Taking Stock

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By Tony Crowell
By Tony Crowell

Time For Gratitude

With the market up over 15 % this year, stock investors should express gratitude at Thanksgiving for a strong bill market. Unrelenting instant news of squabbles in Washington jeopardizing Wall Street’s dreams of tax cuts continues to provide enough worries to stifle further robust gains. The earnings season brought the most favorable results and optimistic forecasts in years but that’s over until January. We are already getting selloffs in stocks with less rosy prospects like General Electric, Target and Best Buy.

Retail continues in transition. Wal-Mart (WMT-$99) made new highs after its quarterly earnings report beat estimates. Its online sales were up strongly with grocery sales adding to profits. Amazon (AMZN-$1,135), which will report its quarter’s results in early February, entered the high-end grocery business in June when it bought Whole Foods for $14 billion, its biggest acquisition ever.

Amazon then slashed prices on many items at Whole Foods, leading to an immediate increase in foot traffic. Many of these new customers came from Wal-Mart, an indication that Amazon bought Whole Foods not to get into the low-margin grocery business but because it wants to develop a physical retail business.

Both companies will be in the news as we celebrate the two other holidays besides Thanksgiving in late November, Black Friday and Cyber Monday. Black Friday dates back to the 1950s, when stores kicked off the Christmas shopping season with big sales the day after Thanksgiving. In theory, store profits would tip into “the black” as shoppers fought to get inside. Then came the Internet and Cyber Monday, which began in 2005.

Why Monday? It turns out that many people still like to shop at the office with its fast connections. Today, Black Friday is as much an online event as inside the physical stores with a diminishing number of retailers running “doorbuster” sales that require shoppers to actually show up. These might be the best deals as stores are willing to lose money in order to get shoppers to fight crowds to get in the door.

Last year, online sales on Cyber Monday hit $3.45 billion, a new record, pulling ahead of Black Friday sales of $3.34 billion. The trend is clear and Amazon remains my only buy recommendation in retail. Its earnings are erratic but its sales growth is overwhelming. Its 2016 sales were $136 billion, 2017 are estimated at $177 billion and 2018 around $228 billion.

In other traditional sectors, General Motors (GM-$43) and Ford (F-$12) reported excellent results. Their stocks are trading at very reasonable price/earnings ratios and their dividends are attractive. This could also have been said of General Electric, which traded at $23 in October and is now at $18. Like Wal-Mart expanding its online business, the automakers are investing vigorously in electric and autonomous vehicles but they face difficulties altering course away from their conventional cars and trucks with their fat profit margins. It’s hard to make a modern technology company out of the old guard.

The drama of Qualcomm (QCOM-$66), last week’s recommendation, is playing out initially as expected. Its Board of Directors rejected last week’s $70 offer from Broadcom (AVGO-$273) as “inadequate.” These opening moves are like two chess players each opening with Pawn to King 4, setting the stage for the next moves to indicate the game’s direction. Qualcomm stock has moved up to the $65-$66 range from last week’s $63-$65.

The next move is Broadcom’s and it will probably soon announce either an increased offer or a proxy fight or both. Any of these should kick the price above $70, thus I continue to recommend a buy. This is a complicated transaction with both companies already having other substantial acquisitions pending b regulatory approvals and I will be continually reassessing the risks to rewards as the corporate battle continues.

In today’s accelerating world, the most forward-thinking technology companies are the likely survivors rather than “the Old Guard.” After all, it has been said of the Guard at the battle of Waterloo that it might die but would never surrender. Among stocks, the “Old Guard” should be sold to make way for the new like Apple (AAPL-$171) or Nvidia (NVDA-$212.

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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