How High the Moon?
By Tony Crowell
Stocks continue to soar to new highs on the Dow Jones Industrial Average, the S&P 500 and the Nasdaq. Five large tech stocks are leading the charge. Apple, Microsoft, Alphabet, Amazon and Facebook have pulled so far ahead of the rest that they now make up 18% of the total market value of the 500 leading stocks in the S&P 500. By an interesting coincidence, on the eve of the dotcom market collapse twenty years ago in March, the Big Five of that day were Microsoft, Cisco, GE, Intel and ExxonMobil; they also made up 18% of the S&P Index. Mark Twain is credited with saying, “History doesn’t repeat itself but it often rhymes.”
Much of their ascendancy of today’s tech companies stems from their links to satisfying consumer demand while old fashioned industrial companies stagnate. Caterpillar recently warned on January 31 that sales of its heavy machinery would slump for a second straight year. CSX, 3M, DuPont and other industrials joined Caterpillar in sluggish sale forecasts. In contrast, McDonald’s and Starbucks reported strong gains for the last quarter of 2019. Even Target, which warned last month of weaker demand for toys and electronics, still reported sales gains over 3%.
The manufacturing sector slumped last year as the trade war with China added costs to supply chains and discouraged business investment. New data show U.S. factory activities expanded only very slightly in January after shrinking in the last five months of 2019. In contrast, U.S. consumer activity reached an eight-month high in January. One reason that the manufacturing decline has not led to a recession is that manufacturing’s share of the economy has continued to contract to its lowest levels since 1947.
Consumer products largely escaped unscathed from the recent quarrels with China. The initial threats last August to impose tariffs on Chinese products including iPhones and toys were first watered down and then mostly rescinded. In contrast, industrial companies were confronted with U.S. taxes on aluminum and steel together with new levies of 25% tariffs on $250 billions of mostly manufacturing-related products. These threats stalled an industrial recovery already burdened with rising labor, materials and logistic expenses. The uncertainties rising from highly variable tariff policies created a discouraging environment for capital expenditures and sales of expensive machinery suffered.
Employment remains encouraging. Despite interruptions in 2019 from a General Motors six-month strike and the grounding of Boeing’s previously best-selling 737 Max jet, the manufacturing industry ended 2019 with a net gain of 46,000 jobs. The profits just reported by the big banks show continuing consumer demand for credit card spending and mortgages, reflecting buoyant consumer activities.
An immediate risk to this “Goldilocks” economy is the coronavirus from Wuhan that, among other consequences, is infecting American- Asian supply chains as it also threatens to erode global confidence. This issue is by no means yet contained although it appears that its spread is slowing. The uncertainties arising from the coronavirus together with its details cloaked in Chines news control are a continuing threat to further market advances. The strong performance of the leading technology companies is likely to continue, while traditional manufacturers lag.
Investors should continue to emphasize stocks in successful technological and biotech companies. Apple (AAPL-$325) and Amazon (AMZN-$2,150) are clear leaders. Visa (V-$206) has staked out a dominant position in payments technology. In defense and aerospace, Leidos (LDOS-$112) and L3Harris Technologies (LHX-$225) are winning key contracts without running ahead of their valuations. BlackRock (BLK-$568) runs the world’s largest asset pool and recently reaffirmed its commitment to preservation of the global environment.
Coherus BioSciences (CHRS-$22) is a new buy recommendation. The company is a commercial-stage biotherapeutics company focusing on the worldwide biosimilar market. (A biosimilar is a biologic medical product highly similar to another already approved biological medicine.) It is already marketing a long-acting anti-infection factor. Clinical stage products include immunology and anti-tumors. The company has collaboration and license contracts with bioscience companies in Japan, Germany and Switzerland.
The company was founded in 2010 and is based in Redwood City, California. On February 27, Coherus will release its earnings report for the fourth quarter. Analysts expect that this will announce that it has achieved profitability with around $.70-.75 earnings per share, a substantial increase from last year’s ($.92) loss. For all of 2020, analysts estimate around $1.50 eps (up from a negative ($3.22) last year. Its timing is fortuitous, its valuation reasonable and its prospects excellent.
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.
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