 into negative territory for 2018.
Concurrently, newly appointed Fed Chairman Powell presided over his first policy move as the Fed raised its interest rate target to a range of 1.50 to 1.75 percent. Economic news, both here and abroad, is favorable. Unemployment is low and falling, inflation is low and stable and financial markets remain buoyant despite reoccurring squalls like the recent tariff surprises.
The Fed noted that the U.S. economic outlook had strengthened in recent months. Gross domestic product growth is now expected to rise 2.7 percent this year, up from recent projections of 2.5 percent, the jobless rate is expected to decline to 3.6 percent while inflation should rise to just slightly above the Fed’s target of 2 percent.
The Feds message is that rapid economic growth may be more sustainable than prevailing beliefs. This is contrary to fears of a trade war that frightened stock investors. Such uncertainties suggest that stock investors who have seen substantial gains from strong growth in our favorite technology stocks should consider well founded asset rich companies with less spectacular but more stable earnings growth. I recently added Merck MRK-$54) and Royal Dutch Shell (RDSA-$62).
There will always be price shakeouts and these should be viewed as chances to add to quality growth. My favorites remain Apple (AAPL-$168), Amazon (AMZN-$1,544), Applied Materials (AMAT-$58), Broadcom (AVGO-$243, Edwards Lifesciences (EW-$137), Lam Research (LRCX-$214), Microchip (MCHP-$96) and Nvidia (NVDA-$241).
Facebook’s (FB-$164) careless privacy practices knocked twenty points off its stock price, sending shocks through the notorious ‘FANG” group. (Facebook, Amazon, Netflix and Google). Amazon has been our only member of this group. I don’t expect that to change although I am adding FANG as a new buy of Diamondback Energy (FANG-$127).
In the developing group of more stable growth, I am adding The Midland, Texas company was started only five years ago to exploit the shale oil revolution and blew from $15 million sales to $2 billion. Management carefully held its debt-to-equity ratio to a modest 28% while many of its larger competitors are now in triple-digits.
Earnings for 2018 are currently estimated at $6.95 a share, up from $5.18. Crude oil prices are always volatile but are currently at three-year highs with inventories low. Its next earnings announcement will come after April 30 and I suggest taking initial positions now while the overall market is hiccupping.
DowDuPont (DWDP-$65), with $200 billion assets, is the product of a merger that took almost two years to survive myriad regulatory issues. As planned, within 18 months from August 31, 2017 the company will split into three publicly traded companies. These will focus on agriculture, materials sciences and specialty products.
Breaking up will be easier than coming together and I expect they can manage the three-way split in a year’s time. Typically, a division into three or more public companies usually results in the stock prices of the parts surpassing that of their parent. DowDuPont currently offers a dividend yield of 2.3% that I expect will be sweetened within the next few months. The days of rapidly growing stock prices might be fading but new opportunities will always develop. As Bob Dylan sang, “For the times they are a’changin.”
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