Taking Stock


Winter Of Discontent; Spring Of Promise

Stocks managed a nice 5% gain in the first quarter of 2010. This was a particularly commendable showing in the face of a winter of discontent with unsettling news from the Middle East and Japan as well as continuing economic softness in Southern Europe.

This performance reflects not only underlying buying pressure, the important emotional factor in stock market behavior, but also continuing rational valuations in most stocks. Corporate earnings reports for the March quarter begin arriving later this month and I am confident that their overall increases will exceed the 5% gains in stock prices for the same quarter, leaving the market still at reasonable earnings valuations.

Investors have experienced a good run since the wretched market bottoms two years ago and another pause for breath would not be unusual and would present an opportunity to add to positions so long as the economic recovery continues.  With job creation still lagging badly, the Federal Reserve is likely to continue its monetary policies that promote business expansion in a low interest rate environment. That’s good for increasing corporate earnings and for investors in their stocks.

Housing is still a troubled sector. I considered selling short some of the homebuilder’s stocks but that aggressive tactic would probably be a distraction from our successful strategy of concentrating on stocks of larger growing companies. Bill Tilden, the great tennis player, said, “Never change a winning game; always change a losing game.”

Aided by a weak dollar, US exports are booming, up 21% in 2010 from 2009. Its workforce deserves much credit with increased productivity shouldering the load with little gain in jobs. Until hiring picks up, I feel the retail and other consumer-oriented sectors will remain fragile.

There are many excellent companies in other sectors trading at valuations reasonable enough to provide a margin of safety. IBM (IBM-$163) and DuPont (DD-$55), two stocks in my top ten holdings, will soon report double-digit earnings increases and pay decent dividends, yet trade at moderate multiples of their earnings. Much as I admire exceptional companies like Amazon, I cannot feel comfortable recommending it at 71 times current earnings.

Reasonably valued technology stocks are timely buys. Repeaters include EMC (EMC-$27), Oracle (ORCL-$33) and Amtech (ASYS-$25). Digital Realty Trust (DLR-$58) is an interesting variation on the tech theme. This is a Real Estate Investment Trust engaged in owning and managing tech-related real estate. It is the largest such company and presently owns 95 data centers in North America, Europe and Asia. It has an investment grade rating, pays a current 5% and has an excellent record of dividend increases.

I recommend Digital Realty over the much better known AT&T even though AT&T offers a slightly higher yield. It just announced a large merger with T-Mobile that will probably take a year for regulatory approval, probably requiring divestitures of some businesses and creating other uncertainties. Analysts expect the merger to be completed eventually, a good thing as AT&T would otherwise owe a substantial fee to the seller, Deutsche Telecom.

Whenever this merger closes, it will leave the U.S. cellular market dominated by a “Big Two” of AT&T and Verizon Wireless. Verizon also yields around 5% but I think the better buy is Vodafone (VOD-$29), the big UK-based wireless company that owns 45% of Verizon Wireless. Its majority partner, Verizon, has been using cash flow from the wireless joint venture to reduce its debt and the forthcoming AT&T buyout might spark a buyout of Vodafone’s interest. Meanwhile, it’s growing a bit faster than any of these others and also pays a 5% dividend.

With stocks getting the year off to a promising start despite many troubling developments, spring looks very promising.

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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