Portfolio Review

2/9/2015


Four downgrades to raise cash

Because of falling Quadrix scores, disappointing quarterly results, and the market's discouraging price action, we are making several downgrades. The state of the Dow Theory is a bit cloudy, but we're lowering the equity exposure of our buy lists to about 85% as a precaution.

We are removing B/E Aerospace ($61; BEAV) from the Buy and Long-Term Buy lists, reflecting disappointing 2015 guidance and deteriorating Quadrix scores. For the December quarter, B/E's per-share profits rose 8% to $0.57 excluding special items, falling $0.13 short of the consensus. Sales grew 10% to $638 million. The stock's Overall score has plunged to 25, hurt by below-average ranks for Momentum and Value. Some investors may be pleased by B/E's plans to launch an annual dividend of $0.76 per share this year, but we see better opportunities elsewhere in the market. We are dropping B/E from the Monitored List, and the stock should be sold. KLX ($40; KLXI), spun off from B/E in December, should also be sold.


ManpowerGroup ($74; MAN) is being removed from the Focus List but remains a Buy and a Long-Term Buy. With 85% of sales coming from outside of the U.S., Manpower's December-quarter results were battered by the strong U.S. dollar. Per-share profits slipped 1% to $1.47 excluding special items but eased past the consensus of $1.43. Revenue slipped 2% to $5.12 billion, but was up 5% at constant currency. Weak operating momentum has caused the Overall score to slip to 68, and 2015 profit estimates are declining as analysts adjust for the stiff currency headwinds.

Yet the stock surged on results and still looks unduly cheap, earning a Value rank of 83 and trading at just 14 times trailing earnings, well off its five-year average of 22. Management says Europe's recovery remains in its early stages. For now, we will keep a close watch on the stock's Quadrix scores and profit estimates.


Schlumberger ($85; SLB), earning an Overall rank of 64, is being dropped from the Buy List but remains a Long-Term Buy. Shares have bounced 12% from their January low, benefiting from the rebound in oil prices. At 19 times estimated 2015 earnings, Schlumberger shares trade well above the median forward P/E of 14 for the S&P 1500 oilfield-services industry. Driller after driller has trotted out lower spending budgets for 2015 in recent weeks, and we would not be surprised to see Schlumberger's analyst estimates fall even further from current levels, which project 29% lower earnings per share this year on a 13% revenue decline.


Wells Fargo ($53; WFC) is being dropped from the Buy list. Its Overall score has fallen to 69, dragged down by subpar Momentum and Earnings Estimates ranks. In a largely disappointing December quarter for financial stocks, Wells Fargo posted decent results. But the bank's prospects in the coming year look tepid due to soft loan growth, with the consensus projecting 2% higher earnings per share on a 4% revenue gain. Although the stock remains a decent play for investors with a three- to four-year time horizon, it no longer ranks among our top picks for 12-month gains. Wells Fargo remains a Long-Term Buy.

Earnings reviews

Technology

Cognizant Technology Solutions ($58; CTSH) grew December-quarter earnings per share 14% to $0.67 excluding special items, easing past the consensus by $0.02. Sales surged 16% to $2.74 billion, also ahead of expectations. For the March quarter, Cognizant anticipates per-share profits of at least $0.69, implying at least 11% growth. The consensus projected earnings of $0.70 per share. Cognizant shares rallied on the report and remain a Buy and a Long-Term Buy.


EMC ($27; EMC) earned $0.69 per share excluding special items in the December quarter, up 15% and a penny above the consensus. Revenue climbed 5% to $7.05 billion. Management expects per-share profits to climb 4% on 7% revenue growth, guidance that fell short of analyst expectations at the time of the announcement. EMC is a Long-Term Buy.


In the December quarter, Google's ($526; GOOGL) per-share profits crept 3% higher to $6.88 excluding special items, missing the consensus estimate by $0.23. Sales, up 15% to $18.10 billion (up 20% at constant currency), also missed analyst expectations. Google is a Buy and a Long-Term Buy.

Financials

Jones Lang LaSalle ($157; JLL) grew December-quarter earnings per share 29% to $4.30 excluding special items, topping the consensus by $0.45. Revenue advanced 16% to $1.75 billion, also ahead of the consensus. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.


Lincoln National ($53; LNC) earned $1.67 per share from operations in the December quarter, up 19% and $0.19 above the consensus. Operating revenue, up 20% to $3.83 billion, also exceeded analysts' expectations. Lincoln is a Long-Term Buy.

Additional earnings releases

Lear ($109; LEA) said per-share profits jumped 46% to $2.27 in the December quarter, topping the consensus by $0.20. Revenue grew 7%. Shares rose on the report, then set an all-time high a few days later when Lear said it will consider an investor's proposal to split its car-seat and electrical-parts businesses into two publicly traded companies. Lear is a Focus List Buy and a Long-Term Buy.


For the December quarter, Gilead Sciences ($98; GILD) reported earnings per share of $2.43 excluding special items, compared to $0.55 earned in the year ago quarter and the consensus of $2.22. Sales jumped 134%. Hepatitis C drugs Harvoni and Sovaldi combined to generate 52% of revenue. The hepatitis C business continues to gain momentum as Gilead locked up chunks of the market with exclusive deals, most recently signing a pact with pharmacy-benefit manager Catamaran ($52; CTRX). But Gilead is taking market share by offering steep discounts, projected to rise to 46% in 2015 from 22% last year. Concerns about those pricing pressures caused shares to fall on what was otherwise a strong report.

Known for its conservative guidance, Gilead expects 2015 product sales of $26 billion to $27 billion, implying 6% to 10% growth and lagging the consensus of $28.65 billion at the time of the announcement. Gilead also initiated a quarterly dividend of $0.43 per share, payable in the June quarter, while adding $15 billion to its share-repurchase program. Gilead, which now yields 1.7%, is a Long-Term Buy.

Mutual-fund changes

Our recommended Growth and Conservative fund portfolios did well last year, with 18 of the 20 funds outpacing their category average. But markets change, and we are trimming exposure to stocks, particularly small-cap and midcap names, reflecting a more conservative allocation. Stocks now account for 80% of the retooled Growth Portfolio, down from 87%. The Conservative Portfolio is 71% invested in stocks, down from 77%. For a table showing the new weightings, click here. Our fund portfolios will be reviewed in the Feb. 16 issue of the Forecasts.

Corporate roundup

Alaska Air Group ($67; ALK) reported 8% higher traffic and 10% higher capacity in January. Alaska Air is a Focus List Buy and a Long-Term Buy.


Macy's ($65; M) reported 2% higher same-store sales for the January quarter and raised its profit guidance for fiscal 2015 ended January. Macy's also agreed to pay $210 million in cash to acquire Bluemercury, which operates 60 specialty stores that focus on luxury beauty products and spa services. Macy's is a Long-Term Buy.


Mylan ($53; MYL) agreed to pay at least $750 million in cash for a women's health-care businesses owned by India-based Famy Care. Mylan is a Buy and a Long-Term Buy.


Shire ($224; SHPG) won U.S. approval to expand the usage of Vyvanse to treat binge-eating disorder, which affects about 5 million people in the U.S. Shire is a Focus List Buy and a Long-Term Buy.


Rank Changes

ManpowerGroup ($74; MAN) is coming off the Focus List but remains a Buy and a Long-Term Buy. Schlumberger ($85; SLB) and Wells Fargo ($53; WFC) are being dropped from the Buy List but remain Long-Term Buys. B/E Aerospace ($61; BEAV) is being dropped from the Buy and Long-Term Buy List, and from coverage. Vanguard Short-Term Corporate Bond ($80; VCSH) ETF now accounts for 15.2% of the Buy List and 15.4% of the Long-Term Buy List.


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