Taking Stock


Tony Crowell

Reverting to the Mean

Buying excitement inspired by the news of the successful raid on Osama bin Laden faded in a few hours on the stock market, leaving investors stalemated by absence of any similarly encouraging economic news. The market swings to and fro in response to investor moods of greed versus fear and eliminating a sworn enemy of the U.S. did not erase the market’s current grumpiness.

The Dow Jones Industrial Average stood at 9,605 the day before the 9/ll/01 attacks closed the markets. When they reopened, stocks regained their levels prior to September 11, only to begin sliding again in March of 2002 to a final low below 7500 in October.

In a long-range view, all this could be viewed as the market reverting to its mean return. For almost 40 years prior to 1995, the Dow achieved an average annual return of 10 percent. From 1995 to 2000, this rate increased to 15% in the overly enthusiastic “dot.com” years. The bear market beginning in 2000 more than corrected for these excess returns until the Dow bottomed out in 2002 at 7286.

Stocks got going again with considerable propulsion from the housing bubble to almost a double on October 10, 2007 of 14,078. This, interestingly, restored the 15% annual increase since 1995. The severity of the global financial crisis then took all financial assets down, with the Dow bottoming at 6507 on March 9, 2009.

The subsequent recovery has been at a more measured pace with the memories of those double-barreled declines still painful for many investors. These misadventures find it today with a 7% return since 1995, when the market first began to overshoot from the 10% returns of the previous four decades. Future returns will always be uncertain and stock prices volatile but the overall market is reasonably valued from a long-range viewpoint.

Stocks are up 7% this year despite an agonizingly slow economic recovery.  Two recessions together with the housing crash have drained household reserves. Unemployment remains stubbornly high despite enlightened policies by the Federal Reserve. With interest rates persisting at near record lows, those fortunate enough to have capital available can continue to enjoy attractive stock returns.

Investors should, as always, avoid trying to chase allegedly hot stocks that will make headlines rather than profits. Open Table (OPEN-$91), for example, a new company that makes online restaurant reservations, has 500 employees, $100 million sales and a market cap of $2 billion. Amazon (AMZN-$197) has a market cap of $90 billion but that’s a more reasonable three times its sales-not fifty times.

Intel (INTC-$24) has $43 billion in sales and is selling at only ten times estimated 2011 earnings. Sales growth is continuing in the low double-digits but earnings growth has been flat recently. Technological achievements such as its new “3-D” chip designs will keep its leadership position in the semiconductor industry. Uniquely for the tech sector, it pays a 2.8% dividend that it has increased for seven straight years.

Reinsurance Group of America (RGA-$62) is a new addition to our portfolios. This St. Louis-based global company focuses on life insurance and reinsurance and has more than $2.6 trillion reinsurance in force. 2011 earnings are forecast at $7.14, up 6%, with slightly faster growth expected in 2012. This is a rock bottom P/E ratio of nine. Yield is only .8% but it boosted its dividend the past two years.

Recent health care buy Novartis (NVS-$60) is doing well and remains a buy. Our other stocks are also doing nicely but we are entering the season where the tail winds become light and fitful.

No column for two weeks. I’ll be traveling in Europe but still checking e-mails. Stick with quality.

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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