Taking Stock

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Tony Crowell
Tony Crowell

Good Bye, 2015; You’re Flat

Time is running out for the stock market to put any exciting numbers on the scoreboard. With only one trading day left, both the S&P 500 and the Dow Jones Industrial averages are at the same levels at which they began the year. This flat performance is disappointing and it helps to take a longer view with stocks. Returns for the three-year period for the S&P are still an above-average 16% and an average 10.4% for five years.

Unless an investor loaded up on gold, oil and other commodities, which lost a quarter of their value, returns were flat across the board. Long-term bonds lost two percent and cash is up all of a tenth of one percent. Wall Street forecasters are projecting these results to continue, confirmation of Mr. Warren Buffett’s comment that the principal benefit of stock market forecasters is to make fortunetellers look good.

Returns varied considerably among stock sectors and individual issues. Apple (AAPL-$107), the biggest position among my clients, was up 3% for the year, lagging its earnings growth. The company has the largest valuation of any private company and over $200 billion in cash or equivalents. Its size draws critics and their constant grumbling about perceived concerns seems to keep its valuation lower than one would expect for its success.

iPhone shipments are the current nervous news topic and Apple has consistently outperformed such predictions. Current Wall Street estimates are for 3-5% declines in iPhone shipments although more measured estimates are for 5-10% upside gains, aided by new models.

Even on pessimistic sales forecasts, earnings for 2016 are forecast at $9.75, up from $9.22, and $10.69 for 2017. I think these numbers are at least ten percent too low but even at these estimates, its stock is selling at only 11 times next year’s earnings. Add a 1.9% current dividend yield with that large cash positions assuring future increases and this is a core investment holding.

My second largest position, Novo-Nordisk (NVO-$58) was up 39% this year, boosting it to about 30 times earnings. It is based in Denmark and employs over 40,000 people. Earlier this year, Harvard Business Review rated its CEO, Lars Soerensen, the #1 CEO in the world. The company is the world’s largest provider of diabetes care, which makes up about $12 billion of its $16 billion sales, the remainder coming from Biopharmaceuticals.

Sadly, the worldwide incidence of diabetes continues to grow, spurred by obesity, fast foods and soda and more sedentary life styles. Novo-Nordisk is projected to continue its 12-15% earnings growth for the next few years. There is a 0.9% dividend. The company is rolling out in this country a recently approved anti-obesity drug, whose potential may ignite increased Wall Street interest in its stock.

Results varied in 2015. Among my other larger positions, Amgen (AMGN-$163) was up 1.5%, Visa (V-$78) gained 20% and Disney (DIS-$106) 14% but both BlackRock (BLK-$342) and Intel (INTC-$34) were off 4%. The average for the much-publicized big “hedge funds” was a 1% gain. Mr. Buffett’s Berkshire Hathaway had a rare down year, off 11%. His positions traditionally are less weighted toward technology and more toward traditional industrial and consumer stocks.

These will probably see buying as institutional investors rotate buying toward these sectors. Honeywell (HON-$104) was up 4% and strong earnings suggest larger gains this year. Boeing (BA-$146), up 11%, should have a good year with the bulk of development costs for new models behind it. Ecolab (ECL-$115), up 10%, continues to produce steady earnings growth in a 12-15% range. It provides products and services for cleaning, hygiene and water treatment for almost all industrial, healthcare and food service sectors. Ecolab stock yields 1.4% with increases for 24 straight years.

Leading Wall Street analysts are predicting a down year in 2016. They’re usually wrong but their concerns and other worries that the media emphasize are likely to build anxieties and fears. If agitated fears develop, remember Mr. Buffett’s advice “be greedy when others are fearful.” Using perspective and not giving in to emotion should lead to a Happy and Prosperous New Year.

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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