Still Cleared For Takeoff
With 85% of the 500 companies in the S&P 500 having reported earnings for their March quarter, the blended growth rate is a solid 13.5%. That’s the highest since the third quarter of 2011 and a strong sign that the stock market’s current uptrend need not be interrupted by the headline-grabbing news from Washington. News changes all the time and investors must stifle their emotional reactions, focusing on the market’s own signals and on persisting themes like technology’s ever increasing importance.
Corporate earnings have now beaten analyst estimates for 21 straight quarters. The market continues in a confirmed uptrend led by the Technology and Consumer sectors. Political earthquakes like firing the FBI Director will leave aftershocks, crowding out issues like tax law changes and tempering some of the optimism that buttressed stocks after the election. Nevertheless, the vital fundamental underpinnings of moderate (and increasing) GDP growth, historically low interest rates, low inflation and solid corporate earnings are intact.
Technology, now the primary driving force for stock market values, is changing at an accelerating pace. Intel’s main microprocessor is the 14-nanometer chip it introduced in 2014. It packs 37 million transistors in a single square millimeter. By the end of this year, the company will begin producing a 10-nanometer chip that will pack 100 million transistors per square millimeter.
This amazing exponential growth fuels the success of Nvidia (NVDA-$129) and Microchip (MCHP-$79). These two both reported earnings that smashed through estimates, raised their forecasts and continue to be among my top ten positions. Each even pays a modest dividend, making them essential holdings for retirement accounts.
These are among the elite stocks whose success reflects the driving genius of visionary company founders. Apple (AAPL-$153) takes center stage in that group. It recently became the first company to reach $800 billion in market cap (market price times number of shares outstanding). Apple is up 75 times since 2007, when it introduced the iPhone. There will be increasing emphasis on the company’s newest developments as it approaches the ten-year anniversary of the iPhone this fall. When its price reaches $191.80, its market cap will hit a trillion dollars.
Amazon (AMZN-$948) and Tesla (TSLA-$324) are also amazing investments created by visionary businessmen. Amazon trades at 83 times estimated forward earnings for the year. Highly competitive, its profit margins are deliberately thin but it has become a rock-solid financial giant with $22 billion in cash and only $8 billion debt. Free cash flow jumped 52% in its March quarter. Beyond its ever-expanding consumer sales, its Amazon Web Services division contributed only 10% of sales – but 89% of profits. Antitrust issues may eventually develop but its structure would permit successful division.
Tesla continues to confound its skeptics. Sales growth is running well over 50% annually and a few analysts estimate profits in 2018. Meanwhile, production of its new Model 3 is scheduled to begin this summer. As today’s fast changing economy requires, the company is committed to the most advanced technologies. Its charging network is far ahead of its competitors, an advantage that will become more evident when the more affordable Model 3 hits the street.
European economies are picking up speed, particularly in the EU. Irish-based Shire reported first-quarter earning of $3.63, up 14% from a year ago, handily beating estimates. Its late-stage pipeline is advancing, its valuation is quite reasonable and there is a modest dividend.
My newest buy is Corning (GLW-$28), which was founded in 1851 and is now a very up-to-the-minute manufacturer of specialty glass for displays, communications and life sciences. Earnings are up and the company just increased its dividend.
Historic market uptrends have been fueled by innovations that boosted productivity and enhanced our lives. The stock market recovered for seven years after the bitter 2007-2008 financial crisis. It paused in 2015 and most of 2016 before beginning a renewed uptrend. Sentiment is skeptical, always a good sign, and removing the struggling energy sector yields a valuation for the rest of the market that offers room to run.
I’ll be on vacation for two weeks and can be reached by e-mail or through phoning my Laguna Beach office at the numbers below. Happy Memorial Day!
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
