Taking Stock

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By Tony Crowell
By Tony Crowell

Time To Buy?

Storm clouds are blowing out. Market corrections last a couple of months on average and we probably have a few weeks before a sustained uptrend reemerges. Meanwhile, stocks will churn about, fluctuating in a valuation band that reflects lowered expectations from those of a few weeks ago.

A venerated study of stock analysis (Graham & Dodd, Security Analysis (1934)), urged seeking “the margin of safety.” They defined this as the difference between expected (or actual) sales levels and breakeven levels. A common interpretation today is attempting to determine stock prices as ratios of “intrinsic value,” perhaps accepting paying 90% of intrinsic value for a high quality issue and only 50% for a more speculative issue.

Estimating “intrinsic values” is like handicapping racehorses but reasoned efforts provide some margin of safety against market downturns and unfortunate investor decisions. They may check marketing shortcuts by Wall Street like last year’s “FANG” stock bundle. (Facebook, Netflix, Amazon and Google), which had their moments in the sun, but are now catching their breath on the bench.

Oil prices continue to bounce, a reminder that traditional big oil stocks are no longer gushing cash. Conoco, for example, just cut its dividend. I’ve avoided oil stocks. Some of my favorites reported strong results and raised their dividends. They include Amgen (AMGN-$149), Brookfield Renewable Energy (BEP-$16, yielding over 6%), Brookfield Infrastructure Partners (BIP-$35, almost 6%), Gilead Sciences (GILD-$86) and Thermo Fisher (TMO-$127).

In contrast, Illumina (ILMN-$142) reported solid sales growth but earnings declined year-over-year. It forecast continued sales growth with 2016 earnings in a range of $3.55 to $3.65, up almost 10% from 2015. Not bad, but its valuation looks a little pricey and I think Thermo Fisher provides a greater margin of safety. It acquired Illumina’s main competitor, Life Technologies, in 2013 and is now adding Affymetrix, further boosting its competitive position. Illumina is a “hold,” with a decent probability that some company some day will buy it. Thermo Fisher is currently forecast to post earnings around $8.00 for 2016, a lower valuation plus a modest 0.5% dividend yield.

The panicked selling in China left some apparent bargains among the crumbs from the fortune cookies and I think Alibaba (BABA-$65) is worth a play. It offers a variety of online and mobile commerce marketplaces in China and internationally. The company was founded in 1999 and already has $100 billion revenues, with $130 currently estimated next year. It’s profitable with both 2016 and 2017 earnings estimated growth rates over 20%. It just announced 4Q 2015 earnings of $.73; slightly beating recently raised estimates of $.70. This stock seems overlooked in current volatile trading ahead of the Lunar New Year.

Cheap oil has been a curse on current stock markets, possibly due to selling by sovereign wealth funds of oil producing nations. The IMF estimates the average per barrel breakeven price for all OPEC members at $95, thus current prices around $30 are straining many producing governments. The predicted boom in consumer spending has been slow to show up with Chase credit card data showing that Americans are spending half their gas savings on higher-octane gas. Other savings are going to paying down debt, building a better foundation for consumers to start spending more of their savings.

Stock investors should be spending more despite scary news. Bank of America runs a contrarian “sell-side indicator” that measures Wall Street bullishness or lack thereof. It is currently at pessimistic levels last seen during the 2009 financial crisis. Stocks have more than doubled since then. Extreme bearishness also prevails among individual investors.

This is proven a more reliable market indicator than the “Super Bowl superstition that an up market will follow a win by the NFC team. This coincidence has been right 39 out of 48 times so far and the NFC team this year is the favored Carolina Panthers. Enjoy the game and remember Mr. Buffett’s advice to be greedy when others are fearful.

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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