He Walks the Line
Stocks continue to take direction from the comments of Federal Reserve Chairman Bernanke. He recently emphasized that the Fed remains committed to shoring up the economy and that any deceleration in its policies will happen because it is achieving its goals, not because it has lowered its sights. Since the Fed initiated its programs of buying bonds to lower interest rates, the line between stimulus and inflation has dominated Wall Street’s attention.
Investors greeted Mr. Bernanke’s latest comments as if he were Johnny Cash singing, “I walk the line.” Stocks continued their recently resumed uptrend with new highs in both the Dow Jones Industrials and the S&P 500 averages. (The NASDAQ average is still well below its peak in the dot.com bubble of 2000, a useful reminder of the dangers of “irrational exuberance.”)
We now have second quarter earnings reports from 76 of the 500 companies in the S&P 500. Total earnings so far are up 12% from 2012 with over half of those reporting so far beating earnings “expectations.” Sales are a little softer, with a growth rate of 5%. Most estimates for the second half of this year look for a significant pickup in earnings. Companies will provide guidance for the third quarter and the rest of the year as their reports come in.
Some of the stronger earnings gains in the second quarter came from the finance group. I am adding JP Morgan Chase (JPM-$56) as a new buy recommendation. Its earnings report shot past expectations and it recently raised its dividend. Like its brethren banks, it is still cleaning up the messes exposed by the financial crisis but its progress seems superior. The raised dividend brings its current yield to 2.8%, providing support as it continues its progress.
Investment banks BlackRock (BLK-$278) and Blackstone (BX-$23) both reported excellent earnings and remain buys. Both offer good dividend yields and with solid growth expected this year. American Express (AXP-$74) also reported strong earnings and is a buy.
Housing starts moderated in June but are still up 25% from last year. The Fed’s low interest rate polices combined with a decreasing inventory of existing homes point to continuing gains in this key sector. Masco (MAS-$20), the maker of brand name products for home construction and improvement recommended last week, will probably more than double its earnings this year.
I am adding Whirlpool (WHR-$119) as another new buy. This substantial global manufacturer of home appliances appears on track for sales over $18 billion this year and earnings per share around $9.70, up over 35%. Like Masco, it has a stable of brand names besides Whirlpool, including Maytag, Amana, and Kitchen Aid. Both companies will report second quarter earnings by the end of the month.
A recent study of successful public companies found two patterns used in their decision-making. The winners consistently chose “better rather than cheap.” Apple (AAPL-$431) comes to mind with its history of innovative products, invariably introduced at higher prices than whatever then passed for competition. A slowdown in its parade of new products has set back its stock price but I would not bet against this company. It yields almost 3% and its earnings report due next week may yield some surprises.
The other thought pattern of winning companies was to value increased sales rather than decreased costs. Both Google (GOOG-$910) and Amazon (AMZN-$304) are good examples. Companies that downsize or shave costs rather than leading into new directions will not be lasting values for investors or for anyone in the long run.
As Chairman Bernanke pointed out, our economy is still not growing as fast as it should be. The resulting uncertainties are good reasons for emphasizing investing in large companies. The strong ones will endure.
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/