Portfolio Review

7/6/2015


Technology update

The European Union granted Google ($543; GOOGL) a deadline extension to respond to antitrust charges claiming the company skews its web-search results to favor its own online services. Two years ago, Google escaped similar charges in the U.S. after promising to make voluntary changes. Google is a Buy and a Long-Term Buy.


Apple ($127; AAPL) launched its streaming music service Apple Music on all of its devices. The service could strengthen Apple's ecosystem and potentially bolster its music sales. Last year the average iTunes user spent slightly more than $30 on music. The new service costs $10 a month. Apple will come out ahead if it can attract enough casual music listeners to offset the cannibalization of its largest iTunes users.

Early production has reportedly begun on Apple's next iPhone, rumored to come in the same sizes as current models and feature new technology that senses how hard users tap their screens. Apple probably hopes the new smartphone can build on momentum in an increasingly important region: China. The price of the average smartphone sold in China jumped 37% from the third quarter of 2014 to the first quarter of 2015. Greater China generated 25% of Apple's sales for the six months ended March. Apple's sales in China surged 71% year-over-year in the six-month period, nearly twice the pace of any other geographic region.

In other news, a U.S. appeals court upheld a lower court's ruling that Apple colluded with five publishers to set e-book prices. Apple faces a $450 million fine for its alleged anticompetitive behavior. Apple is a Focus List Buy and a Long-Term Buy.


Seeking to boost its life-sciences unit, Corning ($20; GLW) agreed to pay $219 million for the glass-tubing business owned by Gerresheimer, a German packaging supplier for the health-care sector. The business generated sales of about $93 million last year, equal to roughly 1% of Corning's total revenue. Corning is a Long-Term Buy.

Health stocks rally on court ruling

The Affordable Care Act dodged a major blow when the U.S. Supreme Court struck down a lawsuit challenging federal tax subsidies. At least 6.4 million Americans use the subsidies in 34 states that rely on federally run health exchanges. Following the decision, shares of hospitals surged, bolstered by the prospect of more paying customers.

Shares of S&P 1500 Index health-care-facilities stocks have averaged a 4% gain since the July 25 ruling, while stocks in the broader index have averaged a 1% decline. Community Health Systems ($63; CYH) shares have risen 14%, with HCA Holdings ($91; HCA) up 9%. Three of Community Health's five biggest states — Florida, Texas, and Tennessee — rely on federal exchanges.

The court's decision could pave the way for consolidation within the industry. New health laws limit profits for hospitals and health insurers, which has motivated both groups to improve efficiency by increasing their scale. Additionally, about 26 million Americans remain without health insurance, presenting managed-care providers with a big opportunity to add more Medicaid and Medicare members at a time when growth has slowed for commercial plans.

Against that backdrop, Aetna ($129; AET) may be nearing an acquisition of Humana ($193; HUM) in a deal worth more than $28 billion, reported Bloomberg. Humana reportedly received a bid from Cigna ($162; CI) as well, but prefers Aetna's offer. About 83% of Humana's 9.1 million members receive Medicare. HCA is rated Focus List Buy and Long-Term Buy. Aetna and Community Health are rated Buy and a Long-Term Buy. Cigna is rated A (above average).

Corporate roundup

Kroger ($73; KR) announced a two-for-one stock split, set to occur on or around July 13. The company also raised its quarterly dividend 14% to $0.21 per share on a presplit basis, payable Sept. 1. Kroger also launched a fresh $500 million stock-buyback plan, enough to repurchase 1.4% of outstanding shares at current prices, though no repurchases are expected for the remainder of fiscal 2016 ending January. Separately, Mike Ellis, a 40-year veteran of the company and most recently its president and chief operating officer, announced his retirement. Kroger is a Focus List Buy and a Long-Term Buy.


Airline stocks, including Alaska Air Group ($64; ALK) and Southwest Airlines ($33; LUV), fell after the U.S. Justice Department said it is probing some U.S. airlines for possibly colluding to grow slowly in order to keep fares artificially high. While the stock declines are unnerving, we rarely make investment decisions based on such legal news, and we're willing to wait for things to shake out. For now, Alaska Air is a Focus List Buy and a Long-Term Buy. Southwest Airlines is a Long-Term Buy.


Disney's ($115; DIS) 2015 U.S. box office sales reached $1 billion in 174 days, the fastest pace in the company's history. In other news, Disney said it may invest at least $1 billion from 2017 to 2024 to expand its Disneyland resort. Disney's budget for capital spending has ranged from $2.11 billion to $3.78 billion over the past five years. Separately, Disney named Christine McCarthy, a veteran of more than 15 years at the company, as its next CFO. She replaces James Rasulo, who resigned after getting passed over for chief operating officer earlier this year. Disney is a Long-Term Buy.

CDW down but not out

Shares of CDW ($35; CDW), a supplier of hardware and software products, have slipped 10% since the end of April. The sell-off may stem partly from the stubbornly sluggish market for personal computers. After a weak first half of the year, PC orders were expected to bounce back on the launch of Microsoft's ($44; MSFT) Windows 10. But Microsoft is letting consumers upgrade to Windows 10 free, hurting demand for new PC replacements. PC makers are now cutting orders for the remainder of 2015, according to DigiTimes. Some suppliers now see full-year PC shipments falling 5% to more than 10%.

Notebooks and mobile devices account for nearly 20% of CDW's sales. Weak PC demand could also be a symptom of troubling, broad trends for CDW's business. However, 2015 profit estimates have crept higher in the past 60 days, with the consensus currently projecting 16% growth. At 13 times estimated 2015 earnings, the stock trades at a 43% discount to the median technology stock in the S&P 1500 Index. CDW remains a Buy and a Long-Term Buy. Microsoft is rated B (average).


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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