Interesting Times
Only two weeks ago, the Dow Jones Industrial Average went into free fall, down 1,600 points before buyers charged in, bringing the decline to a 1.175 points, a new record. Today, the Dow is back, flirting again with the 25,000 level, not too far from its January 26 closing record of 26,616.
The stock averages may be back but conditions on the playing field have changed. The January dips broke a period of such little price volatility that investors may have been lulled into complacency. These drops took the market down over 10%, the definition of a” correction” and the first one since 2015. On average, “corrections” come along about once a year, investors shook this one off and the market resumed its uptrend.
The Federal Reserve and other central banks have provided a playing field of historically low interest rates that laid the foundation for economic and market recovery from the recent Great Recession. This worked with textbook precision and minutes of the Fed’s recent meeting showed a stronger economy than that at the end of 2017, bolstered by overall real wage gains and low unemployment.
Stock market volatility is returning and we can expect a return to the usual zigzag market behavior. Higher interest rates are coming and they will subdue market exuberance like chaperones at a party. The Fed has suggested three or possibly four quarter-point interest rate bumps this year; that would still leave rates in a workable range. Still, higher rates are coming that will take a toll on the bond market.
Stocks in companies that can deliver double-digit growth rates will continue to be the gold medal winners. This is the dawning of the age of technology and larger tech companies have pricing power plus research strengths that will keep them on the podium. Proven winners are Apple (AAPL-$172), Applied Materials (AMAT-$56), Broadcom (AVGO-$259), Corning (GLW-$29), Lam Research (LRCX-$188), Microchip (MCHP=$84), MKS Instruments (MKSI-$112) and Nvidia (NVDA-$241).
I am adding Alibaba Group (BABA-$188), the large and rapidly expanding China-based mobile commerce company that provides a variety of services to business and retail customers. Annual sales are approaching $40 billion, growing at over 50%. Earnings are keeping pace and will be around $5.15 for 2018, a reasonable valuation for such sustained growth.
General Dynamics (GD-$220) and Northrop Grumman (NOC-$350) are both trading near new highs on record earnings. Defense contracting is unlikely to slow under developing global conditions. General Dynamics will enjoy an extra edge as global economic growth brings increased sales to its leading business jet Gulfstream division.
The Broadcom and Qualcomm takeover is foundering with Broadcom actually lowering its takeover bid. Qualcomm’s stock price is down three points from our sale last week. Broadcom seems committed to further growth by acquisitions and its stock is a buy.
I have added to our positions in AbbVie (ABBBV-$117). The company provides pharmaceutical products worldwide. Analysts are increasing their earnings estimates, now ranging about $1.86 for this quarter, up from $1.28. There is a 3.2% dividend yield and buys before its next earnings date in late April look timely.
Royal Dutch Shell (RDS.A-$63) adds an asset-rich company as balance to our portfolios. Sales are over $310 billion and growing steadily. Analysts expect earnings for this March quarter around $1.23, up from $0.92. The dividend yield is a generous 6% and Shell’s genuine commitment to alternative energies will make it an institutional favorite.
The times have become more turbulent while I believe the opportunities are enhanced for investors who keep their cool. Paradoxes will always prevail as Dickens wrote, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness . . . Keeping perspective while the media babble about fluctuating prices is often difficult but usually rewarding.
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
