Portfolio Review

1/6/2014


Apple stays busy at home and overseas

Apple ($560; AAPL) shares are up just 5% for the year but have soared 41% since the end of June, buoyed by confidence that the company can return to growth after a rough patch of several quarters. Rising analyst estimates project 10% higher earnings per share in fiscal 2014 ending September on 8% revenue growth.

An iPhone deal with China Mobile ($53; CHL) should jolt Apple's near-term results. Moreover, Apple reportedly plans to open in February its first retail store in Turkey, where it also hopes to land a government contract for more than 10 million iPads, according to a Turkish publication. The contract, which aims to equip classrooms with new computers, could be worth up to $4 billion over four years.

In other news, Apple revived its legal warfare against Samsung Electronics by once again seeking a ban on U.S. sales of more than 20 smartphones and tablets that allegedly infringe on its patents. In Quadrix, both of Apple's sector-specific ranks exceed 90, while the Overall score at 98. Apple is a Focus List Buy and a Long-Term Buy.

Corporate roundup

American Express ($89; AXP) agreed to pay about $76 million to settle allegations that it misrepresented the benefits of add-on products such as protection from identity theft. That sum includes a fine of $16 million and the return of almost $60 million to customers. Amex is a Long-Term Buy.


Wells Fargo ($46; WFC) agreed to pay Fannie Mae $591 million to resolve a dispute over mortgage loans sold before 2009. Separately, Wells Fargo was ordered to repay investors $94 million over auction-rate securities. Regulators have accused financial companies of deceptive marketing practices by telling investors that these securities — with interest rates intermittently reset by auctions — were cash-like and safe. In 2008, the market for auction-rate securities was among many segments of the financial universe that crashed. Wells Fargo is a Focus List Buy and a Long-Term Buy.


DirecTV ($68; DTV) plans to raise its rates by an average of 4.4% in 2014, up from a 3.2% hike in 2013. Rival DISH Network ($58; DISH) seeks to push through a rate increase of 5.5% in 2014, compared to a 16.3% hike in 2013. The new rates reflect how pay-TV companies are trying to cope with higher programming costs in a mature industry. Taking a page from DISH's playbook, DirecTV has begun to distribute a channel called WeatherNation in an attempt to gain leverage in negotiations with the Weather Channel over a new contract, reported the Los Angeles Times. DISH used WeatherNation during contract talks with the Weather Channel three years ago. DirecTV is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson ($92; JNJ) is reportedly nearing the sale of its clinical-diagnostics unit to Carlyle Group ($36; CG), a private-equity firm, in a deal potentially worth about $4 billion. The diagnostics unit generates annual sales of roughly $2 billion, less than 3% of J&J's total revenue. Over the past year, J&J has sought to exit slower-growing businesses and revitalize its drug portfolio, agreeing to sell its North American feminine-hygiene unit for $185 million and pay up to $1 billion for Aragon Pharmaceuticals, which is developing a drug to treat prostate cancer.

These moves come at a time when other U.S. drugmakers are unloading nonessential operations. Recall, Abbott Laboratories ($38; ABT) split off its branded-drug business in the past year, while Bristol-Myers Squibb ($53; BMY) agreed to sell its stake in a diabetes-prevention venture for as much as $4.3 billion. After selling its nutritionals unit for $11.85 billion in November 2012, Pfizer ($31; PFE) spun off its animal-health unit and could seek to divest its generic-drugs unit. J&J and Abbott are rated B (average). Bristol-Myers and Pfizer are rated C (below average).

BlackRock's not too big to grow

With $4.10 trillion in assets under management, BlackRock ($316; BLK) pursues new paths for growth. Seeking to expand beyond stock and bond funds, BlackRock is soliciting up to $3 billion for a hedge fund that will invest in credit derivatives. It also acquired a majority stake in a Texas wind farm earlier this month.

These moves come at a time when the U.S. Treasury is weighing whether to adopt stricter liquidity and capital standards for BlackRock and other asset managers, as it has done with the largest U.S. banks. These financial companies, unlike banks, do not hold client assets on their own balance sheets. But regulators worry the financial system could be strained by asset managers that pile into popular investment classes and are then forced to sell their positions under duress. Tougher regulatory requirements could hinder long-term profitability, said Fitch Ratings.

While the regulatory situation deserves monitoring, BlackRock remains favorably positioned to ride the stock market's rising tide. In the first nine months of 2013, BlackRock grew revenue 9%, cash from operations 31%, and free cash flow 60% to $1.53 billion. Analyst estimates are drifting higher, currently projecting a 12% rise in earnings per share in 2014 on 10% revenue growth. Up 53% this year, the stock trades at 18 times estimated 2014 earnings. BlackRock is a Long-Term Buy.

Health-reform update

This holiday season, health insurance was near the top of many Americans' shopping lists. The Obama administration announced that 1.1 million people signed up for health insurance through federal exchanges during the initial enrollment period that ended Dec. 24, with 975,000 Americans enrolling in December alone. An additional 850,000 people have enrolled through state-run exchanges.

Officials had originally targeted total enrollment of 3.3 million, but technical glitches hindered website usage. Some specialists and hospitals that will be excluded under the new health plans reported a surge in visits and elective procedures before the coverage takes effect on Jan. 1.

News briefs

Ford Motor ($15; F) says its 2013 retail sales have climbed 15% through November and it expects sales to "grow substantially" in December, boding well for our recommended auto-parts makers Lear ($81; LEA) and Magna International ($81; MGA). Both Lear Magna are rated Focus List Buy and a Long-Term Buy. Ford is rated A (above average).


Google's ($1,118; GOOG) Chromebook accounted for 10% of all computers sold to businesses in 2013, according to industry researcher NPD. Google is a Focus List Buy and a Long-Term Buy.


S&P 500 Index companies repurchased $128.2 billion of stock in the third quarter of 2013, the most since the fourth quarter of 2007.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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