Singing The Blues
Wall Street almost ignored publication of a new book charging widespread irregularities in high-speed trading. After a brief flurry, the market moved up to new all-time highs on both the S&P 500 and the Dow Jones Industrial Average. Regulators were not so blasé and we have not seen the end of these headline-grabbing issues.
The initial focus was on hedge funds and other large traders but I think the exchanges may become the targets. After all, they create and peddle this information that is so highly valued by nanoseconds in the world of high-speed trading. Drug enforcement aims at dealers, not the users on the street, but in this case, the dealers are the “Street.”
The opening quarter left the S&P 500 up one percent and the Dow Jones Industrials down one percent. After the strong gains of 2013, this anticlimax tried investor nerves as stocks flirted between a correction or a resumed advance. The slight outperformance by the broader S&P continues the lead it has maintained over the blue-chip Dow Industrial Average for over two years.
That may be a mild indicator that investors are becoming a bit more confident. Even so, it’s hardly a reason to turn away from stocks in larger companies, which I maintain should form the core of almost everyone’s stock investments. They provide stability, making it easier to use market dips to buy more of them rather than surrendering to fearful selling.
They can also produce pleasing investment returns, if chosen thoughtfully. Johnson & Johnson (JNJ-$97) is a dividend machine with a 2.7% yield and 51 years of dividend increases. Healthcare issues provide continuing demand, a global market that J&J has served for 128 years with medical devices and consumer products from Band-Aids to Neutrogena.
In recent years, it has increasingly emphasized its more profitable pharmaceutical sector and now operates the world’s eighth-largest pharmaceutical business and sixth-largest biotechnology business. Overall, this is a substantial company with sales over $75 billion that is still managing to grow earnings in the 5-6% range.
As one of only four companies with a AAA credit rating (better than our nation’s downgraded AA) it deserves a premium valuation, yet is currently trading at 16 times estimated 2014 earnings, only slightly above the general market. With the overall market regaining its momentum, it should soon be trading above $100.
With continually growing global government support for improved healthcare, stocks in the medical sector offer a strong combination of sustained demand with growth opportunities. Familiar U.S. recommendations include Bristol-Myers (BMY-$50) and Pfizer (PFE-$32. Denmark-based Novo-Nordisk (NVO-$44) and Switzerland’s Roche (RHHBY-$37) are solid blue chip investments.
Pharmaceutical companies are traditional defensive plays against market volatility. Biotech stocks usually attract those seeking more growth but the top biotechs are priced today like old-fashioned pharmaceuticals. Amgen (AMGN-$125) is the top blue chip name in biotech. Once relying on only two drugs, its research and acquisitions have greatly expanded its present worldwide reach and its promising pipeline. It trades for 15 times forward earnings and even offers a 2% yield, unique for this sector.
Among other sectors, I continue to underweight consumer stocks pending more dynamic signals of spending. Traditional retailers still seem to be adjusting to the Internet market. Nestlé (NSRGY-$75) is a large global provider of nutrition and health products. Sales are over $100 billion, the forward P/E is 18 and it yields 2.8%.
Apple (AAPL-$540) blends consumer products with technology. Google (GOOG-$580-post split) has become a blue chip tech stock. Intel (INTC-$26) has superb credentials for financial strength and research capabilities. Growth slipped but is rebuilding and it is a returning pick.
In the industrial sector, General Electric (GE-$26) and DuPont (DD-$68) are solid buys. Deere (DE-$91) and Cummins (CMI-$149) are contenders. Union Pacific (UNP-$188) is currently my only blue chip transportation stock.
Among finance stocks, many alleged blue chips ran short of green during the financial crisis and either went under or needed rescuing by the government. Visa (V-$214) was recently added as one of the 30 companies in the Dow Jones Industrial Average. (It doesn’t seem like an industrial stock but Dow Jones may have been short of worthy candidates.) Earnings are very strong.
Every portfolio needs some variety and Grifols, S.A. (GRFS-$42) brings a solid entry from Barcelona. It is a specialty biotech providing blood plasma products within Europe, the U.S. and Canada. This is still a relatively undiscovered company that has produced growth in double digits. Estimated growth this year is over 80%. Olé!
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/