Taking Stock

By Tony Crowell
By Tony Crowell

Competence Is Scarce

Spring is here. After sliding into a correction, stocks rebounded in mid-April with three straight up days that prodded the S&P 500 back to a positive number for 2014. Volume was only moderate but trading during Passover and Holy Week always slows. Heavier trading showing institutional demand together with more upside action is still needed to confirm a resumed market uptrend.

There may be some April showers but most economic indicators are supportive. New Federal Reserve data show industrial output up for the second straight month. After an unusually cold winter, improving weather is bringing increased traffic to retailers and banks report better demand for business loans.

Housing remains sluggish after the cold winter while losses from the real estate lending crisis still hang over much of the financial sector. Bank of America, which bought the notorious Countrywide Financial in 2008, just reported a startling $6 billion in litigation costs for the first quarter of this year. Litigation expenses since 2008 now total over $50 billion.

Bank of America was founded in 1904 in San Francisco as the Bank of Italy to serve immigrants. Now, it serves lawyers. B of A is a leading example of Carl Icahn’s comment, “Very often assets of significant value are mismanaged by highly-compensated but less than highly-competent managers and boards of directors, all protected by highly compensated lawyers . . . “

Bank of America is not one of my recommendations; Icahn Equity Partners is a recent buy (IEP-$101). The impact of the mortgage crises continues and I am still avoiding all bank stocks, preferring investment managers in the important financial sector. The biggest, BlackRock (BLK-$305) is the world’s largest asset manager with $3.8 trillion under management. Blackstone (BX-$31) has $280 billion focused on more diverse asset management.

BlackRock and Blackstone are among the top ten holdings in my clients’ portfolios. The larger firm is trading at 17 times earnings and yields 2.6% with increases for 4 straight years. Blackstone’s less steady earnings record results in its selling for 10 times earnings while currently paying over 7%.

This is earnings season and Johnson & Johnson (JNJ-$99) and Intel (INTC-$26) reported earnings as solid as their reputations.  Google (GOOG-$569) disappointed nervous followers but remains a buy. Apple (AAPL-$522) will report quarterly earnings on April 23. Its stock is doing its usual pre-announcement gyrations, which the company has already guided toward slight declines in sales and margins. It traditionally guides on the conservative side.

Apple may lack the drama and inspired genius of its Steve Jobs years but its market position and developments such as the recent deal with China Mobile keep it a compelling buy. It yields 2.3% from four straight quarters of $3.05 payments and I expect a dividend increase in the 10-15% range.

Russia’s bullying in Ukraine reflects less than highly-competent management. Rather than following the example of its former satellites in Eastern Europe who have become active participants in the global economy, it has lapsed into a petroleum dependency like some desert kingdom. Its threat to cut off natural gas deliveries to the European Union might spark consequences similar to those that followed the oil embargo in 1973.

That oil crisis spurred research in renewable energy, which has since grown to provide 16% of global consumption. Any major disruption in conventional energy supplies would encourage even more activity. Among the many contenders for commercial success, Canadian Solar (CSIQ-$26), one of the world’s largest solar power companies, swung into profit in 2013. Earnings estimates for all of 2014 are for $3.00-$4.00 a share, up from $.52.

These projections may be aggressive but they still illustrate the prospects of the alternative energy sector. The world continues to move away from the days before the oil embargo when General Motors executives said that Americans who wanted an economy car could buy a used car. Such complacency eventually bankrupted GM, another example of highly-compensated but less than highly-competent managers. Competence is a scarce commodity.

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



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