Follow-up on monitored stocks
Perhaps the only thing that could move the market more than a $700 billion bailout plan was the defeat of that very plan in the U.S. House of Representatives. The S&P 500 Index fell 9% on Sept. 29, its third-largest percentage decline since World War II, and the Dow Jones Industrial Average shed 7%. Wall Street’s bleakest day since 1987 ended with U.S. stocks losing $1.2 trillion in value.
How soon the markets will fully recover from the malaise of the last three months is uncertain, although stocks came back strong the day after the big decline. The Dow and the S&P 500 have been volatile in recent days, gyrating to a medley of financial news. It seems likely that the passage of a bailout plan could lift stocks in the short term. But so far, the government’s actions suggest Washington seeks to reassure mortgage holders and avert a financial panic, and doesn’t seem too concerned about the common-stock investors. In other words, don’t expect a miracle.
A steady stream of news from the financial sector continues to roil the markets.
American International Group ($3; NYSE: AIG) was expected to start auctioning off assets last week, beginning the process of paying off an $85 billion loan from the Federal Reserve. As a condition of the loan, AIG will issue securities that give the government a 79.9% stake in the insurer. While AIG is burdened by billions of dollars in exposure to risky debt securities, most of its insurance businesses remain healthy. At press time, AIG had not said what businesses were for sale, but a conference call was planned for Friday, Oct. 3. AIG is rated Neutral.
Fitch Ratings downgraded its outlook on Hartford Financial ($41; NYSE: HIG) to negative from stable. The credit-rating firm cited declines in capital levels caused by slumping earnings and deterioration in the quality of investment assets. Caught holding hundreds of millions of dollars in troubled debt and preferred stock, Hartford has significant exposure to Washington Mutual, Lehman Brothers, and American International Group ($3; NYSE: AIG). Hartford is rated Neutral. An attractive upgrade candidate is Aflac ($59; NYSE: AFL), a seller of supplemental life and health insurance.
In one of its first moves as a newly minted bank holding company, Goldman Sachs ($128; NYSE: GS) looks to buy at least $50 billion in assets from other U.S. banks. Brokerage giants Goldman and Morgan Stanley ($23; NYSE: MS) became bank holding companies last month, giving them access to loans from the Federal Reserve and insurance for client deposits. Goldman’s asset purchases are designed to augment its commercial-banking operations, potentially making it a bank in more than title only. Goldman and Morgan are rated Neutral.
Three financial stocks, one rated Neutral and two rated Underperform, were dropped from coverage. For more information, read on.
Three stocks dropped
Mortgage-finance giant Fannie Mae ($2; NYSE: FNM) may still be publicly traded, but it’s far from an independent operator. Fannie and counterpart Freddie Mac ($2; NYSE: FRE) were taken over by the government last month in an effort to bring stability to the mortgage market. So far, federal stewardship has not been good for stockholders, with dividends suspended and the share price below $2. Since the well-being of shareholders is not a priority with current management, we see no reason to cover — or own — Fannie Mae. The stock, formerly rated Neutral, is being dropped from coverage . . . In a deal brokered by the federal government, Citigroup ($21; NYSE: C) has agreed to acquire $700 billion of Wachovia’s ($3; NYSE: WB) banking assets for $2.16 billion in stock. Citigroup inherits a troubled $312 billion mortgage portfolio. The federal government agreed to insure all but $42 billion of potential losses. In exchange for the protection, Citigroup will give $12 billion in preferred securities and warrants to the Federal Deposit Insurance Corp. Citigroup is rated Neutral, and we would not be buyers. Wachovia, formerly rated Underperform, is being dropped from coverage . . . In the largest bank failure in U.S. history, the federal government took over Washington Mutual, then agreed to sell its banking operations to J.P. Morgan Chase ($47; NYSE: JPM) for $1.9 billion. J.P. Morgan will take responsibility for the roughly $300 billion loan portfolio. J.P. Morgan is rated Neutral, and we advise against owning the stock. WaMu, formerly rated Underperform, is being dropped from coverage.
Accenture’s ($38; NYSE: ACN) earnings per share grew 35% to $0.67 on revenue growth of 17%, or 10% at constant currency. Accenture projected revenue and profit growth higher than the consensus for fiscal 2009, and the shares rose on the news. Accenture is a Focus List Buy and a Long-Term Buy . . . Excluding an accounting gain, Walgreen ($31; NYSE: WAG) earned $0.37 per share, down 8% and $0.08 below the consensus estimate. Including the gain, Walgreen earned $0.45, in line with expectations. Revenue rose 9% to $14.60 billion, with same-store sales up 2.6%. Given Walgreen’s reasonable valuation and long history of growth, the stock remains a Long-Term Buy for now.
Billionaire investor Warren Buffett is throwing his financial weight behind another struggling company, with Berkshire Hathaway ($4,395; NYSE: BRKb) agreeing to buy $3 billion of General Electric ($26; NYSE: GE) preferred shares. The shares pay a 10% dividend and are callable after three years at a 10% premium. GE plans to raise an additional $12 billion by issuing common stock. The company is taking steps to shore up its liquidity after lowering expectations for 2008, projecting per-share profits of $1.95 to $2.10, down from previous guidance of $2.20 to $2.30 and the $2.21 consensus. GE also postponed its stock-buyback program and froze its quarterly dividend at $0.31 per share through the end of 2009. General Electric is rated Neutral . . . Oracle ($20; NASDAQ: ORCL) entered the computer-hardware business with plans to sell computers loaded with prepackaged database software. Partner Hewlett-Packard ($46; NYSE: HPQ) will build the computers. Oracle and H-P are rated Buy and Long-Term Buy . . . A U.S. District Court awarded Johnson & Johnson ($69: NYSE: JNJ) $1.2 billion in a patent dispute over a stent. Boston Scientific ($12; NYSE: BSX), which plans to appeal the decision, was ordered to pay $703 million, while Medtronic ($50; NYSE: MDT) was ordered to pay $521 million. J&J is a Buy and a Long-Term Buy. Medtronic is rated Neutral. Boston Scientific is an Underperform . . . Lockheed Martin ($110; NYSE: LMT) increased its quarterly dividend 36% to $0.57 a share, payable Dec. 26. Lockheed Martin is a Focus List Buy and a Long-Term Buy.