Portfolio Review

2/23/2009


Focus, Buy lists outperform
So far, 2009 is shaping up to be friendlier than 2008. While the S&P 500 Index was down 12.6% for the year as of Feb. 17, all three of our recommended lists are outperforming by at least six percentage points, with the Focus List up for the year.

Since 2003, the Focus List has risen 9.2%, outperforming the S&P 500 Index by more than 19 percentage points, while the Buy List has gained 21.3%. The Long-Term Buy List is up 0.2%, more than 10 percentage points above the S&P 500’s loss of 10.3%.

Year
Focus
List
(%)
Buy
List
(%)
LTBuy
List
(%)
S&P 500
Index
(%)
2003
20.2
25.0
24.0
26.4
2004
17.5
18.8
8.7
9.0
2005
8.1
10.3
3.5
3.0
2006
12.9
14.8
9.3
13.6
2007
22.8
18.1
10.4
3.5
2008
(48.8)
(44.7)
(36.4)
(38.5)
2009 †
0.8
(1.2)
(6.3)
(12.6)
Since 2003 †
9.2
21.3
0.2
(10.3)
† Through Feb. 17. Note: Returns based on fully invested portfolios excluding dividends and transaction costs.

Quarterly earnings
Transocean ($56; RIG) posted profits of $3.69 per share excluding special items in the December quarter, up 9% and roughly in line with the consensus. Operating revenue soared 57% to $3.27 billion. Buoyed by demand for ultra-deepwater drilling rigs, the average day rental rate rose 4% from the September quarter. Pending shareholder approval, Transocean may repurchase up to $3.02 billion of stock, representing about 16% of shares outstanding. Transocean is a Focus List Buy and a Long-Term Buy . . . Oceaneering International ($31; OII) earned $0.93 per share in the December quarter, up 15% and in line with Wall Street expectations on 9% revenue growth. Citing economic weakness and low oil prices that could stunt spending on new production projects, the firm projected 2009 per-share earnings of $3.00 to $3.60, ranging from roughly flat with 2008 results to a decline of 16%. The consensus projects profits of $3.48 per share this year. Oceaneering’s guidance sounds conservative, and the stock, which trades for just nine times the midpoint of company guidance for 2009, remains a Focus List Buy . . . Hewlett-Packard’s ($34; HPQ) January-quarter profits rose 8% to $0.93 per share excluding special items, matching consensus estimates. Sales crept up 1% to $28.80 billion on 11% growth in North America. The computer giant expects per-share profits of $3.76 to $3.88 excluding special charges in fiscal 2009 ending October, versus the $3.77 consensus. H-P is a Buy and Long-Term Buy . . . Questar’s ($32; STR) December-quarter profits rose 34% to $0.99 per share excluding special items and beat the consensus by $0.15. Revenue rose 18% to $879 million, helped by a 28% increase in energy production. Citing weaker energy prices and lower capital spending, Questar lowered 2009 earnings and production guidance. At 13 times the low end of its 2009 profit guidance, Questar seems reasonably valued relative to its growth potential and remains a Long-Term Buy . . . PepsiCo ($52; PEP) earned $0.88 per share in the December quarter excluding restructuring charges and losses on commodity hedges, rising 11% and in line with the consensus. Net revenue rose 3%. Pepsi expects lower commodity prices in the second half of 2009 to foster mid- to high-single-digit growth in both sales and per-share profits for the year. The company also plans to repurchase about $2.5 billion in shares, or about 3% of shares outstanding, in 2009. PepsiCo is a Buy and a Long-Term Buy . . . Laboratory Corp. of America ($62; LH) earned $1.10 per share excluding special items in the December quarter, up 6% and a penny better than the consensus. Revenue increased 11% to $1.12 billion on higher testing volume. In 2009, LabCorp projects per-share profits will grow 3% to 8% and revenue will rise 2% to 4%. LabCorp is a Buy and a Long-Term Buy . . . Wal-Mart Stores ($48; WMT) earned $1.03 per share excluding one-time charges in the January quarter, down 2% but $0.04 above the consensus. Total sales rose 2% and U.S. same-store sales excluding gasoline climbed 2.8%. In fiscal 2010 ending January, Wal-Mart expects per-share profits of $3.45 to $3.60, representing growth of 1% to 5%. Wal-Mart is a Long-Term Buy.

Financials report
The financial sector, hurt by shriveling profits and suspect balance sheets, accounted for 77% of S&P 500 Index companies’ dividend cuts in 2008. The S&P 1500 Financial Sector Index plunged 54% in 2008, and financials continue to lead the stock market’s retreat as a flurry of write-downs, restatements, and debt downgrades weigh on the stocks. Some lowlights:

Manulife Financial ($12; MFC) lost C$1.24 per share in the December quarter, down from a profit of C$0.75 per share in the year-earlier period, hurt by more than C$2.7 billion in noncash costs. Manulife is rated Neutral.


Sun Life Financial ($16; SLF) posted a December-quarter per-share operating loss of C$1.25 excluding gains from asset sales versus a profit of C$0.98 in the year-earlier quarter. The Canadian insurer’s revenue slumped 13%. Sun Life is rated Neutral.


Wells Fargo ($14; WFC) restated its December-quarter loss, citing additional costs associated with securities holdings. The bank now says it lost $0.84 per share, $0.05 more than previously reported, compared to a $0.41 profit in the same period last year. Wells Fargo is rated Neutral.


Recent downgrades of its debt ratings caused Hartford Financial ($10; HIG) to lose access to a short-term lending facility. Hartford must now find other sources to raise the cash needed to repay $375 million borrowed under the program. Hartford is rated Neutral.

GM wants another $16.6 billion
In the recovery plan General Motors ($2; GM) submitted to Congress, the automaker said it would eliminate 47,000 jobs, closing five more factories and thousands of dealerships. On top of $13.4 billion it has already received, GM seeks another $16.6 billion from the government and could face bankruptcy without the funds. General Motors is an Underperform.

News roundup
President Obama signed into law a $787 billion economic-recovery package that includes more than $260 billion in tax cuts for individuals and businesses. Passed after contentious debate, the plan calls for about $500 billion in spending designed to jump-start the economy and save or create 3.5 million jobs . . . Microsoft ($18; MSFT) said it will open a “small number” of retail stores to showcase products — possibly computers, cell phones, and video-game consoles — carrying its software. Microsoft’s move echoes similar pushes into retail by other technology companies. Microsoft is a Buy and a Long-Term Buy . . . A Florida jury ruled against cigarette giant Phillip Morris, a division of Altria ($16; MO), in the 1997 death of a longtime smoker unable to shake his addiction to nicotine — damages have yet to be decided. This lawsuit represents the first of about 8,000 filed since a $145 billion class-action suit was dismissed in 2006. Altria is rated Neutral . . . Freeport-McMoRan ($27; FCX) raised $750 million from the sale of 26.8 million shares, increasing the share count by about 7%. Freeport is rated Neutral . . . Chevron ($66; CVX) asked an Ecuadorean judge to dismiss a protracted $27 billion environmental lawsuit. Texaco, which Chevron bought in 1991, has already paid $40 million to clean up a jungle area it allegedly polluted between 1972 and 1992. Chevron is a Buy and a Long-Term Buy.


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