Taking Stock

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Tony Crowell
Tony Crowell

Greetings from Earnings Season

Both the Dow Jones Industrials and the S&P 500 broke their streak of nine straight positive quarters three weeks ago as the first quarter ended. Each index was off about 2% for the quarter, enough to ignite returning fears on Wall Street. Technology stocks did better; the NASDAQ index, which includes many tech stocks, gained 3% for the first three months. Three weeks into the second quarter, all three indices are up 2% as the correction ends.

This modest growth is encouraging as the market is making these gains despite worries of Fed interest rate increases and of setbacks to trade from the United States and China imposing tariffs in each other’s goods. Each of these factors subdues growth and the market’s stumbling up the stairs indicates that investors should continue my favored strategies of emphasizing stocks that can continue to produce superior earnings growth.

Earnings reports are starting to come in with overall encouraging results. The prospective benefits from reduced corporate tax rates have encouraged analysts to raise forecasts toward an estimated 20% growth rate. If achieved, this would be the highest growth rate since 2010 and the fourth quarter of double-digit earnings reports among the last five quarters.

Investors will not have to wait long as three quarters of the companies in the S&P 500 will report results over the next three weeks. The banks have already turned in their scorecards and results were excellent, including my selections: Bank of America (BAC-$30, JPMorgan Chase (JPM-$111) and Morgan Stanley (MDS-$54). All three dipped slightly after reporting for no apparent reason, and are now rebounding in a down market day. This illustrates the importance of studying the actual performance and prospects of companies rather than just monitoring stock prices.

Amazon.com (AMZN-$1,550) shot up after CEO Jeff Bezos revealed it had over 100 million Prime members, its enhanced service option that costs $99 annually. It announces earnings in a week that will give further evidence of the company’s unique skills. It has a fast-growing entertainment business that is moving to Hollywood’s historic Culver Studios, home of “Gone With the Wind,” Citizen Kane and “E.T.” With a Price/Earnings ratio around 250 and no dividend, traditional stock analysis doesn’t compute but its stock is a dynamic holding for aggressive portfolios.

Taiwan Semiconductor (TSMC), a leading maker of various components, forecast sales growth of 5% in smartphones, down from 5%-7.5%. Analysts translated this to soft sales for Apple (AAPL-$173), which dipped slightly as did suppliers like Broadcom (AVGO-$241). It also lowered growth estimates for contract chipmakers, causing price dips for Applied Materials (AMAT-$51) and Lam Research (LRCX-$190). Lam beat estimates for both sales and earnings but its price dipped on a warning of future slowing orders. High tech companies often experience these temporary setbacks and they are usually forgotten by the next quarter’s results.

While some of the highly valued advanced tech stocks are pausing, more conservatively valued asset- rich stocks are making quiet progress. Royal Dutch Shell (RDSA-$70), Diamondback Energy (FANG-$129), Merck (MRK-$58) and DowDuPont (DWDP-$66) will announce earnings over the next few weeks. Analysts expect good results from each and they are all buys.

In aerospace, Northrop Grumman (NOC-$358) and General Dynamics (GD-$224) are reporting in a week and analysts expect solid growth. Their valuations are reasonable, they have decent dividends and their prices bump up whenever world tensions are exacerbated.

Market volatility has returned, adding to investor concerns. With increased earnings estimates arriving, I paraphrase Paul Simon in saying, “Hello, earnings, my old friend ..”

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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