Three top stocks for the season
Stocks began the year at a fear-ridden level of 8776 on the Dow Jones Industrial Average. They dropped another 1000 points before beginning a strong rally in March that has taken them to a current level of around 10,500. Investor spirits have lagged this rally. The battle for our attention by myriad cable channels, blogs and the surviving newspapers results in exaggerated, shrill accounts of economic perils. For investors, the resulting undervalued stock market continues to reward those who move through this fog of worries.
These worries have led to irrational conclusions. For example, a recent poll by the Pew Research Center found that 44% of the American public believe that China is the world’s leading economic power. They’re wrong as America’s economy is well over twice the size of China. Those polled magnify China as 58% think that China will become a more important American ally while only 10% believe that of Britain.
The market slump beginning in 2007 left an exaggerated gloom in many quarters. There is no questioning the damage from the hyperventilating real estate boom nor the pain to those left in its wake who are seeking work but portfolio recovery is aided through greater realism.
The U.S. remains the most competitive economy in the world, leading in information technology, biotechnology and many other advanced sectors. Its universities are still the envy of the world and its openness to new entrepreneurs has served it well. As David Brooks observed in a recent New York Times column, since 1975 the US economy grew 63%. For this same period the economies of France, German and Japan grew 35%, 22% and 16%, respectively.
In 1975, the U.S. accounted for 26,3% of the world economy. Today, despite the rise of China and other Asian economy’s, the U.S. accounts for 26.7%. We should not be complacent and his column argues for incentives to innovation such as enacting the Administration’s education reforms to insure that we do not enter a period of decline. We also should not be paralyzed by fear.
Investors who have continued to maintain stock portfolios anchored by solidly financed companies with sound bases for rising sales and earnings have done well. The economy is recovering and there is no need to deviate from this strategy but the present slow pace of the recovery will produce some inevitable disappointments.
Although I would never bet against the ingenious powers of the American consumer to find new ways to spend, lower home prices have depressed many personal balance sheets, which will probably cloud retail spending. Even Costco and McDonald’s, two of the world’s best-run companies, are having problems in this struggling economy.
Amazon.com (AMZN-$132) has become the world’s leading retailer. Sales have grown compounded over 5 years at 29% annually to $22 billon, earnings even faster at 78%. These rates will slow as it grows but they are similar to what marked Wal-Mart a generation ago when it became one a most rewarding long-range stock holding. Amazon is hardly cheap with a forward P/E ratio over 50 but I believe it will have a blowout quarter and will be a rewarding but pricey stock.
The same is true of Apple (AAPL-$197) and Google (GOOG-$595). Apple dipped a bit on news that Google is developing a competitor of the iPhone. Apple will prosper as it, like the other two, has shown continuing innovative strengths. It grosses a billion dollars a year on royalties from “apps” that others develop which it licenses for its iPhone. Google, as usual, is trying to do everything while making tidy profits from its main business. It’s forward P/E is a relative bargain basement 26 and Apple’s only 21. All three may be pricey but still worth a splurge. After all, it’s the season to splurge.