Taking Stock

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By Tony Crowell
By Tony Crowell

Yearnings For Earnings

 Stocks finally seem to have recovered their sense of direction after shillyshallying around for months. Earlier this year, defensive issues like tobacco, soup and utilities took center stage. The recent strong rallies kicked the market into a higher gear as growth stocks resumed their traditional leadership.

The arrival of corporate earnings season is reinforcing this pattern. Ahead of actual reports, earnings analysts almost always shade their estimates downward, protecting their own reputations and setting the bar lower. Companies have an easier tine delivering results that beat estimates, usually boosting stock prices.

Alcoa (AA-$10) traditionally kicks off the earnings season and did so on Monday with earnings that beat forecasts and sales that didn’t. In the four weeks before the start of earnings seasons, the S&P 500 has been down about half the time with 0.1 percent average returns. In the four weeks that follow, it’s traded positive 70% of the time with an average return of 1.5 percent. Among sectors, defensive stocks often climb ahead of earnings as investors look for safer bets and tech and industrial stocks outperform after actual results come in.

Overall, stock prices lagged for over a year, as the U.S. economy seemed unable to ignite recovery above the sluggish pace since the crises of 2007-08. Bank stocks, in particular, stumbled under their burdens of lower quality loans and mortgages, thus their recent earnings reports were watched closely.

JP Morgan Chase (JPM-$62), best of the breed, beat earnings estimates, kicking off a rally that spread through the market. Its results were actually still down from the preceding year, but investors were primed for upbeat news. Bank of America (BAC-$23) and Wells Fargo (WFC-$49) slipped by, beating estimates by a penny or two, and their stocks joined the party.

Lower energy prices are shaving the prospects for these big banks and I feel there are better opportunities in other sectors. Indices of investor optimism from option ratios and bullish predictions in newsletters are tame, further supporting continuing stock advances. These will collide with the June Federal Reserve interest rate meeting, which could slow the market as it enters its habitual summer doldrums.

Spring is here, especially for big growth stocks. NVIDIA (NVDA-$36) reports earnings in early May. I expect continuing strong growth from this leader in visual computing. Acuity Brands (AYI-$255) already topped estimates for its recent quarter, which ended in February. It reports next in early July, when it should report continuing growth and, at some point, a stock split. Both of these fine growth stocks even pay a modest dividend, usually an encouraging sign of a healthy concern for shareholder interests.

Both Cognizant (CTSH-$60) and Genpact (G-$27) are racking up solid earnings gains from outsourcing and other information technology services. Their next reports are due the first week in May and buys before then look timely.

Among medical stocks, Bristol-Myers (BMY-$67), Celgene (CELG-$107) and Gilead (GILD-$98) will all report quarterly earnings on April 28, or shortly thereafter. Their stock price actions are already favorable and their valuations based on forecasts for this year are reasonable.

Apple (AAPL-$112) often sags between quarters, and then firms up as it comes through with solid results. It reports on April 25 and is expected to show a decrease, thus confirming an already lowered bar. Full year earnings will be around $9.00 a share, resulting in an absurdly low valuation for a company with its financial strength and market position. Growth will slow, if for no other reason, from its size, however, a dividend yield of almost 2% with strong prospects of further increases makes this an essential stock for almost everyone.

A Hermès red crocodile handbag just sold for $298,000. It was bought from the New York Hermès store in 2008 for $160,000. Apple stock traded around $20 in 2008 and doesn’t require killing crocodiles.

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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