Taking Stock

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By Tony Crowell
By Tony Crowell
Change For A Quarter

 Stocks wrung in the New Year with the worst 10-day start in market history. Those gloomy days followed a disappointing year that ended with the Dow Jones Industrial Average down two percent. Many investors are overly influenced by the most recent market behavior. They would do better if they applied Mark Twain’s advice, “If you don’t like the weather in New England, just wait few minutes.”

After that rotten start, stocks keep sliding and were down more than 10% by February 11, before turning the ship around more than 10% up. As the quarter ends, the market is even with a 7% return for the month of March, the best month since last October. Volatility scares off many investors and so does their exaggerated aversion to losses. They will find the record after similar swings is encouraging.

Since 1932, stocks have experienced seven years when the first quarter of the year combined 10% moves both to the upside and the downside. Returns for the rest of the years following these swinging quarters averaged 28%. The rebounds were even stronger when the first 10% move was to the downside, as is the case this year. Momentum is a powerful market force and is currently on the side of the bulls.

Federal Reserve Chairwoman eased fears of early rate increases. In two weeks, we begin the next round of corporate quarterly earnings reports, which will probably dictate the tempo of the next movement for stocks. Analyst expectations are muted and market action may become even more selective, with superior earnings results gaining increasing favor with investors.

Stocks with growing dividends look even better in a low interest rate environment, particularly in contrast to bonds in the modern environment. The current 10-year Treasury yield is around 1.9%. It was 5% fifteen years ago while the dividend yield on the stocks in the S&P 500 was 1.5%. The rationale for buying stocks then was the expectation that stocks offered an expectation of capital appreciation, offsetting their lower income yield.

That expectation persists even though the dividend yield on the S&P 500 has increased to 2.3%, outshining bonds. It may be that fears unleashed by the financial crisis have stained stocks with a label of risk, chasing loss averse investors into bonds. Fears make for wrong decisions and investors should prefer stocks, especially those with elite dividend records and prospects. Clorox (CLX-$126) is exemplary. It currently yields 2.4% with dividend increases for 19 straight years and steady earnings growth.

Danaher Corp. (DHR-$94) is a new buy. It is one of the least cyclically exposed industrial companies on the market. Its businesses are in more stable sectors, including life science and diagnostics, dental, test instruments and environmental technologies. Its businesses have little exposure to the weak oil and gas sectors.

Currently, Danaher is integrating its recent acquisitions of Nobel Biocare (dental) and Pall Corp. (life sciences and diagnostics. It announced last May its intention to split in late 2016 into two publicly traded units: a science and technology company and a diversified industrial company. Often, such divisions develop into a combined valuation greater than the original.

Danaher will report earnings in three weeks. These are likely show consistent steady growth in a 10%-14% range. Estimates for the full year look for $4.85 a share, up from $4.30, a reasonable valuation. Yield is 0.7% with two years of increases.

NVIDIA (NVDA-$35), our new buy in the tech sector, presents its Annual Investor day on April 5. This should bring new announcements of its products for visual computing and I intend to continue to add to our positions before then.

April looks promising although Mark Twain warned of this month (and others), “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

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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