Taking Stock

Tony Crowell
Tony Crowell

Stocks are alternating up and down days, creating a chart pattern that looks like an electrocardiogram. The market’s uptrend remains intact but under some pressure as investors fret whether the forthcoming round of quarterly earnings reports will be sufficient to sustain its momentum. For the last three years, April brought us a spring swoon that kept stocks down through the following summers.

Most earnings reports will show further gains, the Federal Reserve is maintaining its support and there are signs of mild acceleration in housing and other sectors. Consequently, a pause would probably be moderate, perhaps 5-10%. That hardly justifies panicked selling, never a sound investment strategy, but some spring cleaning is appropriate.

I sold our positions in Novartis, the Swiss-based pharmaceutical company. It was making new highs but its earnings growth looks to be flat for the rest of this year. An excellent company, it remains on my watch list for possible repurchase on a price dip.

I replaced some of these positions with Pfizer (PFE-$29), the world’s largest pharmaceutical company. Its drug pipeline is substantial, there are interesting developments with its growing consumer divisions and it is trading for only 12 times 2013 earnings while yielding 3.3%.

In another vital sector, the U.S. energy sector is being reshaped by the increasing availability of its vast reserved of cheap natural gas. This is a developing major story with unresolved issues of environmental impact, transportation and exporting. It is already wiping out the coal industry and may do the same for nuclear power.

One pressing problem is shipping, particularly with many pipelines at capacity. Niche players are doing well and I am repeating last week’s buy recommendation of EQT Midstream Partners ($38). At the other end of the spectrum, I am impressed with the successful efforts of Chevron (CVX-$118) making new finds all over the world as well as its aggressive purchases of reserves from smaller companies.

Chevron is selling at only 9 times earnings, roughly half that of the S&P 500. Its stock yields 3.1% with dividend increases for each of the last 19 years. Chevron is not on center stage amid the current excitement about shale energy extraction and is thus an unusual value.

Energy exploration and transportation companies are often organized as partnerships, usually providing above average yields. In response, investment managers have recently developed a number of closed-end funds to invest in these sectors. Their current popularity has brought investor interest pushing most of their prices above their net asset values.

Tortoise Capital provides energy management services including running seven closed-end funds of which only one is still trading at a discount to net asset value. Tortoise Power & Energy Infrastructure (TPZ-$26) is trading now at a 7% discount while yielding almost 6% paid in monthly distributions. Larger holdings in its portfolio include Kinder Morgan, Enbridge, ONEOK, TransCanada, and other sector leaders. As a closed-end fund, its distributions are reported like traditional dividends without the need for K-1’s.

Apple (AAPL-$428), still our largest position, continues to wobble as it approaches the April 23 date for its next earnings release. Estimates for its annual earnings have dropped to around $44 a share for this year and for 2014. These seem overly pessimistic but, even so, that’s a P/E ratio of 9 on a company that just started paying dividends and is already yielding 2.4% already.

Down from almost 40% from its high last fall of $705, it’s not hard to envision a few innovations pushing its price up 60-70 points a year. That’s 15-16% annualized that, with a growing dividend, is not a bad return. This may no longer be the company that Steve Jobs built but it is still a sound investment.


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 1993. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

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