Taking Stock

Tony Crowell
Tony Crowell

Industrials That Are Above-Average

Three factors make up stock prices: earnings, dividends and multiples of earnings. Earnings dominate and are presently on track to deliver their sixth record quarter over the past seven earnings seasons. Compared with 2013, profits for the third quarter were up 10% year-over-year.

The December quarter appears to be slowing to around a 5% growth rate with a stronger dollar and weaker oil prices producing crosscurrents. A strengthening dollar pressures exports while softer energy prices impact our large energy sector. These factors are longer-term boosts as a stronger dollar aids consumer purchasing power as also does the drop in gasoline prices below $3.00 a gallon for the first time in four years.

Consumers account for around 70% of Gross Domestic Product and increases in purchasing power and confidence are making timely appearances before the holiday shopping season. Corporate profit margins should remain high amid increased consumer and business spending.

Dividends track earnings and enhance investment returns, particularly during periods of lower interest rates. Compared to previous bull markets, expansion of multiples of earnings remains surprisingly restrained, probably because of residual fears from the scars of the “Great Recession” of 2007-2008. We will certainly experience flare-ups of market volatility in coming months but successful investors will ignore distractions and uncertainties and focus on the underlying strengths of the U.S. economy.

Technological, medical and biotechnology stocks continue to lead the market. As the economy regains traction, industrial stocks are gaining relative strength. General Electric (GE-$26) has been a drag on our returns for too long but it is finally showing returning vigor.

For the last five years, GE has mirrored the action of the Dow Jones Industrial Average, which it joined in 1907. Earlier this year, as the Dow began making new highs, GE stock sagged until the beginning of November when it finally picked up momentum, currently running 10% ahead of the Dow.

Besides indicating a revival of interest in GE, its infrequent leaping ahead of the Dow has often been a leading indicator for the overall market. Analysts estimate 5% sales growth for the current quarter but only a few pennies earnings increase. GE just opened a large R&D facility in Brazil, its first since one in Munich ten years ago. This indicates its increasing emphasis on advanced manufacturing which may spark more life in its stock price.

Industrial growth means increased business for Cummins (CMI-$143). The company continues to build market share through its advanced Diesel engines, which add efficiency and reduce emissions. Sales were stagnant in 2012 and 2013 but it recently announced that its September quarter results beat analyst estimates for both sales and earnings.

Even better, it forecast growth for all of 2014 of 10-12% (up from 8-11%) and announced improving profit margins. Cummins increased its dividend and now yields 2.1%. Its business is cyclical but the company is in a sweet spot in its cycle.

Here in Orange County, we were named in a Wall Street Journal survey as one of the 16 areas in the country with above-average numbers of problem brokers cited with regulatory complaints. The common factors were above-average numbers of affluent senior citizens who seem to be susceptible to invitations or advertisements of free dinners with investment “seminars.”

A fundamental economic principle is that there is no free lunch. Another is that thoughtful, patient investments can enhance or enable enjoyable retirement years.

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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