It’s Almost Over
Hurricane Sandy forced the stock market into a rare two-day shutdown. This was the first two-day weather closure since the Blizzard of 1888 that brought 40 inches of snow to the Northeast. After 9/11, the markets closed for four days.
There have been other closures, sometimes for happier events, particularly to celebrate the Armistice in 1918 and V-J day in 1945. During the 1929-33 period, there were numerous closings including one for ten days in March of 1933. When the market reopened after that record recess, stocks doubled in four months. That’s well above average although the pattern in 4 out of 5 closures has been an initial dip, then a rally to a higher close in two weeks.
October 29, 2012, the first day the markets closed, also was the anniversary of the market crash in 1929. Were there that not enough to spook investors, we are, of course, in the final lap of a hotly contested race for the Presidency. There also remain unsettled issues in the Euro Zone and with our “fiscal cliff” of poorly conceived Congressional attempts to escape responsibility for its inability to act in the national interest.
With all these arrows in the air, it would be understandable if investors fled the scene. Indeed, there was a minor dip on the first day that trading reopened, however, investors then began November with enthusiastic buying that sent the Dow up well over 100 points. This might be nervous relief that the trying month of October was finally over although it seems more solidly grounded in positive reports of improving employment and continuing economic growth.
Such market resilience in the midst of multiple anxieties indicates underlying buying strength. The market remains in a “correction” that will require several more days of buying on increased volume to confirm a reversal. Pending this, investors should tread lightly, reserving buys for only the soundest stocks. With low interest rates and overall higher corporate earnings, improving retail sales reports could prompt a year-end rally.
Prevailing anxieties have kept most stocks at moderate valuations. Apple (AAPL-$595) is a leading example. Current estimates for its year ending next September are for earnings around $50.00 a share, up 22% from this year. That equates to earnings increasing rate in excess of its price: earnings ratio of 12, a traditional, but seldom achieved, benchmark for judging growth stocks.
The critics’ reaction to its last quarterly report created this bargain. Earnings fell short of estimates even though they were up 24% on a 27% sales increase. Such a big company invites lots of catcalls from the bleacher seats and sensible investors should build positions to at least 10% of their portfolios. Apple will sell hundreds of millions of its new products, probably exceeding lowered “expectations” for this shopping season. It even pays 1.8%.
There are other developing bargains like ConocoPhillips (COP-$58), which exceeded forecasts for the fourth time in five quarters. It is selling for less than 10 times forward earnings and its stock has developed a bottoming base since its spin-off of Phillips 66. It yields 4.6% and has raised its dividend for five straight years.
Cummins (CMI-$98), the well managed maker of diesel and natural gas engines, slumped as concerns grew of the strength of its industrial sector. After bottoming around $86, it tacked on 10 points but is still selling for less than 10 times earnings. Yield is 2% with dividend bumps for 6 straight years.
The big banks continue to make more news than progress in the much-watched financial sector. My single bank recommendation, U.S. Bancorp (USB-$33) is making steady gains, trading near its 52-week high. Aflac (AFL-$50), my only insurance recommendation, made a 52-week high and increased its dividend for the 30th straight year.
Insurance stocks can be quite profitable. The tragic damage of the hurricane will impact their results but these effects are often exaggerated in their stock prices. Two for the watch list are Ace (ACE-$78) and Everest Re (RE-$109). A stable way to wait out developments is with Federated Enhanced Treasury (FTT-$14), a closed end fund yielding 6% in monthly distributions.
By my next column, the election will be over. The odds favor the reelection of President Obama. Wall Street has probably anticipated this result, thus any market reaction will be short-term. Removal of this current uncertainty should remind investors that the fundamental things apply.
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/