March Came In Like A Bull
March came in like a lion or, more accurately, like a bull. After a discouraging start to the year, stocks are behaving as if “seldom is heard a discouraging word.” Last week, the European Central Bank announced an interest rate cut and other aggressive economic stimulus measures. Stock markets sank, focusing on the comment that this probably was as low as the ECB would take rate levels down.
A day later, world markets rallied, apparently concluding on reflection that immediate action outweighed the risks of this “discouraging word.” Our Federal Reserve followed with its announcement this week that it foresees fewer interest rate hikes this year than it had indicated in December. It lowered its projection for the key federal funds rate to 0.875%, down a half-point from its December forecast. If it did so move in its usual quarter-point increments, that would call for two moves this year rather than the four it projected last December.
A by-product to the Fed’s decision is a softening of the dollar’s value against other currencies, good news for exporters and job creation. Oil price volatility will continue to send crosscurrents across most markets. Further swings are probable from a meeting of major oil producers in Qatar on April 17, which may lead to a partial freeze on production.
Analysts are lowering earnings estimates on oil and gas companies. Remember coal? Peabody (BTU), the largest coal company, is down from almost $300 two years ago to $2.40 today. Banks are still taking write-offs on real estate loans and neither bank nor energy stocks are attractive at present. I question the endurance of the present rally without the participation of these two large sectors. The tech, biotech, industrial and consumer sectors are posting increasing earnings overall and should make up the heart of investors stock portfolios.
One famous Wall Street platitude is “Sell in May and go away,” based on the theory that stocks often stagnate during the summer. It’s not a reliable indicator, in fact, stocks went up in the May-September period for the last three years, but extending the present rally into the summer will need support from forthcoming earning reports.
Biotech stocks have lagged and are now presenting tempting values. Gilead Sciences (GILD-$90) is down over 30 points from its 2015 high and now trades at a ridiculously low P/E of only 7. Next earnings report due 4/28 to 5/2 and analysts are raising their estimates. The company has approvals pending for significant new drugs. Its stock yields almost 2%.
The wild card in the biotech group is Allergan (AGN-$271), which agreed last November to being acquired by Pfizer (PFE-$29) for 11.3 shares of Pfizer. The merger value at today’s prices is over $330, a whopping discount and a warning sign that Wall Street doubts whether the deal will close. Allergan is now based in Ireland and the merger would lower Pfizer’s effective tax rate from 35% today to about 17%. It is possible that Congress might turn their attention from politicking to blocking this merger but no such steps have yet been initiated. If not, closing should take place in around six months.
There are hosts of growing companies who, like the children in Garrison Keillor’s Lake Woebegone are “all above average.” Nike (NKE-$63), reporting earnings on 3/22, is on track to continue 12%-15% gains. Besides outfitting the U.S. Summer Olympic teams, the NBA, dozens of soccer teams and sports celebrities, Nike has been quietly courting the fashion world since 2014. Among fashion brands, Nike led an Instagram survey with over 47,000,00 hashtag mentions, two and a half times Prada’s, its closest competitor. Its logo and shoes were seen often at recent fashion weeks in New York, London and Paris.
Other leaders with forthcoming earnings announcements include Apple (AAPL-$106), Chubb (CB-$126), CDW (CDW-$41), Disney (DIS-$99), Intel (INTC-$32), TJX (TJX-$76), Total System Services (TSS-$45), Thermo Fisher (TMO-$138), Verizon (VZ-$53) and Visa (V-$73). Clorox (CLX-$127) is a new buy, replacing Ecolab.
March seems likely to go out like a bull, as it came in. April will bring a blessed end to tax season and baseball’s opening day, all preceded by April Fool’s Day
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