Taking Stock

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Tony Crowell
Tony Crowell

Happy Birthday, Bull Market!

The bull market in stocks is five years old this week. That certainly does not signal running to the hills, panicked selling never being a successful investment strategy, particularly since stocks have averaged a 26% gain over the year following a five-year anniversary. Averages are of limited use in planning and it is worth recalling that the last five-year bull market anniversary was in October 2007, just before stocks began a sickening plunge.

That happened while soaring real estate prices had brought euphoric visions of riches to every mortgage broker in the country and similar complacency abounded in the stock market. Market bubbles burst when overconfidence dominates financial media; a healthy skepticism is more prevalent in today’s markets.

Perhaps the best indication of the strength of today’s stock market is its reaction to Russia’s military theatrics in the Crimea. Essentially, there was no reaction as stocks sold off for a day or so and then rallied in the absence of any return to Cold War days.

As I’ve written here recently, momentum alone seemed sufficient to carry the market to new highs on the S&P 500 average. This happened, repeated and is continuing with new highs; the more publicized Dow Jones Industrial Average is within easy range. A new high on the Dow would spark more publicity and, in all probability, a further modest advance before a pause for breath.

While valuations are high, they are far from historic peaks while corporate earnings continue to grow. Interest rates are still low, benefitting those earnings, but are increasing, making bonds a weak alternative. Sticking with quality stocks backed by growing earnings and avoiding trying to trade the market remains a winning strategy.

The Walt Disney Company (DIS-$83) qualifies. Media companies can be erratic but Disney is both large ($48 billion sales) and diversified. Its parks, resorts and consumer products balance the entertainment divisions. Earnings for the current quarter will be around $.95, up from $.79, and for its (September) fiscal year around $4.00-$4.10, up from $3.39.

Starwood Property Trust (STWD-$24) is my newest recommendation. This Real Estate Investment Trust recently spun-off its residential operations and now focuses on commercial mortgage loans. The company just reported a solid December quarter that brought core earnings for 2013 to $2.24 a share, up from $1.99 in 2012.

It declared a dividend of $.48 for this March quarter, an annualized current yield of 7.9%. The stock goes “ex-dividend” on March 27. Starwood’s initial guidance for all of 2014 is for a repeat of last year’s results. This seems guarded and I expect further gains as its operations advance through the year. Its loans are primarily floating rate and thus will adjust to increasing rates.

Although the demand for agricultural chemicals and seeds continues to grow, variable weather pressured sales, putting a brake on the growth of American Vanguard. I sold our positions with most of the proceeds earmarked for DuPont (DD-$67). This veteran company will exceed $37 billion in sales this year on growth rates in the 4-6% range both this year and next. Earnings per share will be around $4.35, up from $3.88.

Cognizant Technology (CTSH-$106) is posting similar growth results and potential. This leading outsourcing company should come in with over $10 billion sales this year, up 17% or so, with earnings for the full year around $4.85, up from $4.03.

Recent disturbances revived the outlook for defense stocks. Northrop Grumman (NOC-$123) is recovering nicely from budget cuts last year. Its diversified array of companies will produce earnings around $8.90-$9.00 this year, up from $8.35. The stock yields two percent and the company has boosted the dividend for nine straight years, making it quite suitable for retirement accounts.

The stock market hardly flinched on news of Russia’s most recent military misadventures. Apparently, our greatest financial threat continues to come from shortsighted struggles within our own Congress.

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. [email protected] 949.494.1376/

800.697.2622 www.crowellroberts.com

 

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