Taking Stock

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Tony Crowell
Tony Crowell

It Was A Very Good Year

It was a very good year for stocks. With the closing bell coming on Friday, the broad S&P 500 is up around 20%, the blue-chip Dow Jones Industrials 25% and the technology-heavy NASDAQ 30%. I have continued to emphasize that investors concentrate on larger, growing companies, particularly in technology and advanced medical technology. Our returns in 2017 have thus been quite pleasing, however, one of the requirements for investment success is a continuing sense of humility.

The strong financial markets this year bring to mind Charles Dickens’ opening to A Tale of Two Cities, “It was the best of times, it was the worst of times, it was the age of foolishness, it was the epoch of belief . . . “ Many analysts forecast that this would be a bad year for bonds and a good year for gold but bonds did well and gold didn’t.

Perspective and patience are other investment virtues. Warren Buffett bet in 2008 that the S&P 500 would outperform hedge funds over the next ten years. The more celebrated analysts on Wall Street manage hedge funds but the results weren’t even close. A selected package of hedge funds fell so far behind the S&P that the hedge fund manager who took the bet conceded last May, seven months before the end of the bet.

Five well-known blue chip stocks shared a common factor in 2017. General Electric, IBM, Exxon Mobil, Merck and Verizon were all down for the year. Even some of the traditional consumer giants like Coca-Cola and Disney were flat. The new leaders besides technology are from the financial and advanced medical sectors. Older retailers like Macy’s (down 28%) will lag.

Amazon (AMZN-$1,185) took 45%-50% of the online retail market, up from 38% last year. Despite its erratic earnings history, its focus is very long range and its stock is an entry into the most advanced technology in retail. Apple (AAPL-$170) demonstrates its continuing leadership in having become the world’s largest private company. Its size guarantees it the continuing attention of critics knowing that negative comments are more likely to win them media attention. Their recent criticisms center lately on the reception for its iPhone X and investors should use any ensuing dips to buy more of its stock before Apple’s next earnings report coming at the end of January.

Overall, economic conditions are strong. Unemployment is down to 4.1% with 200,000 new jobs coming monthly. This will finally bring some improvement in wages that will, in turn, increase personal consumption. This should also induce mild inflation, which would also boost the economy.

At some point, stocks will overshoot and the inevitable “correction” will swat those who tried to make too much, too soon. The market has been unusually stable and on January 5, 2018, it will mark a streak of 394 trading days without a 5% dip, a consistency not seen for nine decades. This should not induce complacency, always an investor vice.

Among our recommendations these stocks are timely buys: In tech, Applied Materials (AMAT-$521), Nvidia (NVDA-$197), Lam Research (LRCX-$185), Microchip (MCHP-$88) and Coherent (COHR-$285). Abbvie (AABV-$97), Edwards Life Sciences (EW-$114) and PRA Health Sciences (PRAH-$90) are advancing medical stocks. Bank of America (BAC-$29) and Visa (V-$114) are strong in an improving financial sector.

An accelerating economy will at last bring some action to the housing and infrastructure sectors. Boise Cascade (BCC-$39) has straightened out its organization, restored its dividend and should almost double its earnings for 2017 with at least 20% growth next year. Masco (MAS-$44), a leader in home and building products, has similar prospects. Vulcan Materials (VMX-$127), an infrastructure materials provider, is headed for accelerating growth next year. Investors should consider establishing initial positions before their next earnings reports due in the next few weeks.

Stocks faced many uncertainties this year and, on average, came through nicely. Investors may profit from their examples. Happy New Year!

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

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