The Bumpy Road to Investment Returns
Stocks are taking the bumpy road to investment progress. Their price volatility softened during the last half of 2014 but returned in February to a familiar zigzag pattern. The S&P 500 was up 11% for 2014 so these ups and downs need not damage stock portfolio gains but a market that swings down when fear spikes and up when greed pushes out fear always unsettles investors.
Oil price volatility is fueling this jumpiness in stocks. It remains the hot media topic for the moment and many investors are following its swings as if they were Texas wildcatters. Price movements usually overshoot and oil prices briefly reversed their recent collapse by jumping 20% in five days.
That didn’t last as U.S. crude oil supplies were reported as reaching their highest level in 80 years. Shale oil production is rapidly slipping from 1.2 million barrels a day to half that number. With supplies still ample and European economies stumbling, demand will increase slowly, thus energy prices have a slow road ahead. The big international companies are likely to keep their attractive dividend policies and Chevron’s (CVX-$109) 4.2% yield stands out in a world of continuing low interest rates. Chevron has raised its dividend for 19 straight years and its stock goes ex-dividend on February 12.
Rather than let events drive them into fear, never helpful in any decision, investor should anchor their portfolios and ballast their anxieties with stocks for all seasons. My strongest recommendation remains Apple (AAPL-$119). I feel the stunning extent of its recent earnings report is not yet reflected in its stock price.
As the Economist commented, “Never before has so much money been made by a single firm in such a short period of time.” It made $18 billion in its December quarter, beating the $16 billion reported by Exxon Mobil in 2012. Tim Cook, its CEO noted that 34,000 iPhones were bought every hour of every day during the quarter. Apple has become the world’s largest company by market cap using an old-fashioned business model of selling highly desirable products at fat profit margins.
Ford, Coca-Cola, IBM, Boeing and Microsoft are similar but investors should always remember that permanent success is never assured. Only 13% of the companies on the Fortune 500 list in 1955 make the list today. The top ten in 1955 included GM, US Steel, Chrysler, Esmark and Armour, whose shareholders may have remembered Shelley’s lines on Ozymandis, the Pharaoh’s decayed statue, “Of that colossal wreck, boundless and bare, the lone and level sands stretch far away.”
Vigilance is required. Gerald Loeb, a Wall Street legend, commented on diversification that it was okay to put all your eggs in one basket provided you watch the basket. Complacency is dangerous. Ralph Lauren (RL-$142) recently failed to exceed analyst earnings estimates after 18 straight quarters of exceeding them. Its stock dropped 18%.
Nike (NKE-$93) is steadier. Earnings have grown at 13% annually and are forecast to keep this up. It attracts good company. Tim Cook is on Nike’s Board of Directors, the only company besides Apple that he has joined. Charlie Munger, whom Warren Buffett names as his partner, is also only on one other Board-Costco (COST-$149). Nike and Costco are both renewed recommendations.
I have avoided bank stocks for sometime but am now buying East West Bank (EWBC-$38). This Pasadena-based regional bank has a growing presence both in the U.S. and in China. Earnings have grown and are forecast to continue in a 10%-14% range. Its stock offers a 2.1% yield with dividend increases for the past four years.
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
