Portfolio Review

1/7/2013


Fiscal cliff averted, foothills still ahead

Congress rushed to pass a bill that will raise taxes on Americans in the top tax bracket, limit deductions, and extend unemployment benefits. Lawmakers also delayed for two months $110 billion in automatic spending cuts, split about evenly between defense and domestic programs.

The bill keeps in place Bush-era tax cuts for most American households earning less than $400,000. But about 77% of households will be affected by the expiration of lower payroll taxes for Social Security. Payroll-tax deductions will rise to 6.2% from the temporary 4.2% rate that was part of the stimulus package. That amounts to roughly $1,000 more withheld from paychecks for households earning $50,000 this year, potentially limiting discretionary spending.

For the top bracket — couples with incomes above $450,000 and singles earning more than $400,000 — the tax rate climbs to 39.6% from 35%. For those households, taxes on dividends and long-term capital gains will rise to 20%, plus an additional 3.8% to fund the Affordable Care Act, from prior rate of 15%.

For now, interest from municipal bonds will remain exempt from federal taxes, and munis could attract renewed attention from wealthy Americans who face higher taxes on other investments. But the tax break on municipal bonds could also become a bargaining chip as lawmakers grapple with the debt ceiling and resume the debate on spending cuts in the coming months.

Technology review

Intel ($21; INTC) is preparing to launch a service that allows subscribers to stream live television through set-top boxes powered by its semiconductors, reported TechCrunch. Eschewing a broad, national rollout, Intel will reportedly introduce the service city by city to negotiate more favorable programming contracts.

The initiative underlines Intel's need to find new markets for its semiconductors as growth in personal computers tapers off. Researcher IDC now expects global sales of semiconductors to rise 5% to $319 billion in 2013, down slightly from its July target of 6% growth. IDC also slashed its 2012 outlook to less than 1% growth, down from the earlier 5% target. Weakness in PCs was offset by strength in mobile devices and automotive electronics. Intel shares have bounced off their November low near $19 per share but remain down 27% since April. Yielding 4.4% and trading at less than nine times trailing earnings, Intel is a Long-Term Buy.


In another sign of the slow adoption of Microsoft's ($27; MSFT) Windows 8, suppliers have reportedly scaled back March-quarter expectations for shipments of optical disc drives used in PCs. Microsoft is a Buy and a Long-Term Buy.


Hewlett-Packard ($14; HPQ) revealed that the U.S. Justice Department has launched a probe into the accounting procedures of Autonomy. H-P paid about $11 billion for the software maker in 2011 but said in November that it would write off about $5 billion after discovering errors in Autonomy's accounting. H-P is rated C (below average).

Mobile roundup

Apple ($532; AAPL) hasn't provided country-by-country sales breakdowns. However, demand for its latest smartphones and tablet computers apparently remains strong in most parts of the world. iPhone 5 faces particularly stiff competition in Japan from a new smartphone made by HTC. But Apple said it sold 2 million iPhone 5 units in China during the first weekend after its launch, and the iPad mini continues to experience a warm reception. Indicative of encouraging demand, some Asian suppliers will reportedly keep production lines running through the Chinese New Year holiday.

In other news, Google ($707; GOOG) appears to be cutting into Apple's lead in applications used on smartphones and tablets, though Apple apps remain more profitable for developers. Apple and Google are rated Focus List Buy and Long-Term Buy.

Corporate wrap-up

Macy's ($27; M) shares shook off the holiday doldrums after CEO Terry Lundgren told Barron's that he continues to expect 4.2% higher same-store sales in the January quarter, building on 5.2% growth in the same period last year. Macy's was expected to announce results for the month of December on Jan. 3, after our deadline. The consensus called for 4.8% higher same-store sales in December, ahead of the projected 3.7% growth for the department-store group. Macy's is a Focus List Buy and a Long-Term Buy.


Chevron ($108; CVX) made two more discoveries of natural gas off Australia's western coast, bringing the count up to 19 since mid-2009. Like the S&P 1500 Energy Sector Index, Chevron shares rose about 2% in 2012. Chevron's Quadrix® Overall rank has slumped to 64, down from 91 at the end of September.

However, we are sticking with the stock because of its defensive characteristics and modest valuation. Chevron's production profile skews more heavily toward oil than its rival integrated energy majors, limiting the company's exposure to weak prices for natural gas. At just nine times trailing earnings, Chevron shares trade 11% below the median for integrated energy stocks in the S&P 1500 Index. Yielding 3.3%, Chevron is a Buy and Long-Term Buy.


In the first day of trading after their parent company split in two, shares of both Abbott Laboratories ($32; ABT) and AbbVie ($35; ABV) rallied more than 2%. AbbVie consists of the branded-drug operations of the former Abbott Laboratories, while the new Abbott operates all of the former company's remaining business units, including medical equipment, diagnostics, and generic drugs. We are keeping Abbott as a Long-Term Buy, while initiating AbbVie as a B (average). We will begin publishing Quadrix scores for AbbVie once they become available.

Foot Locker still fits

Concerns about a soft Christmas for retailers have contributed to Foot Locker ($32; FL) shares slumping more than 10% since the end of November. Sales of athletic footwear fell 7% marketwide in the week ended Dec. 22, after a 4% decline in the preceding week, according to researcher NPD. Making matters worse, a pair of analysts issued negative reports on rival Finish Line ($19; FINL), which has been losing market share to Foot Locker.

But Foot Locker remains a Focus List Buy and a Long-Term Buy based on its operating momentum, encouraging trends in analyst estimates, and valuation. Same-store sales have exceeded 7.2% in each of the last nine quarters, more than double the growth rate of the average S&P 1500 apparel retailer. Profit estimates are on the rise, and the stock trades at 13 times trailing earnings, 41% below its three-year average. Foot Locker is a Focus List Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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