Taking Stock

Tony Crowell
Tony Crowell

Happy New Year On The Street

Wall Street observed the New Year in reverse order. Crowds in the streets, noisemakers and fireworks celebrated the passing of 2017 but stocks were in a sour selling snit. Investors were still nursing hangovers when the stock market greeted 2018 with broad and vigorous buying that elevated the Dow Jones Industrial Average above 25,000.

The market’s advance has been remarkably consistent. Through January 4, the representative S&P 500 Stock Index has not registered a 5% decline for 384 straight trading days, the third-longest streak on record. The second-place record is 386, which it can overtake on January 8 and, if a 5% drop doesn’t strike before the end of trading on January 18, it will match the longest streak ever of 394 trading days.

Even more unusually, the S&P is already in its longest streak ever without a 3% decline. This consistency reflects the overall strength of the market. The S&P gained 19.7% in 2017, its best year since 2013, and, with dividends, it has gained for fourteen consecutive months, another record.

This calm lack of volatility in the market is part of its steadiness. Within stock sectors, investors have become more agile in switching from the laggards to the innovative. Stock selection is thus more critical and investors who relied on the traditional old guard are not matching overall market strength.

IBM, Exxon Mobil, Merck, Pacific Gas & Electric, and Verizon were all down during the year. Under Armour, a once hot sportswear maker that traded at $99 in 2015, lost 50% and proud GE lost 44%.

As the year began, Intel, the largest microprocessor maker announced a major security flaw discovered by outside researchers. Its stock dropped a few points but worse yet, it seems its CEO sold most of his stock after discovery but before the public announcement. Its stock is a “Sell.” “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”-Warren Buffett.

There is no need to compromise with the stock of a company that has compromised itself, particularly when there are superior alternatives. Nvidia (NVDA-$213), Applied Materials (AMAT-$54), Coherent (COHR-$286), Lam Research (LRCX-$193) and Microchip (MCHP-$92) are all developing innovative products as fundamental building blocks in our rapidly expanding world of technology.

I intend to emphasize these product makers rather than platforms like Google and Facebook. These face potential government and customer restraints in view of disclosures that their unrestricted policies have permitted foreign government meddling with election and other diffusions of misinformation. The tech giants are now grudgingly accepting that the have responsibilities to the offline world. Changes to their business models will impinge their profit margins. Although Intel’s misadventures points out that hardware companies also operate in a demanding environment, they face less restraints, at least for now.

MKS Instruments (MKSI-$100) is a new Buy recommendation. This Andover, Mass, -based company has $2 billion sales from instruments and process control systems for advanced manufacturing worldwide. Earnings for 2017 will near $6.00 per share, up from $3.03 last year. There is a modest but growing yield of 0.7% from dividends increased regularly for 6 years. Its next earnings report is due in early February and initial investments this month are timely.

The Dow’s rise through 25,000 is sparking concerns that we may be in some sort of “bubble.” That’s actually reassuring as bubbles form when these concerns disappear in excited stampedes to “get into the market before it’s too late.” This sounds more like Bitcoin and its imitators as stocks ride with the economy, which is presently strong, broad and gaining momentum.

Investors should keep a weather eye on the Federal Reserve and its tentative plans to raise interest rates three times this year. A delay would indicate a possible signal of slowing growth while stepping up the pace might signal the return of inflation. Meanwhile, all systems are “Go” for a countdown to a 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


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