Taking Stock

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By Tony Crowell
By Tony Crowell

Steady As She Goes

The stock market’s remarkable streak of 15 straight gaining months came to an end in February, when the S&P 500 gave up 3.9%. Halfway through March, the overall averages have almost erased the previous month’s loss and are very slightly ahead for the year.

Our portfolios are weighted toward the stocks recommended in this column and have solid gains so far this year. My top ten are Apple (AAPL-$178), Nvidia (NVDA-$249), Amazon (AMZN-$1,583), Amgen (AMGN-$189), Visa (V-$123), Applied Materials (AMAT-$60), Abbvie (ABBV-$115), Novo-Nordisk (NVO-$50), Morgan Stanley (MS-$57) and Broadcom (AVGO-$267). Lam Research (LRCX-$223), Morgan Chase (JPM-$115) and Bank of America (BAC-$32) are leading contenders.

Readers may recognize these as repeated buy recommendations among advanced technological, health care and financial sectors. While much Wall Street research still centers on the traditional and staid energy, industrial and consumer product sectors, I believe that longer lasting stock values will continue to be found in companies whose research into and adoption of leading technological innovations will lead to higher and more sustained earnings growth.

I doubt that the 15-month steady growth record will be broken in our lifetimes; it even remains uncertain if March can begin another streak. The streak produced some complacency and returning to more traditional volatility is jangling investor nerves. Investors should try to keep perspective well beyond obsessing on the usual daily price fluctuations and media braying.

Investor enthusiasms, like their fears, always overshoot. It is not uncommon that leading stocks pause for a quarter or two to allow their earnings to catch up with their stock prices. This often shifts attention to companies rich in assets and potential whose earnings have not made headlines. Royal Dutch Shell (RDSA-$61, recommended in January, qualifies and its 6% yield helps the waiting.

Merck (MRK-$55) is another buy for stable growth. Its next earnings report on May 1 should show it on track for around $4.17 this year, up 5%, and a modest PE ratio of 13. Its dividend yield is 3.5% with increases for 6 straight years. Its CEO, Kenneth Frazier, the son of a janitor, is the first African-American to head a major pharmaceutical company. I believe that that women and minorities who have achieved success in highly competitive fields have developed an extra edge that can be associated with business success and, quite possibly, in stock prices.

Investors should realize that the media play to their anxieties. This Monday, there was much ado about nothing as Boeing ($329) dropped 14 points on news of proposed tariffs, taking a hundred points off the Dow Jones Industrial Average. This is a peculiarity of the DJIA, which Charles Dow first calculated in 1896 by an arithmetic average of industrial stocks. (General Electric is the only survivor from the beginning.)

The divisor must be factored down whenever a member company splits its shares to maintain continuity. There have been a lot of splits over the past 122 years and the divisor, actually now a multiplier, is down to 0.145. A one-dollar move in any of the Dow components thus translates to almost a $7 swing in the average. This gives a distorted weight to the higher priced members of the index. The S&P 500 and NASDAQ are weighted by market cap but they haven’t been around nearly as much as the Dow and old habits die slowly.

Qualcomm (QCOM-$59) is down 6% this year following the collapse of its ill-starred flirtation with Broadcom. Qualcomm has done much for its native San Diego but its stock has gone nowhere for years and it may be looking for a friendlier merger partner. Meanwhile, Broadcom announced it will move its headquarters from Singapore to the U.S. It has and is projected to grow earnings at double-digit rates.

When Stephen Hawking, the scientific genius, was 21, he was given three more years to live. Despite grave illness, he died this week 55 years later. This comment shows his perspective. “We are in danger of destroying ourselves by our greed and stupidity. We cannot remain looking inwards at ourselves on a small and increasingly polluted and overcrowded planet.”

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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