Portfolio Review

1/19/2015


Upgrades & downgrades

We are upgrading Aetna ($90; AET) to the Focus List. Earning a Quadrix Overall rank of 95, Aetna seems capable of maintaining its steady operating momentum in 2015. Citing strong growth from Medicare and public exchanges, Aetna said 2014 membership exceeded its prior target of 23.4 million. Aetna also announced plans to raise its minimum wage to $16 an hour in April, affecting about 5,700 workers, or 12% of its U.S. staff. The move will cost about $14 million in 2015 but could reduce turnover costs of roughly $120 million a year. At less than 13 times estimated 2015 earnings, the stock offers a 25% discount to the median for S&P 1500 managed-care providers. Aetna was already a Buy and a Long-Term Buy.


Corning ($23; GLW) produces glass and ceramic products, including materials used in the displays of electronic devices. The company should benefit as consumers upgrade to the next generation of ultrahigh-definition televisions. The stock scores above 70 in all six Quadrix categories, contributing to an Overall rank of 96. Both sector-specific scores exceed 85. Corning is being upgraded to a Long-Term Buy.

Cash from operations, up 78% to $4.88 billion in the 12 months ended September, consistently exceeds net income. Last month, Corning announced a 20% hike to its quarterly dividend, payable March 31. Corning, which now yields 2.1%, is scheduled to post December-quarter results on Jan. 27, with the consensus projecting 31% higher earnings per share and 24% higher sales.


We are adding Nvidia ($20; NVDA) to the Buy and Long-Term Buy lists. Best known for designing graphics semiconductors for personal computers, Nvidia is accelerating its push into automobiles with components that power dashboard graphics and navigation systems. Sales grew 12% in the 12 months ended October, while free cash flow increased 10% to $517 million.

At 15 times trailing earnings, the stock trades at a 27% discount to both its five-year average and the median for S&P 1500 semiconductor stocks. For the January quarter, the consensus forecasts 21% higher per-share profits on 5% revenue growth. Nvidia, yielding 1.7%, is expected to post results during the second week of February.


SanDisk ($80; SNDK) is being sold from the Buy and Long-Term Buy lists after the company warned of weaker-than-expected results in the December quarter. SanDisk expects revenue of about $1.73 billion, flat with the year-earlier period and short of the consensus of $1.83 billion. SanDisk also lowered its guidance for gross profit margin. Shares are down about 18% since the announcement. We are not hanging around for a potential bounce-back, given SanDisk's weakening operating momentum and middling valuation relative to peers. SanDisk is now rated B (average).


Wells Fargo ($51; WFC) is being dropped from the Focus List after the bank's operating momentum remained sluggish in the December quarter. Per-share profits crept 2% higher to $1.02, up 2% and matching the consensus estimate. Revenue advanced 4% to $21.44 billion, ahead of the consensus. Income from mortgage banking slipped 4%, offset by higher fees at the investment bank and brokerage-advisory business. Core loans and average total deposits rose 8%.

The stock's Overall score has slipped to 63, weighed down by a Momentum rank of just 31. But the bank seems capable of generating steady, if unspectacular, operating growth to fund management's plans to increase the dividend. Wells Fargo has raised its dividend more than 16% in each of the past four years, with hikes typically announced in the spring. Wells Fargo, yielding 2.7%, remains a Buy and a Long-Term Buy.

Retail update

Retail sales for the last two months of 2014 increased 4.6% year-over-year, according to industry researcher ShopperTrak, marking the strongest holiday growth since 2005. ShopperTrak had originally forecasted 3.8% growth. The federal government's official December retail-sales number came in below expectations, falling 0.9% from November, but was still up 3.2% from a year ago (4.3% excluding autos and gasoline).


Macy's ($64; M) reported 2.7% higher same-store sales for November and December, in line with management's guidance. The retailer narrowed its January-quarter guidance for same-store sales, now projecting 2.5% to 3%, the top half of an earlier target range of 2% to 3%. Macy's is a Long-Term Buy.

Corporate roundup

In the December quarter, J.P. Morgan Chase's ($57; JPM) earnings per share slid 8% to $1.19, missing the consensus estimate of $1.31. Revenue, down 2% to $23.55 billion, also fell short of expectations. Results were hurt by rising legal expenses, higher credit provisions on loans, and weakness in fixed-income trading. Management conceded that regulators are still coming after the bank from multiple directions but dismissed suggestions that J.P. Morgan should break itself up in order to reduce scrutiny. J.P. Morgan, earning a Value rank of 88 and yielding 2.8%, remains a Long-Term Buy.


Anthem ($132; ANTM) agreed to offer exclusive coverage to hepatitis C drugs made by Gilead Sciences ($99; GILD). Anthem, which covers about 30 million people, cited favorable pricing and a simpler dosage in its decision to pick Gilead over AbbVie's ($64; ABBV) rival treatment. Separately, Prime Therapeutics, which covers 25 million people, gave preferred status to hepatitis C treatments from both Gilead and AbbVie, citing "substantial" price reductions. Gilead is a Long-Term Buy. Anthem is rated A (above average). AbbVie is rated B (average).


Southwest Airlines ($39; LUV) said both traffic and capacity increased 3% in December. For the December quarter, traffic climbed 4% and capacity 2%. Southwest is a Long-Term Buy.

Auto-parts update

Magna International ($97; MGA) shares slumped on management's disappointing 2015 outlook. Magna anticipates revenue of $34.4 billion to $36.1 billion, compared to the consensus target of $37.74 billion. Analysts expect Magna to report 2014 sales of $36.46 billion. However, investors should remember that Magna's initial 2014 guidance proved conservative. The sales target started out below the consensus, only for management to steadily increase it over time. Magna sees light-vehicle production rising 2% in North America and essentially holding flat in Europe; others in the industry are more optimistic. Operating margins are also expected to expand in 2015. Magna remains a Focus List Buy and a Long-Term Buy.


Lear ($95; LEA) said revenue should rise 4% to 7% in 2015 on a balanced mix of organic and acquired growth. According to the researcher IHS, vehicle production is projected to climb 3% worldwide this year on growth in all major geographic regions but Russia. Lear also expects profit margins to keep expanding. Lear is a Focus List Buy and a Long-Term Buy.


Rank Changes

Aetna ($90; AET) is being added to the Focus List, replacing Wells Fargo ($51; WFC), which remains a Buy and a Long-Term Buy. Nvidia ($20; NVDA) is being initiated as a Buy and Long-Term Buy. Corning ($23; GLW) is joining the Long-Term Buy List. SanDisk ($80; SNDK) is being dropped from the Buy and Long-Term Buy lists. Vanguard Short-Term Corporate Bond ($80; VCSH) ETF now accounts for 5.8% of the Focus and Buy lists and 10.3% of the Long-Term Buy List.


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