Taking Stock

Tony Crowell

The Signal From Europe

The latest attempts by European leaders to rescue their continent from its debt crisis are encouraging but not conclusive. This is a complex problem that continues to enhance the relative merits of stocks in companies focused outside the Euro Zone. Solidly financed global companies like Spain’s Telefonica (TEF-$22), Denmark-based Novo-Nordisk (NVO-$110) and Switzerland’s Novartis (NVS-$59) continue to enjoy rising earnings and their stocks remain buys.

In this country, the stock market has been plagued by fears of deficits and debt defaults rather than by reliable signs of economic retraction. To the contrary, domestic economic indicators have steadied. Corporate earnings continue to show overall gains, pushing stock valuations into even more reasonable figures. This is solid ground for sensible value investing in stocks in companies that can manage rising sales and earnings in these challenging times.

Inning-by-inning reports of currency negotiations in Europe push the stock market to and fro but U.S. economic recovery and accompanying corporate earnings progress are the key factors. The audience remains quite critical and even slight disappointments have pummeled stocks like Amazon. Overall, there are scattered signs of a pickup in the economy and the market’s willingness to press ahead despite unresolved uncertainties is an encouraging signal of higher prices ahead.

Our market surge is a sign of its underlying value and built up buying pressure. Europe still has major problems to address, particularly in Italy, its third-largest economy. The U.S. has its own fiscal issues but a persistently recovering economy will do more to ease deficits than any amount of political blustering.

With interest rates at near-record lows, valuations reasonable and the economy recovering, even at a weak pace, this looks like 2011 will finish on a strong note. Investor nerves are still frayed and there is no need to test our own by chasing the riff raff darlings that make headlines when there are so many quality opportunities available.

Regional banks have stayed clear of the minefields that still hobble the big money center banks. Rather than gamble that Bank of America can continue to avoid failure, I recommend US Bank (USB-$26), which has sensibly expanded from its Minnesota base to become the fifth largest commercial bank in the U.S. It recently announced record earnings, trades at 11 times earnings and yields 2%. This may not be as exciting as owning stock in some Chinese Internet company but it should be more rewarding.

ITT (ITT-$44), once a headline conglomerate, is continuing its process of disengagement. On October 31, it separates into three listed companies in three sectors: defense, industrial products and water treatment. Its price flared to $60 after these spin-offs were announced in the spring, but failed to regain investor interest after the summer market swoon.

I expect the sum of the parts to trade higher with a half dozen point aggregate increase by yearend. The package trades for 10 times earnings now with a 1% yield. The water company looks particularly attractive, the defense company less so, and I plan to be selective as to which companies we retain.

Safeguard Scientifics (SFE-$18) continues to provide a successful method to invest in smaller companies. It owns interests in 13 early-stage tech and life science companies, which it calls “partner” companies. Sales of its stakes in other partner companies have left it with over $12 in cash per share, thus these 13 investments are undervalued at less than $6. Safeguard is currently trading at less than its book value. All the partner companies are doing well and current market conditions are likely to boost its underlying investments and its stock.

Momentum is returning to quality stocks. This has been a trying year but patience is being rewarded. There will doubtlessly be further trying times and memories of recent market dips may revive panicked selling. That has never been a successful investment strategy but careful selection of quality stocks with rising earnings works quite well.


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 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com



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