Taking Stock


Climb Every Mountain

Tony Crowell

As a mountain path gains height, it usually gets narrower. Two years ago on March 6, 2009, the Dow Jones Industrial Average bottomed out at 6,443. Two weeks ago, revolutions in the Middle East prompted panicked selling but the Dow held above 12,000 and needs only a few hundred more points for a double in two years. After this climb, the path is narrowing, demanding careful attention to stock selection, but the path still heads up.

The strongest evidence of the market’s continuing upward bias is its calm absorption of these unsettling news events among oil producing nations. Oil prices flared, as did gold, probably based more on fears than on rational calculations. Egypt’s oil production is minor and Libya ranks only 17th in global production while Saudi Arabia, the leading producer, promised to make up shortfalls.

Possible interruptions to our accustomed patterns of energy supply always send prices up and West Texas crude went to about $100 a barrel. With the global economic recovery well launched and world governments largely committed to free trade, I view this price rise as a caution signal rather than a stop sign.

Particularly in the U.S., interest rates remain modest, inflation contained and its current low dollar exchange rate benefits its exports. Investors should bear in mind that earnings increases accompanied the rise in stock prices over the last two years. Apple, our largest holding, has tripled in price since 2009 but so have its earnings. Amazingly, it still trades at about the same price to earnings ratio as the S&P 500.

Companies like Apple that can introduce products like the iPad, which are so innovative that they create their own industry sectors, are not common. Owning them is rewarding and investors should always be alert for companies whose creativity can move them to the front of the pack.

WPP Group (WPPGY-$68), the world’s largest advertising and public relations group, is a fountainhead of creativity with 141,000 employees in 107 countries. It works with 28 of the 30 companies in the Dow Jones Industrials. WPP includes such familiar names as Ogilvy and Young & Rubicam. Sales are $14 billion, growing at 15% with earnings increasing at a 28% rate.

The ad world has changed from television’s “Mad Men” of the 1950’s, who concentrated on buying drinks and seducing each other. Today’s global economy with its increasingly rapid connectivity demands elite communications services. WPP delivers, yet has a reasonable forward P/E of 14. Yield is 2% and I expect an increase this year.

I also expect further increases in gas prices, already hitting $4.00 a gallon for premium here in Southern California, and also in interest rates later this year or early in 2012, as the business recovery keeps going. Higher gas prices will hurt many retail businesses and rising interest rates will hobble the bond market. Further stock gains will come for manufacturers with good export sales like Roper (ROP-$87), 3M (MMM-$93), DuPont (DD-$55). GE (GE-$21), Globe Specialty Metals (GSM-$24) and Rockwell Automation (ROK-$89).

Strongly capitalized energy stocks will be obvious beneficiaries. Occidental (OXY-$103) and Apache (APA-$125) are headed for new highs. So is SeaDrill (SDRL-$38), a newer Norway-based company unfamiliar to most investors. It has the most modern drilling fleet in the offshore sector, where political strains in the Middle East will force big oil companies to divert their explorations. Earnings can be volatile but last quarter’s earnings of almost a dollar indicates a reasonable valuation. Recently increased dividends equal a 7% current yield. Such quality stocks will keep us on the upward path.

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. (949)-494-1376/(800)-697-2622; www.crowellroberts.com


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