Taking Stock

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Tony Crowell
By Tony Crowell

Real News Needed

Stocks closed the quarter with a badly needed up day. Despite that last-minute boost, they still ended the third quarter down 7% on the S&P 500, which left them also down 7% for the year-to-date. This quarter was the worst in four years and the best thing that can be said for it is that it was an orderly retreat. There were no evident signs of forced selling of quality stocks to meet margin calls nor were there outbreaks of panicked selling, never a successful strategy.

Price/earnings ratios were lowered on the “Price” side. Earnings reports begin next week and should also improve P/E ratios with mild improvements to the “Earnings” denominator. Based on current estimates, the P/E of the overall S&P 500 is 19, above average but well below prior peaks. Decent earnings reports could provide a rational basis for price improvement during the coming quarter. It will probably take more than a few good earnings reports, however, to jolt the overall market into positive returns for 2015.

Despite disappointing price action, news developments among our stocks were favorable. Apple (AAPL-$108) is now off 15% from its peak this summer even though its sales are soaring. Large, successful companies sometimes stagnate but Apple is maintaining its vigor even though its growth will inevitably taper as a function of size. It will report its latest results around Oct 27 with current estimates of $1.88 up from last year’s quarter of $1.42, and bringing its September fiscal year to $9.13, up from $6.45.

That’s a P/E of 12, absurdly low for this level of growth and a 1.9% dividend yield with highly probable increases lying ahead makes it a remarkable value. Its prominence insures that carping critics jostling for media attention will find excuses for complaint. Their comments are of much less value.

Our second largest position, Novo-Nordisk (NVO-$54), already the world’s leading provider of diabetes treatments, obtained FDA approval for its long-lasting insulin drug, Tresiba. Already sold in 30 countries, Novo-Nordisk will launch the drug early next year in the U.S. Relatively unknown here, the company has steadily growing sales of $15 billion, an earnings growth rate over 15% and a dividend yield of 1% with increases for 18 years.

Amgen (AMGN-$137) is among the more reasonably valued biotech stocks, possibly as it is losing patent protection exclusivity on two drugs. Others like arthritis blockbuster Enbrel have extended protection and it has 40 product candidates, with 12 in Phase 3 trials. Its 2.4% yield is the highest in the biotech sector.

Among our financial stocks, Blackstone (BX-$30), just spun off PJT Partners (PJT-$21), a financial advisory firm, to Blackstone owners on a 1:40 basis. Blackstone is quite profitable with a current 9% yield but its variable earnings seem to have spooked some analysts. It reports in two weeks.

BlackRock (BLK-$292), the very large asset manager with over $4 trillion under management, will report on October 14. Its overseas operations will occlude results but I expect the company to report growth picking up in the next quarter.

Visa (V-$69) reports October 27 and analysts expect continuing growth in the 14%-18% range. The P/E is 26, high but steady growth keeps it at the top of the pack in worldwide electronic payments. Yield is 0.7% with increases for the past six years.

Disney (DIS-$102) was hammered after a mild shortfall in expected earnings provoked panic that cable television is doomed. This ignores its movie studios, theme parks, network programming and its enormous production of media content. Earnings due November 5 and are expected to take this September fiscal year to $5.05-$5.10, up from $4.32.

Earnings announcements over the next few weeks will be a welcome change from the previous unending speculation about Federal Reserve intentions. Interest rate news will be back but real earnings news might restart market momentum.

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


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