Taking Stock

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Tony Crowell

Stocks are going through a “correction,” normal behavior after a satisfying advance so far this year. Investors remain quite sensitive to company events and the forthcoming round of quarterly earnings reports will be critically judged. Last quarter’s reports produced some disappointments. These prompted analysts into downward revisions on many stocks for this quarter and all of 2012. A decent round of earnings against these expectations would set the stage for a yearend rally.

The event dominating investors at the moment is the pending Presidential election, which became more of a horse race after the first debate. Debates are big events for the media, which can get lots of viewers for a concentrated spot in a lengthy campaign. It’s a blessing they haven’t divided it into rounds with interim commercials.

Like any publicized event, the debates invite critics who make their living by discussing what happened. When a result is indicated, such as the negative reaction to President Obama’s performance, succeeding rounds of critics usually magnify the conclusions reached in an earlier round in order to draw attention to their own comments.

I see this frequently in the stock market when a development in a company is first noted by one analyst. Stock analysts are generally compensated by the size of their followings and it is often not long before results of the first report spread like ripples when a rock is tossed in a pond.

This happens more frequently with newsworthy stocks like Apple (AAPL-$631). One negative comment about something like a delay in new iPhone availability can bring such increasingly gloomy forecasts that one wonders how the company can avoid bankruptcy. These cautions have clung to Apple since its stock was trading in single digits but it has managed to survive its critics and become the largest private company in the world.

As the composer Jean Sibelius observed, “A statue has never been erected in honor of a critic.” In stocks and, perhaps, in politics, criticism often breeds overreactions that can be useful. Bristol-Myers (BMY-$33), for example, dropped 10% this summer on comments that it was paying too much for an acquisition. The company bought, San Diego-based Amylin, was not cheap at over $5 billion but it had won FDA approval for a weekly diabetes self-administered shot with a monthly treatment in the pipeline.

BMY’s stock price has not yet recovered and its next report should provide some positive momentum. Meanwhile, it yields slightly over 4%. This is a similar yield to that of Digital Realty (DLR-$67), which missed second quarter earnings forecasts and also sagged about 10% this summer.

DLR is a real estate investment trust that owns over 100 data centers in North America, Europe and Australia. This provides strong cash flow and opportunities for growing dividends, which the company has increased for six straight years.

Among other growth areas, DLR will benefit from legislation that will require hospitals and physicians to achieve digitalized medical records by 2015. This will also increase the sales of Cerner (CERN-$73), the leader in healthcare information technology. It joins the others in having missed earnings predictions by a few pennies three months ago with subsequent price action that has enhanced its potential. It has the highest price: earnings valuation in this group and also the highest sustained growth,

As a registered investment advisor for almost twenty years, I am well aware of how much easier it is to express an opinion or a criticism on a stock or the market than to produce real investment returns. This seems true in most demanding fields and I have never heard an actor nor an author speak highly of a critic. Political candidates chose a field in which they are subjected to continual criticism but I feel that critical attacks on them may often be motivated by the self-interests of the critics. The same goes for stocks.

President Kennedy often quoted a poem by the matador Domingo Ortega.

Bullfight critics ranked in rows

Crowd the enormous Plaza full

But only one is there who knows

And he’s the man who fights the           bull.

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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