See the U.S.A. in A Chevrolet
This week, all three major U.S. stock indexes, the Dow Jones Industrials, the Standard & Poor’s 500 and the Nasdaq, reached another set of all-time highs. Today’s bull market began over seven years and has continued its run, climbing a slope or worries. There are plenty: P/E ratios are high, economic growth is weak, corporate earnings slipped over the last four quarters and commodity prices are slumping.
Central banks are pushing interest rates down in continuing hopes that business recoveries can gain momentum. Fading financial luminaries like Bill Gross and Carl Icahn are forecasting bear markets but more successful investors like Warren Buffett keep rolling on like Ol’ Man River.
Markets almost invariably break down when greedy euphoria inflates a fashionable sector. Dot.com excesses ushered the market down in 2000 and the mania for housing and financial stocks burst bubbles in 2007. Neither period brought the skepticism that pervades today. Paraphrasing President Roosevelt, “The only thing we have to fear is fear itself,” stock investors should fear the absence of fears.
Today’s pessimism is heightened by campaign rhetoric. The stock market invariably discounts uncertainties and an unusually bitter Presidential contest brings fears of the unknown. This will finally conclude in two and a half months, probably easing investor nerves just in time for the usually robust stock markets in November and December. (The UK limits the campaign season to a few weeks and also caps spending, two ideas worth considering here.)
The 14-month stock slump that began in 2015 was the equivalent of a bear market. More than half of the companies that make up the S&P 500 lost more than 20% until the recovery that began after the cathartic plunge after the U.K. voted to leave the European Union. All this scared nervous investors into allegedly stable sectors like utilities and consumer companies that sell detergents and hamburgers. These defensive stocks are now losing ground to technology, financial, industrial and commodity stocks that do well in an expanding economy.
General Motors (GM-$31) is a timely example. Its recently reported quarterly earnings jumped to $1.86 a share, well above analyst estimates of $1.32. Sales were flat but profits increased and GM raised its 2016 earnings forecast to “as much as $6 a share.” That would be a forward P/E of only five, which, after coupling a 4.8% dividend yield, is quite a reasonable value.
European sales were strong although the U.K.’s plan to leave the EU will hamper sales of its Vauxhall brand. GM has managed to beat analyst estimates by at least 15 percent for five straight quarters. Analysts will raise their sights ending the streak at some point but the significance lies in the company’s regained ability to sustain profits.
GM will begin production in October of its new all-electric Chevrolet Bolt. The car has a range over 200 miles and a price somewhere around $35,000. That puts it up against Tesla’s new Model 3. The Tesla will be faster but it appears that the Bolt will hit the market first. If it gains consumer acceptance, GM is better situated to expand production.
Global X Social Media (SOCL-$23) is an Exchange Traded Fund (ETF). Its holdings include LinkedIn, Facebook, Twitter, NetEase, Yahoo and the like. Small positions in more volatile issues like this ETF add spice to portfolios focused on more seasoned companies.
Apple (AAPL-$109) officially became a “value stock” Mr. Buffett’s Berkshire Hathaway had increased its Apple position to more than 15 million shares. Carl Icahn sold his investment company’s Apple position. His stock price is down this year; Berkshire is up. Berkshire also owns 50 million shares of GM.
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
