New Weeks, New Highs
The market uptrend continues with stocks quietly making new highs on both the Dow Jones Industrial Average and the S&P 500. Trading volume is up, signaling institutional buying support. The European Central Bank finally made a substantial cut in interest rates, encouraging all stocks upward. Both the S&P 500 and the Dow Jones Industrial Average made new all-time highs, with the broader base S&P up 5% year-to-date.
As usual, concerns blossomed in the financial press whether the market had run ahead of comfortable valuations. Corporate profits achieved record levels in the first quarter, running ahead of a stagnant overall domestic economy. Investors should keep a weather eye on forthcoming second quarter reports. Barring a foray of negative surprises, these reports should provide a logical foundation for future market advances.
Emotions and misperceptions often outweigh logic in market behavior. The severity of the 2007-2008 financial crisis appears to have driven many investors away from the market. A recent study shows that investors worldwide, both individual and institutional, are keeping only 37% of their investable assets in stocks, the lowest exposure since 1959, when records were first kept.
The total pool is some $90 trillion, thus there are substantial amounts that could support stock prices, if these assets returned to historical levels above 50%. Some of these funds have gone into the expanding areas of alternative assets and private equity. This expanding field is fueling the growth of our three alternative asset managers.
In decreasing size, these are BlackRock (BLK-$310), the world’s largest asset manager with over $4 trillion under management. Blackstone (BX-$32) is smaller but agile and is in a “sweet spot” with several of its private equity holdings in various stages of public offerings. Carl Icahn, CEO and majority owner of Icahn Enterprises (IEP-$100), has produced excellent returns for holders of this public vehicle. Its stock is off a bit as some fret about headlines involving Mr. Icahn and alleged improper trading, even involving the popular golfer, Phil Mickelson. (Mr. Icahn and Mr. Mickelson have never met.)
All three stocks are trading at valuations below the ordinary market and provide dividend yields ranging from 2.5% to 5% with earnings forecasts of 10% growth or more. I feel these are more potentially profitable members of the financial sector, which is dominated by banks that are still trying to stumble out of the mess they created with their irresponsible mortgage lending.
Aetna (AET-$79) is a new buy in the financial sector. Its entire sector suffered in reaction to overblown worries about the impact of the new Health Care Reform Act. This large company leads in proactive adaption to a changing industry. First quarter earnings were $1.98 a share, up 27%, trouncing consensus estimates of $1.56. The company raised its estimate for earnings for the full year from $6.25 to $6.55.
Its investments in products and technology are keeping it ahead of its competitors and I expect it will raise its earnings estimate for 2014 over the next few months. Yield is 1.2% with dividend increases for 3 straight years.
Among energy stocks, EQM Midstream Partners, LP (EQM-$86) continues to perform quite nicely. Its pipeline operations are concentrated in the Appalachian area. Magellan Midstream Partners (MMP-$83) operates a large pipeline network of refined petroleum products. Both provide increasing cash distributions and fit well in retirement portfolios.
Financial media have rung tocsins heralding a major slowdown in our economy. Unsurprisingly, they are exaggerating the effect of a severe winter and their squawking together with more understandable concerns of Russia’s bizarre foreign policy rattled investor nerves enough to prompt a rally in the perceived safety of the bond market. Interest rate are already so low that bonds have no room to go other than down. With its uptrend finding firmer ground, stocks have upsize room.
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