A Turning Of The Tide
After tacking back and forth for over a year, the stock market finally broke out of a narrow channel into a new uptrend. Its duration depends on a number of factors, most immediately the Federal Reserve meeting in June, but the renewal of upside vigor is most encouraging.
Many rallies have failed to carry through this year and last, with selling often developing toward the end of the trading sessions. This skittishness reflected persisting anxieties and the recent breadth and increasing volume indicates returning investor confidence. Last week, investors sold stocks on expectations that of an interest rate bump upwards; this week, they bought, especially bank stock, believing that higher rates would boost their profit margins.
Other sectors joined, with welcome strength in medical and biomedical stocks. Amgen (AMGN-$155), Celgene (CELG-$107) and Gilead (GILD-$85) are all still down this year despite solid earnings growth for no logical reason. Their P/E ratios are at bargain levels and earning reports coming in midsummer should fuel their prices. These three pair nicely with more stable Bristol-Myers (BMY-$70) and Pfizer (PFE-$34). All (except Celgene) offer dividend yields of 2% or more from companies with histories of dividend increases.
Every stock sector takes its turns on center stage but the fundamental underpinnings are still weak for bank stocks. Their recent favorable price action as well as that of some oil and gas stocks appear based on new data showing consumer prices, wages and home prices, especially on the coasts, heading up. Investors woke up, realizing that accelerating economic growth, a goal long sought the Fed, may be at hand and the news prompted a market surge.
New home sales jumped 17% in April, the biggest monthly increase in 24 years. The median prices rose to a record $321,000. Durable good orders beat estimates, jobless claims fell more than expected, and oil prices touched $50 a barrel for the first time in six months. Wage growth still lags but there are signs of improvement.
Retail sales show some improvement, particularly for hard goods suppliers like Lowe’s (LOW-$80) and Acuity Brands (AYI-$254). High-end retailers like Nordstrom are weak while discounters like TJX (TJX-$75) are doing well. Concerns about growing online sales are providing a renewed buying opportunity in Simon Property Group (SPG-$196), the largest mall operator.
Simon continually innovates in global real estate markets through developing premium outlets, mills, and adding entertainment with other lifestyle/community centers. Sales are over $5 billion, growing at 10%, and this Real Estate Investment Trust (“REIT”) yields 3.2% with increases for five straight years.
Simon is a particularly timely buy, as a change to the S&P indices at the end of August will split REIT’s from the finance sector into their own newly created sector. This will be the first new classification since 1999 and reflects the growth of the REIT sector. The index changes will prompt a flurry of buying from index-tracking funds and active managers who follow these metrics.
Boeing (BA-$129) is gaining altitude from new business like the order of 100 737’s from Vietnam’s VietJet that greeted President Obama’s visit to Vietnam. Also, Congress has renewed the Export-Import Bank, of whose guaranteed loans Boeing is the principal beneficiary. Estimates call for earnings growth in the 10%-15% range. Its stock yields 2.8% with four straight years of increases.
Stocks are settling down in anticipation of the Memorial Day holiday. As we move into summer, July will bring new earnings reports as well as the two political conventions, which will begin to dominate the news. Should economic data continue to improve, stocks are positioned for a good year.
Next column will be on June 17, between the Fed interest rate meeting and the vote in the UK whether to remain in the European Union. I’ll be on a short vacation and can be reached through my Laguna office at 714-494-1376.
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