Portfolio Review

9/15/2014


Alaska Air shares pull out of tailspin

In the Aug. 18 issue we urged investors to ride out a patch of turbulence for Alaska Air Group ($47; ALK). The stock since has rebounded, posting an 8% total return in the past month, ahead of the 6% average for S&P 1500 airline stocks. Competitive pressures remain, as Delta Air Lines ($39; DAL) encroaches on Alaska Air's turf in the Northwest. Delta's new routes have hurt Alaska Air's passenger load factor, which measures an airline's utilized capacity.

Despite the concerns, Alaska Air's stock seems unduly cheap at less than 14 times trailing earnings, 36% below its peer-group median. The company's operating profit margin stands at its highest level in more than 30 years, while cash from operations has risen in seven straight quarters. Over the last month, analyst profit estimates have crept higher for both full-year 2014 and 2015. Alaska Air is a Focus List Buy and a Long-Term Buy.

Apple doubles down on mobile

With all the scrutiny surrounding Apple ($98; AAPL), investors were left with few genuine surprises when the company showed off its latest products: two iPhone models, a smartwatch, and a mobile payment system. Both iPhones feature larger screens and go on sale Sept. 19. The Apple Watch, set to debut early next year, requires an iPhone for most of its features to work.

The Apple Watch and the iPhones double as digital wallets. Apple will receive a fee each time shoppers use the devices to make purchases. Until now, mobile payments have failed to gain much traction, but Apple has lined up some high-profile stores to accept payment using the devices. Forrester Research projects mobile payments to more than quadruple to $90 billion by 2017. Apple is a Focus List Buy and a Long-Term Buy.

Google finds trouble in Europe

In February, Google ($592; GOOGL) reached a tentative settlement with European Union Antitrust Commissioner Joaquín Almunia to end an anti-competition probe, now four years old. Armed with "very, very" negative comments from rivals that accuse Google of abusing its market position, Almunia has returned to the company to seek additional concessions. Almunia says the two sides are unlikely to strike a deal before his term as commissioner concludes in October. That puts Google at risk of facing formal antitrust charges and fines of up 10% of its annual revenue. Google, which controls more than 80% of Europe's search market share, generated sales of $63.13 billion in the 12 months ended June. Meanwhile, Google officials are touring Europe to tackle another thorny issue: scrubbing online history. Since the EU's top court ruled that people should have the right to seek deletion of old online data, Google has received more than 120,000 removal requests. Google is a Focus List Buy and a Long-Term Buy.

Our oil stocks should steer out of skid; BP takes huge hit

In the past week, Brent crude, the global oil benchmark, slumped to its lowest price since May 2013. Oil prices dipped below $100 per barrel after the Organization of the Petroleum Exporting Countries (OPEC) slashed its 2015 projection for oil demand to what would be its lowest level since 2009. OPEC's pessimism partly reflects slowing economic activity in China and rising U.S. production.

West Texas Intermediate (WTI), the U.S. oil benchmark, fell in sympathy with global prices to a seven-month low earlier this month. Our recommended energy stocks are also down since the end of August, with Whiting Petroleum ($83; WLL) shedding 10%, EOG Resources ($101; EOG) 8%, Schlumberger ($104; SLB) 5%, and Halliburton ($66; HAL) 3%. The S&P 1500 Index has slipped 1% so far in September. September-quarter profit estimates for all four stocks have receded in the past month.

We recommend investors stick with all four picks. WTI has begun to recover, following a sharper-than-expected decline in U.S. oil reserves. While U.S. oil production in August reached its highest level since July 1986, energy demand remains strong. Larry Summers, former economic advisor to President Obama, has endorsed the U.S. lifting its ban on exporting crude oil, which would likely let domestic producers realize higher prices. Schlumberger and Whiting are rated Focus List Buy and Long-Term Buy. EOG and Halliburton are Buys and Long-Term Buys.


A U.S. judge found BP ($45; BP) "grossly negligent" and "reckless" in the 2010 drilling explosion in the Gulf of Mexico. BP vowed to appeal the ruling that leaves the company facing a potential fine of $18 billion under the U.S. Clean Water Act. Although BP has already taken charges of $43 billion to cover expenses from the accident, it had reserved just $3.5 billion for fines linked to the Clean Water Act. The U.K. government came to BP's aid, asking the U.S. Supreme Court to review the ruling.

The judge also ruled Halliburton, which performed cement work on the well, and rig owner Transocean ($37; RIG) negligent in their roles in the disaster — but not grossly negligent, limiting the penalties they could face. Both companies expressed relief regarding the decision. BP is rated B (average).

Corporate roundup

Bank stocks fell after the Federal Reserve said it will require the largest U.S. banks to keep a bigger capital cushion to backstop potential losses. This capital surcharge would be higher than international standards. Banks depending heavily on short-term funding could also face a higher surcharge than peers.


The previously announced joint venture between Comcast ($57; CMCSa) and Charter Communications ($157; CHTR) will be called GreatLand Connections. Comcast plans to take a 67% stake in GreatLand, with Charter owning the remainder of the new company. By spinning off 2.5 million subscribers in 11 states to GreatLand — as well as selling 1.4 million subscribers to Charter and swapping another 1.6 million — Comcast hopes to ease regulatory concerns about its proposed $45 billion acquisition of Time Warner Cable ($153; TWC). Comcast is a Buy and a Long-Term Buy.


Nvidia ($20; NVDA) sued Qualcomm ($76; QCOM) and Samsung Electronics for allegedly violating semiconductor patents used for graphics in Samsung smartphones and tablets. Qualcomm is a Long-Term Buy.


Boeing ($128; BA) won a contract to supply Ryanair Holdings ($58; RYAAY) with 100 of its 737 Max airplanes, which combine for a list price of $11 billion. Ryanair has the option to acquire an additional 100 jets. Boeing also raised its long-term forecast in China, projecting demand for more than 6,000 commercial jets between 2014 and 2033. Boeing says it may increase production of the 737 jetliner — good news for B/E Aerospace ($86; BEAV), which supplies lavatory and lighting systems for the 737. B/E Aerospace is a Buy and a Long-Term Buy. Boeing is rated A (above average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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