Gaining Altitude
Stocks continue their slow climb to altitude. They are fighting persisting headwinds from worries about China, tighter Federal Reserve policies, weak economic growth and collapsing prices of oil and other commodities. The sluggish growth stems back to the limited fiscal stimulus that avoided a depression after the financial crisis but hampered recovery.
Despite these handicaps, the U.S. stock market is up 11% from its February lows and about 2% so far this year. Its overall price: earnings ratio is 18, slightly below its level a year ago. This follows three straight quarters of essentially flat earnings.
We will be reminded of the old slogan, “Sell in May and go away.” Wall Street loves these catchy fortune-telling slogans but, for once, there is some statistical support. Since 1950, the S&P 500 return from May to October averaged 1.7%, while from November through April it was 7.1%. This “indicator” is breaking stride recently with both the 2012-2014 and 2003-2007 periods showing good gains between May and October in each year.
More significantly, market breadth is improving. The financial sector finally climbed above its 200-day moving price average, putting all ten of the S&P 500 stock sectors above their 200-day averages. This broke an uncommon streak without all ten sectors above their averages. Since 1990, there have been four similar breakouts of which three preceded strong markets, 1993 being flat.
The technical outlook is favorable even though current reports are mixed. Earnings forecasts for later this year are encouraging, thus there are reasons for optimism. With investor emotions still edgy, selectivity among individual companies is essential.
The insurance sector is always interesting. With premiums paid up front, cash flow is usually favorable, a reason Mr. Buffett’s Berkshire Hathaway is centered among its insurance group. Insurance companies usually skillfully handle their premium income, their results varying with their investment income.
In the first quarter, MetLife, Prudential, Allstate and Lincoln Financial all reported declining profits while Chubb (CB-$122) was the only one of these major insurers to report an increase in operating income. Chubb became the largest property and casualty insurer in the U.S. following completion of its merger with Ace Limited in January. Its CEO, Evan Greenburg, a former executive at AIG, forecast increased investment income while referring to his competitors as “wounded animals.”
I feel the strength of the newly expanded company is not yet reflected in its stock price and renew my buy recommendation. Its stock yields 2.3% with dividend increases for the past 28 years.
Among other recommended buys, Huntington Ingalls (HII-$151) moved to a new high after reporting results that beat estimates for both earnings and revenues. It pays 1.4% with increases for 3 years. Pfizer (PFE-$33), which recently canceled its merger with Allergan after the Treasury issued new rules, reported a solid quarter. It raised its earnings estimate for the year to a range of $2.38-$2.48, up from $2.20 in 2016. A dividend leader, it’s paying 3.6% with increases for five years.
Recent recommendation Danaher (DHR-$96) moved to a new high after it also beat estimates on both sales and earnings. This well-run industrial conglomerate has beaten analyst estimates in all but seven of the past 43 quarters. It will spin-off a new division named Fortive on July 2. Fortive will include Danaher’s instrumentation and industrial tech sectors with revenues for Fortive to exceed $6 billion this year. Additional purchases of Danaher before the spin-off record date of June 15 are timely.
In tech, a reduced PC market pressures Intel (INTC-29). Its efforts in data centers and cloud computing are beginning are bearing fruit. It is a solid company with a 3.5% yield and has not lost imagination, lighting up the night sky over Palm Springs by flying 100 drones.
https://www.youtube.com/watch?v=KV5Jjd0ww5Q
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
[…] Taking Stock – They are fighting persisting headwinds from worries about China, tighter Federal Reserve policies … limited fiscal stimulus that avoided a depression after the financial crisis but hampered recovery. Despite these … […]
[…] Taking Stock – Despite these handicaps, the U.S. stock market is up 11% from its February lows and … there is some statistical support. Since 1950, the S&P 500 return from May to October averaged 1.7%, while from November … […]