Taking Stock

Tony Crowell
Tony Crowell

The Shell Game And The Shale Game

Stocks face two obstacles, both stemming from Washington. The first is the pending forced array of arbitrary spending cuts labeled “sequestration.” The other stems from concerns of an earlier-than-expected end to the Federal Reserve’s program of buying bonds. Much of the economic recovery is attributed to the low interest rate environment supported by Fed policies and its open market buying.

The Fed’s policy making is more reasoned than the Congress, where assisting the American economy has become increasingly subordinate to partisan conflicts. The New Year’s wrangling over the “fiscal cliff” followed last year’s needless posturing over the debt ceiling and the forthcoming quarrel promises to be just as ugly. Another last minute postponement is possible but it is more likely now that widespread spending cuts will take effect.

While no one denies that our enormous fiscal deficit needs major surgery, the pending robotic approach should soon be supplanted by annual budget negotiations. Public outrage will quickly develop if, for example, forced furloughs to agencies like the TSA lead to airport security clearances stretching into two-hour lines.

Investors can anticipate choppy seas as fiscal haggling takes over the financial news. This haggling is hardly new and is probably already somewhat discounted in today’s relatively moderate stock valuations. Our strategy remains unchanged. Concentrating on stocks in consistently growing larger companies builds good returns. While it is always tempting to try to jump out of the market in anticipation of a dip, it is very difficult to get back in before the next incoming surge. Market timing, like the weather, is a fascinating subject for news broadcasts, but my experience has been that calculated stock selection brings better returns. Still, umbrellas will always be good to have, just in case.

The growth of some companies in the medical sector has slowed with drug approval issues and patent expirations. Even some big pharmaceutical companies like Pfizer and Merck, once stock market darlings, have slid into slow growing “value” stocks. Allergan (AGN-$106), popularly known for Botox medical aesthetics, has expanded into eye care, neurosciences, urologics and other areas. Strong emphasis on research contributed to 7% growth in sales and 17% in earnings for 2012.

Analysts forecast earnings growth in the 13-15% range for the next two years. With a valuation of 25 times its 2012 earnings, its stock price has room to grow. Its finances are sound, with debt ratios less than the average of its sector. A recent acquisition brought Allergan an inhaled, faster-acting treatment for migraine sufferers. It anticipates FDA approval in April, which, if obtained, could coincide with its quarterly earnings report.

The huge energy sector remains in a tentative mode amid international tensions and global recovery uncertainties. One major development is the increasing importance of the shale oil and gas deposits in the U.S. A recent Economist article highlights resources here in California, where shale oil deposits are more than half the total of the continental U.S.

As demand increases to develop these resources, we can expect a battle over environmental opposition to “fracking.” The article notes that one small company near Santa Barbara is extracting crude from around 2,500 feet using natural rock fractures rather than fracking. Chevron, which has been pumping oil out of the region for over a hundred years reports that its exploratory drilling for shale oil deposits has not been encouraging. This area holds much promise and also many uncertainties.

Global energy demand continues to grow. Offshore development is particularly strong and Oceaneering Int’l (OII-$62) is benefitting as a major supplier of services and products, with an emphasis on worldwide deep-water applications. It is the largest provider of remote operated vehicles, rated up to depths of five miles. Sales are $2.8 billion, growing at 14% with earnings up at 17%. The energy business has unique uncertainties but global demand is assured and Oceaneering owns a unique niche in supporting more sophisticated exploration efforts. Politicians may disrupt markets but consumers will continue to demand energy and healthcare. Allergan and Oceaneering will grow with these demands.

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 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com






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