Bullish Trend Reconfirmed

5/5/2014


With the Dow Industrials finally surpassing their Dec. 31 all-time high, the bullish primary trend has been reconfirmed under the Dow Theory. For now, we are maintaining a nearly fully invested posture while aiming to keep our money in our best ideas. To that end, we're making several rank changes based on Quadrix scores, March-quarter results, and year-ahead profit prospects. Our buy lists have 95% to 97% in stocks.

Downgrades

J.P. Morgan Chase ($56; JPM), hurt by a disappointing earnings report that impacted its Quadrix scores for Momentum and Earnings Estimates, has seen its Overall score drop to 60. The Value score is an impressive 93, and we'd be tempted to keep the stock on our Focus List and Buy List if we had more confidence that results would get back on track this year. But profit estimates and results from the other big banks point to a worse-than-anticipated industry environment. J.P. Morgan Chase is being dropped from the Focus List and Buy List. The stock, yielding 2.9%, remains on our Long-Term Buy List based on its two- to three-year potential.


Qualcomm ($79; QCOM) slumped more than 3% on April 24 after the communications-equipment giant posted disappointing March-quarter results. Profits beat expectations, partly because of a lower tax rate. But sales rose just 4%, breaking a 14-quarter string of double-digit revenue growth. Guidance for the June quarter was slightly below expectations, but the company reaffirmed its guidance for full-year 2014. In other news, Qualcomm said it could face penalties from the Securities and Exchange Commission for allegedly violating anti-bribery laws. From its own investigation, Qualcomm discovered it had provided less than $250,000 in unfair benefits to Chinese officials. Qualcomm is being dropped from the Focus List but remains a Buy and Long-Term Buy. The stock seems reasonably valued at 15 times expected fiscal 2014 earnings, and profit-growth prospects remain mostly intact.

Upgrades to Focus List

Alaska Air Group ($94; ALK) said March-quarter earnings per share rose 106% to $1.28 excluding special items, ahead of the consensus of $1.24. Operating revenue rose 8%. Results benefitted from 5% higher capacity, 4% traffic growth, and a 6% decline in aircraft-fuel costs. Alaska Air stacks up favorably to S&P 1500 airline stocks. Its 2014 per-share earnings are projected to grow 29%, ahead of 11% average growth for its peers, while its forward P/E ratio of 13 offers a 10% discount to its peer-group average. Alaska Air is being added to the Focus List.


Foot Locker ($47; FL) earns an Overall score of 98, with all six category scores above 68. At 14 times the consensus profit estimate for the year ending January, Foot Locker seems cheap considering its operating momentum and nearly $5 of net cash per share. Foot Locker, yielding 1.9%, is being added to the Focus List.


Dow Chemical ($49; DOW) delivered better-than-expected earnings for the March quarter, as much-improved margins countered a higher tax rate and weather headwinds. Sales rose 1%. Efforts to cut costs and focus on core operations should help sustain margin improvement, and sales growth should accelerate in the second half of 2014. Dow Chemical, with a Value score of 69 and a dividend yield of 3.0%, is being added to the Focus List.


SanDisk ($85; SNDK) shares surged April 17 on an impressive March-quarter report, but the stock remains cheap at 14 times expected 2014 earnings. Helped by strong sales of premium solid-state drives for data storage, profit margins are likely to remain on an uptrend. SanDisk, with an Overall score of 99 and a Value score of 73, is being added to the Focus List and the Long-Term Buy List.


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