Tune In May And Stay To Play
In recent months, it has not been easy to make money in stocks. Actually, it never is although strong market surges can create that impression for a while. Such bouts of optimism often pull in the unwary just in time for the next downward dip. In those historic times before the Internet and social media, one indicator was the occasional tendency of both Time and Newsweek to run market stories with a bull on the cover.
With remarkable consistency, these usually appeared as a bull market was running out of steam. Conversely, when they ran bearish lead stories, the market was often transiting to an uptrend. Today’s widespread electronic media present a less unified front with attitudes and behavior often conflicting.
From the recent low in February, the S&P 500 rebounded 17%, giving back 2% this week. (All this action left it up all of 1% year-to-date.) This action builds from a trend last year when almost all the gains came from a few stocks like Amazon and Google [now called Alphabet.] Remarkably, the 10 largest stocks in the S&P 500 were up 11% and the other 490 lost 3%.
Such a narrow market hardly inspired investor confidence, which has never fully recovered from the financial crisis. Since the crisis, mutual fund investors have taken more money out of these funds than they have invested, a seven-year period during which stocks gained over 250%. Skepticism like this is sometimes called a “wall of worry” and often precedes an uptrend. Economic recovery and earnings reports are slightly upbeat and recent market strength has been much broader, indicating wider institutional participation.
All this is mildly encouraging even though the measured pace of economic recovery makes it essential to screen stocks for those who can sustain earnings growth. Honeywell (HON-$114), which recently reported beating estimates for both sales and earnings, is nibbling at an all-time high price. It just announced that it will spin-off its $1.3 billion resin and chemicals business.
Such spin-offs often result in enhanced overall shareholder value. Honeywell yields 2.1% on dividends that it has increased for five straight years. Danaher (DHR-$98), also a diversified industrial company, has bumped its 0.7% dividend for two years and remains on track for its spin-off in six weeks of Fortive, its instrumentation and industrial tech businesses.
The construction industry is finally picking up steam. Martin Marietta Materials (MLM-$186), which provides heavy building materials, reported impressive first-quarter results, and its stock is making new highs. Analysts now estimate earnings for all of 2016 around $7.38 a share, up from $4.50 in 2015, a combination of strong growth and a reasonable valuation.
Martin Marietta remains a buy. Others under consideration in the building industries include Sherwin-Williams (SHW-$296), Masco (MAS-$31) and Lowe’s (LOW-$75). I prefer Lowe’s to Home Depot for faster growth and slightly more reasonable valuation.
I have repeatedly recommended NIVDIA (NVDA-$35) in advance of its quarterly earnings report and the company came through nicely after the market close on Thursday. It was up two points in after-hours trading on favorable results. First quarter sales were $1.3 billion, up 13% from a year ago, with growth across all its platforms. Earnings were $.33 a share, up 38% from $.24.
NIVDIA is a leader in visual computing GPU and processing. Its platforms include gaming, professional visualization, data center and auto. Current estimates look to $1.47 for its full year, up from $1.08. Somewhat unusually among its sector, it offers a 1.30% dividend yield with increases for the past three years.
The energy sector remains a cloud over its own sector as well as some industrial companies like General Electric (GE-$30), which sell oil and gas equipment. Oil stocks seem to be seeking a bottom but I feel there are more timely buys available.
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
