Taking Stock

Tony Crowell
Tony Crowell

A Turning Of The Tide

Recent stock market action is raising hopes that the severe stock correction this year may be coming to an end. It takes time to rebuild a base for a renewed uptrend but I am reminded of Mr. Churchill saying after the battle of El Alamein. “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

On February 11, JP Morgan Chase CEO Jamie Dinan bought 500,000 shares of his firm for $26.6 million. This buy came after the stock had fallen 20% this year and has turned out to be at the recent bottom for the stock. Some commentators call this the “n Bottom” and his vote of confidence has coincided with overall market improvement.

The bank stock sector has suffered even more than energy stocks this year with Citicorp and Bank of America down 30%. Plunging oil prices have raised fears that energy sector loan losses may spiral and, indeed, Chase just announced an additional $500 million increase in loss reserves for energy exposures.

Oil price declines have dragged down stocks generally, apparently from fears that they are forecasting an economic downturn leading to a recession in the U.S. Economic data and job growth figures don’t support this pessimism but fearful sellers are showing their usual impatience. The resulting risk aversion increases demand for bonds, pushing bond yields down, squeezing bank net interest margins.

Even though energy sector losses may increase, banks are not nearly as overextended as they were in 2008. They also now have stronger capital cushions and their stocks will eventually recover but investors should continue to avoid bank and most energy stocks.

There are plenty of others. General

Electric (GE), Intel (INTC) and Pfizer (PFE) are all trading in a price range at or just below $30. All three have very strong balance sheets, rising earnings and dividend yields above 3%. I expect improving market conditions will take this Blue Chip trio above a combined value of $90 by the end of this quarter and over $100 by year-end.

Pfizer is a special case. Its stock has been sagging since it proposed a merger with Irish-based Allergan, plc in a $160 billion deal that would create the world’s largest drug company. The deal would also lead to a substantial reduction in Pfizer’s taxes, a maneuver that has awakened considerable political outcries.

Allergan, which used to be based here in Irvine before being acquired by an Irish company, is trading about 15% below its calculated merger price today. Meanwhile, Pfizer obtained an expanded FDA approval for its breast cancer drug and settled a long-standing lawsuit against its Wyeth division. It also recently raised its dividend for the fifth straight year.

Johnson & Johnson is an aristocrat among drug companies. It is also the unsuccessful defendant in a lawsuit awarding $72 million in damages for a cancer death linked to its talc-based baby powder. Over a thousand cases are pending against it and I felt possible reputation damage no longer supported its above-average valuation and sold our positions.

Restoration Hardware (RH-$38) stumbled badly on a disappointing business update. This seems at least partly attributable to unusual overall market conditions that affected high-end spending. In view of encouraging reports of strong existing home sales, I felt the market reaction was excessive and added to positions.

Other companies provided a variety of encouraging news. Thermo Fisher (TMO-$130), which raised its dividend, also announced the first blood test for the Zika virus. TJX (TJX-$75) beat earnings estimates on strong off-price retail sales and raised its dividend. Chubb (CB-$118), recommended last week at $116, also raised its dividend.

The probabilities are increasing for a renewed uptrend. Weakness in energy and banking will be a drag but advanced medical, technology and industrial stocks are reemerging as market leaders.


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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