Taking Stock

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By Tony Crowell
By Tony Crowell
A New Chairman to Lead the Fed

The Federal Reserve’s meeting earlier this week passed without an interest rate increase. The President nominated Federal Reserve governor Jerome Powell as its next chairman, succeeding Fed Chairwoman Janet Yellen, whose four-year term expires in February. In his five years at the Fed, Mr. Powell has been a reliable ally of Ms. Yellen and is seen likely to continue the cautious policy of gradually raising interest rates in quarter-point steps through 2020.

This absence of change, continuing the prevailing stable financial conditions, reminds me of the Sherlock Holmes story, “Silver Blaze.” This deals with the mysterious nighttime disappearance of a racehorse, hinging on “the curious incident of the dog in the nighttime.” The Scotland Yard detective says, “The dog did nothing in the nighttime.” And Holmes replies, “That was the curious incident.”

The “curious incident” was easily explained. The dog made no noise because no stranger took the horse. In somewhat similar fashion, the Dow Jones Industrial Average is up 19% so far this year as no strange or unexpected events have interrupted its bull market rise. The Fed noted signs that the economy “has been rising at a solid rate despite hurricane-related disruptions.” While this increasing momentum paves the way for a probable rate increase at the Fed’s December meeting, the accompanying strength in corporate earnings growth also supports further stock market gains.

Bull markets eventually overshoot as investors forget Mr. Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful.” Rather than wasting energy trying to forecast whatever unexpected events will be associated with inevitable market dips and “corrections,” investors should continue to critically tune their stock positions toward companies and sectors that are succeeding in all seasons.

In retail, Amazon (AMZN-$1,096) seems destined to dominate the future. Although online shopping still represents only a small share of overall U.S. retail sales, it is growing rapidly, up an estimated 16% this year and Amazon will control 44% of online sales in 2017, up from 38%. Its closet competitor is eBay with 7%, followed by Apple and Wal-Mart at 3.6%. Home Depot, Macy’s and Best Buy round out the seven online retailers. Only Amazon and Apple (AAPL-$168) are buys.

Apple reports earnings later today, bringing on the usual cluster of chattering commentators with contrasting predictions. They can be ignored, as Apple’s strengths have almost nothing to do with short-term headlines. One reason is that its stock is comparatively inexpensive. It will probably earn close to $11.00 a share in its current fiscal year, a P/E of 15, a bargain that also brings a 1.6% yield.

The other reason is its record of game-changing products to which its new iPhone X will doubtlessly soon join. The iPhone was first introduced only ten years ago, bringing to an end the era when you had to buy a separate GPS for your car, flashlights and alarm clocks, stopwatches, video and still cameras and portable video and music players. Its products, soon to include a new watch, are expensive but they replace so many gadgets that they are really a value, as is its stock.

The medical sector continues to offer attractive growth opportunities. New buy PRA Health Sciences (PRAH-$81) provides clinical development services worldwide to the biotech and pharmaceutical industries. 2017 earnings are forecast at $3.30, up from $2.52, a P/E of 24 for a company with a record of growth in the 20% to 30% range. Sales this year will be round $1.9 billion, up from $1.58 billion.

Bob Dylan sang, “You don’t need a weatherman to know which way the wind blows.” The market and its leading stocks continue to point to larger companies with well-founded growth rates. For tuning, keep in mind Mr. Buffett’s recent comment on interest rates that if interest rates were 100 basis points [1%] higher in three years, stocks would still be cheap. If 300 or 400 basis points, they won’t look cheap.


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


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