Taking Stock

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Tony Crowell
Tony Crowell

Opportunity Rising

The Old Year fled as the New Year stumbled in without the usual year-end “Santa Claus Rally.” Oil prices continued their collapse with the spillover impacting all commodity prices. On balance, these drops are a net benefit for the global economy but the immediate effects on investors are heightened anxieties, particularly as many equate increased volatility with increased risk.

Volatility and risk are different but they become jumbled together when investors lose their long-term perspectives and are swept into swirling eddies of short-term reactions. Tumbling oil prices turn into lower gas pump prices, becoming popular fodder for “breaking news.” There’s nothing broken in this sector as prices are responding to an unusual supply and demand convergence.

The Economist listed four major factors. First, demand worldwide is low due to a halting recovery from depressed conditions brought on by the financial crisis while efficiency and alternative fuels are finally having some impact. Second, conflicts within Iran and Libya have not affected their oil output. Third, the United States has become the world’s largest oil producer. It is not yet a net exporter but we are importing less. Fourth, Saudi Arabia and their Gulf partners are not cutting production in order to keep market share and frustrate countries they detest like Iran and Russia.

These factors will change over time, restoring the fortunes of solid energy companies like Chevron (CVX-$110), EOG (EOG-$87) and Schlumberger (SLB-$82). Marginal companies dependent on fracking will suffer and this is no time for “wildcatting” in small company stocks. There are increasing reports of earthquakes in the Midwest in areas that have been subject to fracking and such activities will become less favored rather soon.

The famous Keystone Pipeline may be deferred as prices change and other pipelines are completed in Canada. Its owner is TransCanada, and I have always found it odd that such political heat has been generated over a project benefitting a Canadian company. Deferral will continue to encourage shipments by rail, thus keeping Union Pacific (UNP-$116) as an attractive buy.

With all this fuss over gas prices, interest rates, the dominant market topic during 2014, has stepped offstage. A year ago, it was a truth universally acknowledged that interest rates would rise during the year. They didn’t and interest rates have actually dropped recently as anxieties rising from oil price and other sector volatilities have driven investors into the apparent safety of bonds.

Deflation, not the traditional specter of inflation, is the most critical issue facing central banks worldwide. The U.S. is showing signs of more vigorous economic recovery but Europe and Japan are fighting stagnation. This suggests an extended period of benign interest rates, which would further enhance the stocks of growing companies with rising dividend distributions.

I am adding Costco (COST-$145) as a buy. Earnings have grown and are forecast to continue in the 10%-12% range with dividends raised for eight straight years. Management, service and employee relations are exemplary. Lower gas prices will boost sales.

United Parcel Service (UPS-$110), also with eight years of dividend bumps, is an excellent stock for retirement accounts and FedEx (FDX-$174) has resumed climbing. Three tech stocks offer rising earnings and rising dividends, scarce in this vital sector. Intel (INTC-$36) Applied Materials (AMAT-$24) and Taiwan Semi (TSM-$21) are buys.

Amgen (AMGN-$157), unique among biotechs, offers a 2.2% dividend yield with increases for three years. No dividends but explosive growth potential are available from Actavis (ACT-$269), Celgene (CELG-$115) and Illumina (ILMN-$196).

Pullbacks of 5% to 10%, such as the New Year surprise, happen every quarter or so. In the absence of fundamental changes, investors should view them as opportunities. As the Doors sang, “The future’s uncertain and the end is always near.” Uncertainties will always accompany the stock market. Investors who do not give in to anxieties will profit.

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 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

 

 

 

 

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