Taking Stock

Tony Crowell

A Facebook in the Crowd

Facebook is back in the headlines with its public stock sale coming in a week. This promises to be a very hot offering with most underwriters taking firm orders only from their larger customers. Those who can’t get in should take comfort in the knowledge that its stock price for the IPO is indicated in a range from $28 to $35. That means it will be selling initially at about 100 times earnings, a higher ratio than 497 of the 500 stocks in the S&P 500.

Google’s $200 billion market cap is twice that of Facebook’s. Google’s sales are ten times Facebook’s. The social media Internet sector is in fashion now but its lasting value is still unproven. In somewhat related areas, Groupon, the Internet coupon company, and Pandora, the Internet radio company are both off more than 40% from their IPO prices.

In my first column of 2012, I wrote “The Facebook frenzy reminds me of Webvan, an online grocery business founded during the dot.com book in 1999 and bankrupted in 2001.” When published then, Apple was trading around $420. It’s up 36% in four months.

Apple is an investment. Facebook may someday qualify but it is now a talented minor leaguer with a good chance to make the majors. Buying stock in “hot” IPO’s like this (if you can get any) may produce a quick gain but investment success demands finding better reasons to buy anything beyond the belief that you can unload it on someone else.

There is nothing wrong with the occasional speculation provided that it is recognized as such and that other assets are solidly grounded in true investments. Speculations work better when the market is in a more euphoric mood. Currently, the market’s reaction to any disappointing news is like stripping a Band-Aid off a child.

Fossil, the watch and handbag maker, dived 40% after reporting first-quarter sales that were up only 10%, well below Wall Street expectations. This triggered nervous selling in high-end fashion apparel and accessories including our Michael Kors (KORS-$40.  I recommended Kors in February at $42 and believe it will take market share from Ralph Lauren.

It’s a good practice to pair the occasional fling (only in stocks) with steadier partners. In retail, TJX (TJX-$42) the off-price retailer, keeps posing good numbers on the scoreboard. It yields 1.1% from dividends that it has increased for 15 straight years.

Aflac (AFL-$43) beats that with almost a 3% yield on dividends bumped for 29 years. This is the insurance company that advertises with the duck. It has a substantial business in Japan, a drag on results for a decade, with signs now of improvement. Its stock trades at less than eight times earnings, to which Daffy Duck would say, “That’s ridiculous.”

Wall Street seldom gets excited about insurance companies, probably because they emulate investment banks in fouling up their financial results with their investments. I recommended ACE Limited (ACE-$77) last month in view of its excellent record of not only increasing its underwriting results but also surviving the turbulent testing period of the financial crisis with a far better record than most. It has increased its dividend three straight years after that period and now pays 2.2%.

Still using dividends as guideposts, U.S. Bancorp (USB-$32) yields 2.5% and has increased its dividend for 40 straight years, a record that makes the much-publicized money center banks look, well, ridiculous. Outside finance, Northwestern Energy (NEW-$35) continues to produce steady results with good growth prospects from new oil exploration in its territory. It pays 4% with six years of increases.

These stocks will provide sound returns whatever happens to the Facebook frenzy. No column for the next two weeks while I’m out of the country.

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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