Long-Term Buy List review

11/24/2008


At the risk of stating the obvious, 2008 has been a rough year. The S&P 500 Index has fallen 41%, while the Dow Industrials have dropped 36%, and there has really been nowhere for equity investors to hide. Just about every segment of the market — small-caps and large-caps, all 10 S&P 500 sectors, and dozens of international stock indexes — have posted declines.

The Forecasts lists are also down for the year, but the Long-Term Buy List has done better than most. The Long-Term Buy List, which now holds a 34% cash position, is down about 31.5% for the year.

Our cash position explains most of the outperformance, but our Long-Term Buys have also benefited from the perceived safety of the big-name stocks that populate the list. In times of trouble, investors often gravitate toward well-known companies with a proven ability to survive through down economies. The average Long-Term Buy earns an attractive Quadrix Overall score of 86 on a scale of 0 to 100 and has a stock-market value of about $62 billion.

In the following paragraphs, we discuss important news from a few of our best-known Long-Term Buys:

Preliminary results indicate that Hewlett-Packard ($34; NYSE: HPQ) earned $1.03 excluding special items in the October quarter, up 20% and $0.03 above consensus estimates. H-P expects further growth in the year ahead, projecting per-share profits of $0.93 in the January quarter, up 8%, and a higher-than-expected $3.88 to $4.03 in fiscal 2009 ending October, up 6% to 11%. The company plans to release final quarterly results Nov. 24. H-P is a Buy and Long-Term Buy.


Chevron ($73; NYSE: CVX) struck oil at its Blind Faith Field in the Gulf of Mexico. Chevron holds a 75% stake in the field, expected to produce 65,000 barrels of oil and 55 million cubic feet of natural gas each day. Chevron is a Buy and a Long-Term Buy.


Wal-Mart Stores ($53; NYSE: WMT) earned $0.77 per share excluding special charges in the October quarter, up 12% and a penny above the consensus. International growth sparked a 7% rise in sales to $97.63 billion, with U.S. same-store sales up 3.3%. Wal-Mart lowered its guidance for the fiscal year ending January, projecting per-share profits of $3.42 to $3.46, up at least 9% but below the $3.49 consensus. Wal-Mart Stores is a Long-Term Buy.

Automakers stalling out
General Motors ($3; NYSE: GM) and Ford Motor ($2; NYSE: F) are burning through cash at the rate of more than $6 billion a quarter and appear desperately in need of federal assistance. The Big Three (Ford, GM, and privately owned Chrysler) have requested federal aid. Unfortunately for investors, even if a bailout materializes, it’s not likely to help shareholders. Large share offerings are possible, and the government is also likely to demand an equity stake in the automakers as a condition of any bailout.

President-elect Barack Obama called the auto industry a “high priority,” though any bailout is likely to focus on keeping factories operating, not compensating equity investors. Unfortunately for the automakers, the government may not take action right away. Senate Democrats have proposed a $25 billion loan package. But congressional Republicans oppose a bailout of the automakers, and direct intervention by Obama — after he becomes president in January — may be necessary to push a bailout through. Both GM and Ford posted huge losses in the September quarter, hurt by sharp declines in vehicle sales.

Earlier this month, GM agreed to sell its 3.2% share of Suzuki Motor back to the Japanese company for about $230 million. Ford also agreed to sell two-thirds of its controlling stake in Mazda for about $538 million. While Ford and GM will probably consider more asset sales, neither company has enough noncore assets to divest itself out of financial trouble. GM and Ford are rated Underperform, and we advise avoiding the stocks.

October-quarter earnings
Target’s ($30; NYSE: TGT) profits fell 14% to $0.49 per share, while same-store sales dropped 3.3%. Credit-card earnings plunged 83% as more customers defaulted on their bills. Bracing for a tough retail environment ahead, Target suspended share buybacks and pared back its capital-spending plans. Target is rated Neutral . . . Applied Materials’ ($10; NASDAQ: AMAT) profits declined 41% to $0.20 per share excluding special items. New orders lifted the company’s backlog by 2% from August levels, but total sales slid to $2.04 billion, down 14%. In an effort to lower costs, Applied Materials plans to slash 12% of its work force in fiscal 2009 ending October. Applied Materials is rated Neutral . . . Home Depot ($21; NYSE: HD) posted per-share profits of $0.45 from continuing operations, down 24% but $0.07 above the consensus. Sales fell 6%, with same-store sales down 8.3%, hurt by weakness in the housing and home-improvement market. Home Depot is rated Neutral . . . J.C. Penney’s ($16; NYSE: JCP) earnings from continuing operations tumbled 53% to $0.55 per share. The outlook for the January quarter looks similarly grim. Penney expects same-store sales to decrease between 9% and 11% in the quarter, with per-share profits down 46% to 53%. Penney is rated Neutral . . . Profits at Nordstrom ($10; NYSE: JWN) fell to $0.33 per share, down 51%. Total sales declined 8% to $1.81 billion, as same-store sales declined 11.1%. Nordstrom is rated Neutral . . . Kohl’s ($28; NYSE: KSS) earned $0.52 per share, down 15% but a penny better than Wall Street expected. Same-store sales fell 6.7%. The company lowered per-share-profit guidance for the January quarter to $0.90 to $1.05, down more than 20% from earlier expectations and year-earlier results. Kohl’s is rated Neutral . . . Medtronic’s ($32; NYSE: MDT) per-share profits increased 16% to $0.67 excluding special charges, but fell $0.04 shy of the consensus. Sales rose 14% to $3.57 billion, lifted by strong results in the cardiovascular segment and an acquisition in the spinal segment. Medtronic is rated Neutral . . . Lowe’s ($19; NYSE: LOW) earned $0.33 per share, down 23% on a 5.9% decline in same-store sales. The company expects per-share profits of $0.08 to $0.16 in the January quarter, down at least 43% from year-ago results. Lowe’s is rated Neutral.

News roundup
The Pentagon approved $50 million to buy components for four Lockheed Martin ($73; NYSE: LMT) F-22 fighter jets. A total of 183 F-22s are on order. It will be up to the Obama administration to decide if more planes will be ordered in the years ahead. However, the approval of spending for the components — all items that take a long time to manufacture and are typically ordered well ahead of production — bodes well for the future of the project. Lockheed Martin, dropped from the Buy List last week, is a Long-Term Buy.


Intel ($13; NASDAQ: INTC) slashed revenue guidance and now expects $8.7 billion to $9.3 billion for the December quarter, down from earlier forecasts of at least $10.1 billion. Intel shares fell nearly 8% on the news. The move reflects computer makers’ scramble to cut back on component inventories as consumers reduce spending. Intel is rated Neutral.


Yahoo ($12; NASDAQ: YHOO) co-founder Jerry Yang plans to resign as CEO once a replacement is found, though he will remain with the company as a senior executive and board member. The move could smooth the path towards a deal with Microsoft ($20; NASDAQ: MSFT); Yang had hindered negations regarding an overture from the software giant earlier this year. Yahoo is rated Neutral. Microsoft is a Buy and a Long-Term Buy.


Citigroup ($7; NYSE: C) shares plunged on news that the bank would take on more than $17 billion in assets from structured investment vehicles. The company also plans to cut 53,000 jobs by March 2009, on top of 22,000 cuts announced in October. Combined, the cuts represent about 20% of the financial giant’s work force. Citigroup is rated Neutral.


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