Taking Stock

Tony Crowell

Weeding And Seeding

Stocks appear to be firming up as if they were going to the gym for workouts instead of to their creditors for financial workouts. Some of their support is coming from an absence of any more dramatically bad news from Europe. Those troubled economies are prompting companies with global sales to temper their forecasts for the next quarter.

Actual earnings reports are, by and large, beating estimates for the June quarter although some of this may be due to analysts having previously lowered the bar. The difference today is that even a small miss three months ago usually triggered bursts of selling. These setbacks interrupted a nice three-month rally and sent stocks into a swoon in May.

The critical responses now are not nearly as pessimistic. For example, Qualcomm (QCOM-$58) lagged estimates for both sales and earnings but jumped two points based on increased sales in developing economies. It then added two more points the next day on expectations that its chips will be used in the new Apple iPhone coming this fall.

Yum Brands (YUM-$66) also missed estimates as sales and profit margins slumped in China. The company said it expected these problems to be short-lived and forecast a return to double-digit growth by yearend. It then reversed a short-lived dip and rose two points.

Despite sliding 3% in the June quarter, such favorable responses to company reports have taken the market to a 9% gain so far this year. This isn’t bad in the face of all the frantic news bulletins and anguished handwringing provided by financial commentators.

The majority of companies have not yet reported but the reactions to those who have so far indicate a continued tolerant market for the next few weeks until this season of reports is over. That takes us to August with its usual summer lull in the stock market.

Investment returns superior to market averages come from continual tuning and improving, like curating an art collection. With the market steadying, at least for the moment, it is timely to weed out underperforming stocks to raise cash for more promising opportunities.

Among those that I like better now are leading companies in the agricultural sector. The severe drought and heat conditions in the nation’s heartland with the accompanying water shortages are part of a global trend attributed to global warming. Corn and soybean crop failures lie ahead, bringing demand for drought-resistant seeds.

These come from biotech approaches to plant and fruit genetics, resulting in genetically modified seeds that can help them resist pests, herbicides and drought. This is a controversial topic, particularly in Europe, but over 90% of this country’s corn and soybean crops already include genetically modified traits.

The three biggest U.S. producers are Monsanto (MON-$87), which has disappointed Wall Street more than once by promising earnings it could not deliver. DuPont (DD-$49 and Syngenta (SYT-$68) have better records and more promising futures.

The agricultural section of DuPont makes up 24% of its sales and is growing rapidly. It includes Pioneer Hi-Bred, the world’s largest seed company. Analysts look for $4.25 earnings per share this year (up 16%), increasing by at least 11% into 2013. Yield is 3.6% with earnings coming on July 24.

Swiss-based Syngenta is not well known despite sales of $30 billion and earnings up 25% this year to around $4.34, growing by 13% into 2013. Among its latest products is the first spray on product to protect field crops from drought. Yield is 2.2% and both stocks are buys.

Another major trend is the continuing record low interest rate environment. The Federal Reserve has a dual mandate of protecting the currency and promoting employment. Weakness in the Euro Zone is providing strength to the dollar, giving it the room to pledge low interest rates until 2014.

That’s a lovely playing field for Annaly Capital (NLY-$17), a mortgage REIT that borrows short-term and invests in government agency guaranteed AAA mortgage-backed securities. The primary risk is a rise in short-term interest rates, which would squeeze its investment margin. The yield varies, but is currently 12.8%, a compelling reward for this calculated risk.

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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