March Market Madness
Volatility is back. Actually, it’s never gone away; just hiding when stocks put together a string of up days before reversing. J.P. Morgan, who dominated American finance during his time, said, when asked what the stock market will do, “It will fluctuate.” (Mr. Morgan gave us another bit of wisdom when asked about buying a yacht, “If you have to ask the price, you can’t afford it.”)
Volatile markets are not necessarily down markets, in fact, stock price movements have been both volatile and favorable over the past six years. Investors, particularly those who “watch” their stocks too closely, often seem to magnify the impact of down movements as if they were projecting them to continue indefinitely.
Their resulting anxieties often produce fearful selling at just the wrong time. In contrast, Warren Buffet buys during down markets, not because he thinks the market is going to go up, which is market timing, but because stocks are cheaper. He thus avoids two cardinal sins of investing: panicked selling at bottoms and greedy buying at tops.
All this works much better if investors can also focus like Mr. Buffett on buying stocks whose current prices offer a discount to their long-term value. I feel that long-term values are more probable from larger companies whose financial achievements and prospects appear more advantageous under reasonably foreseeable business developments.
Conditions are moderately favorable; the global economy is steaming with its engines slow ahead with the U.S. moving up from half ahead to full ahead. This disparity has brought investor money to our shores but also dampened investor interest in our exporting companies as the U.S. dollar continues to strengthen
As is their custom, the financial media are exaggerating the perils of a strong currency. A strong dollar pressures profits of exporters but no economy ever went under because its currency was too strong. Oil and gas are priced in dollars, impacting some emerging economies, but also benefitting American consumers. Imports will be cheaper and tourists should find prices in Europe about 12% cheaper than six months ago.
One reason for investor money flowing to the U.S. is the prospect of higher interest rates. Just as news of a stronger dollar was blamed for stock market weakness, anxieties build with every favorable job report as Wall Street fears an improving economy will encourage the Federal Reserve to initiate its first interest rate increase since 2006.
Our economy as well as the rest of the world suffered deep scars from the Financial Crisis. Wage growth remains sluggish, the housing and financial sectors remain confused and the whole energy group is slippery. Our recovery is still fragile and inflation so modest that I believe the Fed will not initiate rate increases as fast as the media predict.
At some point, rates will begin to rise, probably not too much, and investors should be considering stocks that can continue to prosper in this environment. Apple (AAPL-$124) is a stock for all seasons. The media are obsessing over the Apple Watch but sales of the iPhone may hit 100 million for this quarter alone. The Apple Watch requires an iPhone to work, thus one will support the other.
This surging growth prompts a buy recommendation for ARM Holdings (ARMH-$52), the world’s leading developer of semiconductor intellectual property. It receives royalties from almost every corner of modern technology, including iPhones and other smart phones.
It’s not cheap. Earnings this year will be about $1.42, up 19% from $1.19. Growth is moderating from rates above 30% while continuing double-digit sales growth is bringing stability. It is based in Cambridge, England and offers a 0.5% yield with increases for five straight years, reflecting the commendable British preference for cash dividends.
In last week’s column, I noted concern for General Electric’s recent investments in the energy sector and suggested possible replacements, among them United Technologies (UTX-$120). Subsequently, it announced a possible spin-off of its Sikorsky helicopter unit. This news follows a stagnant year and the firing last fall of its CEO. Such actions often accompany developments intended to boost the stock price. It’s already attractive with a 2.2% yield and 19 years of dividend increases and I am moving it to a buy, possibly to replace GE.
These recommendations are intended to follow Mr. Buffett’s practice of buying good companies at fair prices.
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
