Earnings Coming Through
The stock market seems to be accepting that spring is really here. Improving earnings reports are boosting the upbeat tempo. Last quarter, companies many squeezed out a small beat on earnings while missing on revenues. Accompanying comments used words like “cautious” or even “deteriorating.” This quarter, reports use “stable,” “firm” or even “accelerating.”
Recent new buy Danaher (DHR-$96), which makes tools, testing equipment and water quality products, beat estimates on both earnings and revenues and boosted its guidance for this year. The company remains on track to split into two businesses, with the new company (“Fortive”) to consist of its instrumentation and industrial technologies groups. Danaher expects to complete the transaction in the third quarter through a tax-free distribution to shareholders.
Overall, stocks are surprising many with the S&P 500 trading above 2,100 and the Dow Jones Industrial Average above 18,000. The advance comes after a solid 15% rebound from February 11 and brings these averages within 2% of their all-time highs set last May.
There are several factors supporting this strength. Oil prices have stabilized and stock prices have correlated strongly with energy prices for months, in fact, the crude oil bottom in the $25-$26 range coincided with the February market bottom. This relationship is not totally logical but nervous investors are always looking for some sort of barometer for stock prices. (They would probably be eager buyers of a Black Forest Weather House with the girl and boy replaced by a bull and a bear.)
Lower energy prices and a strong dollar pressured first quarter earnings but economic indicators point to a bounce back to GDP growth around 2.5%. Europe and Japan are slowly firming and China eased concerns with 6.7% growth last quarter. The U.S. dollar is off 6% from its December high, which will aid U.S. multinational companies. Foreign central banks are (finally) adopting stimulus monetary policies to help kick them out of economic stagnation.
Our Federal Reserve policies have a strong correlation with stock prices, which stalled out during 2015 as the Fed pivoted toward raising rates for the first time since 2006. The Fed’s quarter-point raise last December triggered a selloff that took the S&P down 12% to the low 1800’s by February 11. Since then, the Fed’s comments have lowered investor expectations of monetary policy changes with only a single quarter-point raise anticipated this year. The Fed is currently not raising and stocks are rising, reminding us of the proven Wall Street rule, “Don’t fight the Fed.”
Among my buy recommendations, Acuity Brands (AYI-$255), Alphabet-$778), Broadcom (AVGO-$151), East West Bank (EWBC-$37), Intel (INTC-$31), Lennar (LEN-B-$38) and Visa (V-$80), have all reported solid results. Results are due soon for the following for whom buys before their earnings reports are timely: Aflac (AFL-$67), Amgen (AMGN-$163), AMN Healthcare (AHS-$35), CDW (CDW-$42), Honeywell (HON-$114), NVDIA (NVDA-$36), Simon Property Group (SPG-$199) and TJX (TJX-$76).
Tesla (TSLA-$248) now has more than 400,000 orders for its newly announced Model 3. This is a unique achievement for a unique company but revives memories of the “Osborne effect.” This term relates to the unintended consequences of a product announcement too long before its availability, which ends up impacting sales of its current product. The term was coined after the Osborne Computer Company took more than year to make its next product available, ran out of cash and out of business in 1985.
Tesla, like Apple, makes very desirable products under the leadership of an innovative CEO and will probably continue its success. One other concern is the $7,500 federal tax incentive, which begins to phase out as a manufacturer’s electric car sales exceed 200,000. General Motors (GM-$32) will have its Bolt EV available a year ahead of Tesla, with tax credits still available. GM just reported earnings well past analyst estimates, is selling for less than six times earnings and yields almost 5%. Buying its stock might help put a Tesla in the garage.
The 90th. Birthday of Queen Elizabeth II is producing a variety of collectibles. An edition limited to 25 hand made enamel music boxes playing “God Save the Queen” is available for £995 while eBay offers a polyester souvenir Union Jack “waistcoat” for £35. I believe stocks are better investments.
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
