Walking A Tightrope
Stocks continue to walk a tightrope above the perils of some country fleeing the Euro Zone or of this country falling off the dreaded “fiscal cliff.” Our political campaign exacerbates these dangers yet the stock market keeps on rolling. As we move into fall, the averages are all holding above their psychologically significant levels of 13,000 on the Dow Industrials, 1,400 on the S&P 500 and 3,000 on the NASDAQ.
The market’s tightrope act is less dangerous than it may appear as it is working above a safety net. Low interest rates, active support by the Federal Reserve and reasonable stock valuations in an improving economy would cushion any fall. A short-term dip would not be surprising, as the market has had a pretty good run this year. The S&P 500 is trading around 1430, up 14% for the year so far, having broken its April high of 1419.
It still has room to grow in order to reach its historic high of 1565 set in October of 2007. That would require the market to climb 9-10%, less than its gain year-to-date. I doubt that we will see a new record this year, however, new highs by Christmas 2013 are quite probable.
In the meantime, the stock market will fluctuate, that being the nature of any market. Many investors try, usually unsuccessfully, to guess where the stock market is going. This rarely works as even a lucky guess may help an investor sell before a market dip, yet such lucky fellows never manage to get back in time to catch the surge back up.
Stock price volatility is increasing, making it more difficult to identify market trends, much less forecast them. Price swings together with a parade of unsettling news have scared many investors into bonds with record low yields. All this has brought a market trading at an overall valuation of about 15 times earnings, which leaves substantial upside room.
The market is currently in an uptrend but its sensitivity to news events demands that investors anchor their portfolios in large, companies with proven and forecast abilities to grow earnings in a challenging environment. Apple (AAPL-$676) is the drum major leading this parade. It is trading at 15 times earnings, the same as the overall market, yet its financial and innovative strengths will carry its sales and earnings at double-digit rates in the foreseeable future. Apple will release fiscal year earnings in late October and the weeks leading up to its earnings releases often see minor dips as analysts fight for airspace with negative forecasts like children crying for attention.
Other solid anchors include TJX (TJX-$46) and Simon Property Group (SPG-$159) in consumer stocks. USB (USB-$34) and Aflac (AFL-$47) are banking and insurance standouts while IBM (IBM-$199) and General Electric (GE-$21) are growing with the industrial recovery. Novo-Nordisk (NVO-$160) and Abbott Labs ($67) lead the medical sector.
Bristol-Myers (BMY-$33), Intel (INTC-$25), Exxon (XOM-$89) and DuPont (DD-$49) are solid blue chips whose growth rates have moderated, partly due to their size. Stock portfolios can often benefit from the gravitas provided by stocks like these, a quality even more appreciated during market dips. Their average yield of 3.5% with steady dividend increases enhances their value.
Successful stock market investing demands discipline but its sporting element allows an occasional carefully chosen unseasoned play. This does not mean the overly publicized stock of the month like Facebook or Netflix but one with solid underpinnings like Mercado Libre (MELI-$82). This young Buenos Aires-based company is the eBay of Latin America.
It is trading at 30 times forecast earnings, a bit rich, but it has been growing its sales and earnings at rates over 30% and has barely scratched the surface of its potential market. Amazon made a brief foray into South America while eBay gives MELI a vote of confidence with its 18% ownership stake in the company. There is even a 0.5% dividend yield. Adios y buena suerte.
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/
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