Taking Stock

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Tony Crowell
Tony Crowell

Rule Britannia?

Despite varied news of unsettling events, the stock market continues to trade in a narrow band, about two percent below record highs in the Dow Jones Industrials and the S&P 500. With 2016 almost halfway behind us, these market averages are up one percent so far this year. They were down one percent last year so investors may understandably feel a lack of significant progress.

The Federal Reserve’s June meeting passed without incident as the Fed held interest rates steady. With the unemployment rate down to 4.7% and core inflation to 2.1%, the Fed’s inaction reflects its preferred policy to hold rates steady until fresh data confirms more vigorous growth in the U.S. economy.

The Fed also noted concerns stemming from the June 23 referendum in the UK (the “Brexit”) whether Britain will remain in the European Communion (EC). The EC began in 1951 although General de Gaulle opposed Britain’s admission, leading to a delay in its entry until 1973. Internal discontent with its membership continued and it is one of the few EC members that has not adopted the Euro as a common currency.

The “leave” camp seems centered on emotional issues of sovereignty and immigration while many world leaders and economists have stated that leaving would be economically costly. This major issue is overhanging world stock markets; a “Leave” vote could provoke widespread selling, hopefully already discounted to some extent by the gloomy market action over the past week.

This is reminiscent of market action in the summer and fall of 2011 when many investors panicked that the EC would unravel because of the fiscal crisis that began in Greece. Cooler heads in Europe prevailed and Eurozone stocks have since gained 51%.

Polls and prediction markets show the “Brexit” outcome in doubt. Should the “Leave” vote prevail, this may trigger global stock market dips. Such moves are frequently overdone, as emotions cause investors to overreact. This would present a buying opportunity for the coolheaded.

Stocks with markets centered outside the Eurozone might nevertheless suffer price dips. Attractive buys include Aflac (AFL-$68), Acuity Brands (AYI-$247), Huntington Ingalls (HII-$159), Lennar (LEN-B, $36), and TJX (TJX-$76).

Waste Management (WM-$63) is a new buy recommendation. This well known company provides a variety of environmental services in North America. Its services to builders of both commercial and industrial properties are expanding. Earnings have steadily grown at 6%-10% and are estimated to be around $2.81 this year, up from $2.61.

These virtues have been noticed and its stock price is up 17% this year. Any dips toward $60 would provide excellent opportunities. It stock currently yields 2.6% with dividend increases for twelve straight years.

With months remaining in the Presidential election campaigning, we can expect charges and countercharges that often strike at investor fears of possible losses. The economy continues to improve; inflation and interest rates are low while housing starts and consumer confidence are growing.

After the ‘Brexit’ vote next week, investor attention will shift to the forthcoming rounds of quarterly earnings reports. Advanced medial and biomedical stocks have stuttered recently even though analysts are raising estimates for their upcoming earnings. Probable overachievers include Amgen (AMGN-$152), Bristol-Myers (BMY-$71), Jazz Pharm. (JAZZ-$145) and Pfizer (PFE-$34).

A “Brexit” vote to “Stay” might shift investor focus to Eurozone stocks, making these growth stocks even more attractive buys. This is a particularly opportune time to remember Mr. Buffett’s advice to be greedy when others are fearful.

 

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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