Taking Stock

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Tony Crowell
Tony Crowell
Fear Vs. Evidence, Growth Vs. Value

As Mark Twain said about the weather in New England, if you don’t like the stock market now, just wait a few minutes. After zigzagging during the first quarter only to end almost flat, the stock market first plunged on Wednesday as China announced retaliatory tariffs, then the Dow Jones rebounded more than 700 points from its low. This was the second day of a rally attempt within a stock market correction, not nearly enough to signal a new uptrend but still adding a welcome bullish tinge to the market, particularly as Thursday then added 240 points.

Confusing actions on tariffs and Mr. Trump’s attacks on Amazon.com have exacerbated Wall Street fears. A trade war serves nobody and China’s responses seem to have prompted the White House to backpedal some tariff proposals. I expect that Amazon’s widespread array of consumer services will carry it through this commotion although its current valuation of over 200 times earnings is of concern.

Its stock price is up 20% so far in 2018 after a 59% climb last year and I sold our positions in our non-taxable retirement accounts. (Selling in our taxable accounts would incur whopping capital gains.) It remains among my top ten positions. I am continuing to add dividend-paying stocks with less lofty valuations in view of market turbulence.

Investors pay too much attention to agitations stirred up by media attention to stories that stir up emotions. As the wise Mr. Buffett said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

It’s twice that level now in this young century and investors should try to keep perspective despite headline news targeted at their fears. In stocks, as in many other fields, success demands continuing effort to distinguish fears from evidence.

Successful stock investing also requires analysis of the strategies of growth versus value. Long-term, the stock market has provided exceptional benefits. Home values, popularly believed to be reliable investment sources, have done quite well, particularly since the 1990’s. This is largely a recent trend as home prices over the previous 100 years from 1890 to 1990 outpaced inflation by only 0.21% annually. Meanwhile, the stock market rose around 7% per year, roughly double the inflation rate.

Over these longer periods, value stock strategies outperformed growth stock strategies. Growth investors seek trendsetting stocks growing faster than the market. Their downside is that their growth may falter or their stock prices overshoot. Value investors search for stocks trading at discounts, often mature businesses. Their downside is that they sometimes get even cheaper while their more stable businesses cannot produce the soaring returns of growth stocks.

Both strategies can work and I have emphasized growth stocks bought at reasonable values. The growth sector does better during periods of low interest rates and economic recovery as they have done over the past ten years. With signals of ever-stronger recovery and of the Federal Reserve raising interest rates, value strategies are coming forward.

This reaffirms recent buys Royal Dutch (RDSA-$66). Diamondback Energy (FANG-$124) and Merck (MRK-$%$). Louisiana-Pacific (LPX-$30) and First American (FAF-457) will benefit from increasing homebuilding as will Continental Building Products (CBPX-$29), a leading maker of gypsum wallboard. It recently announced quarterly earnings that beat Wall Street estimates and is trading at 16 times expected earnings for 2018.

Value stocks outperformed growth stocks for 15 straight quarters from 2002-2006, the last period of interest rate increases by the Federal Reserve. As Mark Twain also said, “History doesn’t repeat itself but it often rhymes.”


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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