Another bounce for ST 100

Minnesota's 100 largest companies had a surprising double-digit rise in value in the third quarter.

The question is whether the surge is over for now.

In the September rally, the bulls climbed the proverbial "wall of worry" built by the bears during the quarter.

Still, even optimists, including this scribe, don't expect a lot more gains until the dust settles over the November elections and the future of the expiring Bush tax cuts.

The huge-company S&P 500 index also rose about 11 percent in the third quarter, as did the Russell 2000 index of small-capitalization companies.

The rally was triggered by better-than-expected economic indicators and investor hope that the Bush tax cuts on earnings and investments may be extended to 2011.

The third-quarter uptick pushed stock indexes into positive territory for the year: Star Tribune 100 (9.6 percent); S&P 500 (3.9 percent); Russell 2000 (9.1 percent), including price appreciation and dividends. Smaller companies tend to snap back more quickly in an economic recovery.

The 2009-2010 market rebound still falls short of what was lost during the huge declines of October 2007 through March 2009, when the market bottomed.

The Star Tribune 100 is down 3.6 percent over the last 36 months. The S&P 500 is down 7.1 percent and the Russell 2000 is down 4.2 percent.

"There was not one discernible catalyst that prompted the September rally," said Rick Moulton, a portfolio manager at Riverbridge Partners, a Minneapolis private wealth management firm. "It helped that 51 Democrats in the House of Representatives wrote a letter [to their leader] favoring extension of all tax cuts.

"American corporations are sitting on almost two times the average amount of cash they hold. But they want clarity [on 2011] taxes before they decide to raise dividends, or buy back their stock or invest in their businesses. Investors like clarity. And ... there's uncertainty in Washington, D.C., and in the markets."

The market has climbed this year amid the underwhelming economic recovery, amid weak housing, unemployment and other statistics.

Keith Tufte, a veteran analyst and portfolio manager at Cherry Tree Capital, said stocks in the third quarter benefited from the prospects of a possible takeover of one or both houses of Congress by Republicans who will resist expiration of the Bush tax cuts, including estate taxes. President Obama has proposed letting lower income tax rates expire only for the highest-earning 2 percent of Americans.

"There is huge uncertainty about tax policy in the fourth quarter," Tufte said. "The recent rally in the stock market is saying, 'Gridlock in Washington will be a big improvement.' If the government doesn't get its act together by year-end, tax rates will go up significantly on income, dividends, capital gains, and estates on January 1. That will be negative for the stock market."

Winners in the quarter

Among Minnesota companies, ADC Telecommunications did the best in the third quarter and so far this year, doubling in value to $12.67. However, that is owed not to better fundamental business prospects but to ADC's pending acquisition by a larger, global telecommunications-equipment manufacturer.

Hawkins Inc., the southeast Minneapolis manufacturer and distributor of chemicals to the water treatment, food and other industries, is one of fewer than 30 members of the Star Tribune 100 to post strong increases so far this year and three-year period.

Hawkins, best known for consistent performance, modest executive compensation and a generous dividend, also has seen its price appreciate thanks to buying over the last couple of years by large institutional investors who have caused major price increases in a company that trades a very modest 33,000 shares daily.

Another gainer is Stratasys Inc., based in Eden Prairie, which designs and manufactures equipment used by product designers, engineers and architects for 3-D designs. Stratasys is up 60 percent this year, thanks to a stronger manufacturing economy and the strength of a deal that it struck earlier this year to develop and manufacture a line of 3-D printers for Hewlett-Packard that will carry the HP brand.

Life Time rebounds

Life Time Fitness is up 24 percent in the third quarter and 58 percent this year. The builder and manager of health clubs said that revenues have started to grow again at locations open for at least a year, and income is rising. The Chanhassen-based company was hurt by the recession amid concerns about consumer spending and store growth. The stock dropped from $64 per share in October 2007 to under $10 in March 2009. It has since rebounded to nearly $40 per share.

Several of Minnesota's cornerstone manufacturers and sellers of industrial, utility and transportation products are doing better.

•Polaris, maker of snowmobiles and utility vehicles, was up 20 percent in the quarter and 52 percent for the year.

•Fastenal was up 7 percent in the quarter and 30 percent for the year.

•Tennant and Valspar are up about 20 percent this year; Donaldson and Graco more than 10 percent.

•Ameriprise Financial is the best performer among the state's big financial concerns. The financial planning and insurance company rose 12 percent in the quarter and 23 percent this year.

Looking in the crystal ball

And what about the fourth quarter?

"We could still could see 1225 on the S&P 500 this year, an increase of [up to] 7 percent or so," said Brian Belski, chief investment strategist at Oppenheimer Asset Management. "There is pent-up demand for stocks. And investors will applaud some gains in Washington by Republicans."

As for next year, "I am moderately bullish on the stock market," said Tufte of Cherry Tree Capital. "Valuation is fairly cheap. The relative valuation of stocks vs. bonds is currently extreme in favor of stocks.

"Retail investors continue to pour massive amounts of money into bond funds and gold, in spite of their unattractive valuations. I don't think most investors who are buying bonds now realize how much money they could lose over the next few years if interest rates increase."

Reporter Patrick Kennedy contributed to this column.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com