Taking Stock

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By Tony Crowell
By Tony Crowell

Growing, Growing, Growing

The end of April shows stocks down for three of the four months of 2018. Investors remain grumpy, almost ignoring the strongest reports for years of increasing corporate sales and earnings. Caterpillar was a leading example. The company reported record sales and earnings for the first quarter and raised its guidance for the rest of 2018 by a whopping 25%. They reported strong demand for their equipment in each of their four primary customer industries – Mining, Oil and Gas, Construction and Infrastructure.

Caterpillar stock was up 5% on what seemed like a flawless earnings report until its CFO commented that the first quarter was a “High water mark,” suggesting that none of the next three quarters was likely to beat the recent quarter. Nervous investors then knocked its stock down over 6% to $144. Caterpillar is one of the 30 stocks in the Dow Jones Industrial Average and its price hiccup caused a 117-point swing on the Dow.

Bad price actions kept happening to good stocks although a nice rally is developing with the Dow up 300 points on Thursday. Many stock investors and media commentators obsess on finding some magic indicator that can forecast the direction of the stock market. No one has although there is a strong negative correlation between interest rate trends and stock market behavior.

As the Federal Reserve pushes rates up to suppress possible economic overheating, stock prices reduce headway, opening downtrends if the Fed or economic shocks smother growth, leading to a recession. Wall Street runs on borrowed money and reversed downwards on headline news this week that the yield on the 10-year Treasury bond had risen to 3%.

As usual, this was an overreaction. The 10-year bond was only a half point lower a year ago and 3% is a historically low rate. Investors are probably mourning the end of the super-low rates that fueled the recovery from the Great Recession. While an extended period of rising rates would cripple any stock market rally, consumer and corporate borrowing remains robust. With stocks like Merck (MRK-$59) and Royal Dutch Shell (RDSA-$70) paying over 3% in dividends, bonds are hardly a compelling alternative to stocks.

Earnings are key and our portfolio stocks are ringing up sales and earnings that are blowing out analyst estimates. Rising earnings are in part the product of recent tax cuts but most increases are coming from strong business growth.

Higher interest rates traditionally benefit financial stocks. In this strong sector, Bank of America (BAC-$30), BlackRock (BLK-$523), JPMorgan Chase (JPM-$110) and Visa (V-$127) all beat estimates for sales and earnings and raised their forecasts. These each combine double-digit estimated growth with reasonable valuations. Their relatively restrained price action probably stems from delay in reducing expected bank regulations. They are doing just fine under existing regulations.

Among medical stocks, AbbVie (ABBV-$97), Amgen (AMGN-$176) and Edwards Lifesciences (EW-$129) also beat estimates for sales and earnings. Merck reports on May 1 and 12% growth is forecast. Our technology stocks and advanced manufacturers are strong. Thermo Fisher (TMO-$214) is up five points after reporting earnings per share of $2.50 for the quarter, up 20% from a year ago and ahead of analysts’ estimates of $2.40. Despite macro concerns of political actions and interest rate worries, stocks are posting good report cards for the first quarter.

Increasingly favorable economic developments will encourage consumer stocks. I am adding a new buy, Tapestry (TPR-$54), a new design house and successor to Coach, the 75-year old line built on luxury leather goods. It first acquired Stuart Weitzman and recently added Kate Spade. Earnings are due May 1 and should show Tapestry on the runway for about $2.60 earnings per share for 2018, up from 2.15. That’s good growth and there’s even a 2.5% dividend.

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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