J.P. Morgan downgraded
We are removing J.P. Morgan Chase ($32; JPM) from the Buy List, largely because of its falling Quadrix scores. The Overall rank is just 55, down from 93 at the end of April, while the Momentum and Earnings Estimates ranks have suffered precipitous declines. The stock appears to be breaking down, even as other financial stocks gain a little support.
We continue to believe the sell-off is overdone and the stock will rebound. J.P. Morgan has taken some corrective steps by installing a new chief risk officer and overhauling the division responsible for massive trading losses. But U.S. regulators are widening their probe, all but ensuring a prolonged drag on the stock. Given the weak Quadrix scores and discouraging share-price action, there is no hurry to buy J.P. Morgan for year-ahead returns. At less than seven times trailing earnings, the stock remains a Long-Term Buy.
U.S. prices for natural gas have been weak in recent years, in part because of a huge rise in supply. But recently, oil prices have also tumbled. West Texas Intermediate crude oil trades at $86 per barrel, down from $106 at the start of May. Although less sensitive to energy prices than smaller exploration-and-production companies, integrated giants Exxon Mobil ($78; XOM) and Chevron ($96; CVX) will likely see earnings estimates decline in coming weeks. Chevron and Exxon are Buys and Long-Term Buys.
In other energy-related news:
• Much of the natural-gas glut stems from the use of hydraulic fracturing, the use of water and sand to break apart rock and extract gas and oil from shale. Environmental concerns about â€œfrackingâ€ have captured plenty of headlines. However, it is too early to tell whether regulators will force producers to cut back.
• Canadian regulators approved plans for Exxon, Chevron, and partners to drill off Newfoundland's coast.
• Exxon plans to build a chemical plant in Texas, hoping to lower costs by using its own natural gas.
• In an effort to collect their $18 billion legal award against Chevron, plaintiffs in Ecuador sued in Canada to seize company assets there.
• Brazil said it will decide by July the size of the financial penalty against Chevron for a November oil leak.
Tech legal blotter
A U.S. judge ruled that companies can use fragments of code that link programs and operating systems without violating copyright laws, disarming a central presumption in Oracle's ($27; ORCL) lawsuit that claims Google ($570; GOOG) infringed on Java patents . . . Hewlett-Packard ($22; HPQ) seeks up to $4 billion from Oracle, claiming Oracle breached an agreement when it stopped developing software that runs on H-P servers . . .Â Google accused Microsoft ($29; MSFT) and Nokia ($3; NOK) of collusion against smartphone rivals in a complaint filed with the European Commission . . . U.S. authors received class-action status in a long-standing copyright lawsuit against Google, which posted online the contents of millions of digitally scanned books.
While lawyers and court cases attract a lot of attention these days, investors should not forget that tech companies are still designing innovative products. Microsoft unveiled a mobile application that lets smartphones and tablets connect to its Xbox videogame console. Oracle rolled out a suite of cloud-based software in June. And Google is preparing a service for small businesses that incorporates its social network Google+. Apple is a Focus List Buy and a Long-Term Buy. Both Cisco and Microsoft are rated Buy and Long-Term Buy. Both Google and Oracle are Long-Term Buys. H-P is rated B (average).
Aetna ($42; AET) CEO Mark Bertolini said he doesn't expect the Supreme Court to strike down the entire health-reform law. Aetna is a Focus List Buy and a Long-Term Buy.
UnitedHealth Group ($56; UNH) hiked its quarterly dividend 31% to $0.2125 per share, payable June 22. The health insurer also approved the repurchase of 110 million shares, about 10% of the current share count. UnitedHealth is a Buy and a Long-Term Buy.
Bed Bath & Beyond ($71; BBBY) agreed to pay $105 million in cash to acquire Linen Holdings, a textile distributor for the hospitality, foodservice, and health-care industries. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.
Wells Fargo ($31; WFC) said it will consider buying an insurance distributor to expand its product line but promised not to overpay. Wells Fargo is a Long-Term Buy.
Comcast ($29; CMCSa) CEO Brian Roberts said a pair of movie flops — Battleship and The Five Year Engagement — will weigh on NBCUniversal's June-quarter results. But Snow White & the Huntsman posted a strong debut the first weekend in June. Comcast is a Long-Term Buy.
Give these stocks credit
Visa's ($114; V) U.S. aggregate payment volume was flat in May after dipping 3% April. In contrast, March-quarter total domestic volumes rose a healthy 6%. A downturn was expected, as new PIN (personal identification number) debit-card routing rules took effect in April, prohibiting network exclusivity and reducing Visa's volumes. U.S. debit volumes fell 8% in May and 12% in April. On the other hand, MasterCard ($408; MA) saw U.S. debit volume surge 21% in the March quarter, as merchants avoided Visa in advance of the regulatory deadline. The new rules will have a limited financial impact. U.S. PIN debit revenue represents only 2% of Visa's overall sales, with signature transactions far more important.
Both stocks entail risk. MasterCard generates roughly 30% of its transaction volumes in Europe, which could slow because of weakness in Greece and uncertain consumer sentiment throughout the continent. In contrast, Visa Europe is a separate company from Visa. However, in early May, Visa said the Department of Justice is probing recent changes to the company's debit-card pricing strategies.
On the bright side, the shift to electronic payments should sustain growth, as roughly 85% of global transactions still use cash or checks. Per-share earnings for both companies are expected to rise at least 17% in 2012 and 2013. MasterCard and Visa are rated Buy and Long-Term Buy.
New mutual fund
In our recommended Conservative and Growth portfolios, Fidelity High Income ($9; SPHIX) is replacing Vanguard High-Yield Corporate ($6; VWEHX), which closed to new investors last month. High-yield funds, which invest mostly in junk bonds that offer outsized income, have surged in popularity. Several large funds have closed to limit assets. Fidelity High Income holds nearly 470 bonds with an average credit rating of only B. The fund, yielding 6.1%, has a modest expense ratio of 0.75% and solid fund score of 90.
J.P. Morgan Chase ($32; JPM) is being dropped from the Buy List but remains a Long-Term Buy. Vanguard Short-Term Investment-Grade ($10.73; VFSTX) now accounts for 16.6% of the Buy List and 15.3% of the Long-Term Buy List.