Taking Stock

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By Tony Crowell
By Tony Crowell
Stocks For Going Steady

Once again, stocks slumped for several days, prompting the media to sound storm warnings. Led by tech and biotechs, stocks then caught their breath, put together a string of rallies and reassumed their uptrend. These elastic rebounds are remarkably consistent but raise concerns as the bull market continues into its seventh year.

Bull markets always climb “a wall of worries” and this year has been no exception. Many of the prevailing frets passed or were deferred like the Greek fiscal crisis and the Chinese stock market reaction to its monster rally. In the first quarter, GDP growth was only 0.6% annualized, increasing to a still modest 2.3% rate in the June quarter.

That’s still tepid but it may be enough to persuade the Fed to allow the long discussed return to interest rate increases in September. It has reiterated that it will move only when data reflect an optimistic growth outlook. The interest rate increase, whenever it comes, will doubtlessly panic unprepared investors but it will actually signal a stronger economy.

The slow but steady pace of recovery since the economic crisis contributes to the increasing longevity of the bull market. The S&P 500 is selling for about 16 times expected earnings, about 6% higher than its 25-year average. This is not alarming although it does highlight the importance of picking stocks with superior growth rates.

These advantages have not escaped notice and the NASDAQ index of over-the-counter stocks is up 8% this year while the popular Dow Jones Average of 30 less agile stocks remains down slightly. The leading sectors are technology, medical and biotech stocks. Those who clung to the wreckage of traditional oil, auto and commodity stocks have not had a good year.

I continue to emphasize leading sectors and stocks in my portfolios, pruning the laggards. My newest buy recommendation is Cognizant Technologies (CTSH-$62). This company provides information technology and business process services worldwide. Like most in this field, much of its operations are in India, but Cognizant is unique in basing its headquarters in New Jersey. Formed as a subsidiary of Dun and Bradstreet, it has grown to over $12 billion in sales.

Earnings growth rate over the last five years was 20%. This pace is slowing to the low teens but easily supports a Price/Earnings ratio of 20. Its next quarterly announcement comes before the market opening on August 5 and I am taking initial positions now.

John Maynard Keynes, the prescient economist, was also a successful stockpicker. He compared picking stocks to a beauty contest run by English newspapers in the 1930’s in which the papers would publish 100 pictures of pretty girls and contestants would choose six. The winners were those who came the closest to the consensus of all the entries.

Lord Keynes commented that it was hard enough to pick companies with sound prospects but that it also seemed necessary to pick those that you predict others will choose. “Expectations” in the stock game produce illogical results Amazon bounced up 20% on “blowout” profits of $92 million on $23 billion in sales. Meanwhile, Apple dropped 10% on profits over $10 billion on $49 billion in sales.

Rather than rely on guessing “perceptions,” investors should always remember that the fundamental things apply. Beauty contests make short-term headlines but I feel that long-term relationships are more rewarding, both with stocks and people.

Amazon looks like a blue chip compared with some of the frothy new startup companies like Jet.com. It intends to undercut Amazon by using its $225 million cash to offer deep discounts. The company plans to lose money on every shipment for five years, staking its success on selling memberships to customers, as does Costco.

I believe in successful long-term gains. Apple (AAPL-$122) and Costco (COST-$122) are keepers.

 

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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