Portfolio Review: October 5, 2015
Nike propels Foot Locker higher
At a time when many stocks are sliding toward 52-week lows, shares of Foot Locker ($72; FL) and Nike ($123; NKE) dashed to record highs after the fitness-apparel maker posted strong August-quarter results. Nike's per-share profits jumped 23% on 5% revenue growth, topping analyst expectations on both counts. Management said sales in China surged 30%, providing further evidence that Chinese consumers continue to spend even as industrial activity slows. Global futures orders, reflecting products scheduled for delivery over the next five months, increased 17% at constant currency, also ahead of analysts' expectations.
Nike's results bode well for Foot Locker; the retailer purchased 73% of its merchandise from Nike in fiscal 2015 ended January. Foot Locker also appears to be gaining share from rival Finish Line ($19; FINL), which posted yet another disappointing quarter. Finish Line announced its weakest same-store-sales growth for the back-to-school season since 2009, according to Goldman Sachs ($174; GS).
Foot Locker shares have advanced 28% in 2015, while the S&P 1500 Index has shed 7%. That rally has pushed the stock's Quadrix Value score down to 44, but we are willing to overlook its middling valuation, given the impressive growth. Foot Locker enjoys strong operating momentum and rising profit estimates; its per-share profits have grown by double-digits in each of the past seven quarters, a trend analysts expect to continue through at least the next four quarters. Foot Locker, earning an Overall score of 93, is a Focus List Buy and a Long-Term Buy. Nike is rated B (average).
More pain in health care's forecast?
The S&P 1500 health-care sector led the market higher in the first seven months of the year (up 12%, versus a 2% gain for the broader index). And it has led the market lower since the end of July (down 13%, versus a 9% decline for the broader index). Although we have trimmed our exposure to the sector in the past few months, our remaining health stocks have not been spared from the slump. Shares of Community Health Systems ($43; CYH), HCA Holdings ($77; HCA), Gilead Sciences ($98; GILD), and Shire ($205; SHPG) are all down between 16% and 27% since July.
The pain has been especially acute for the biotechnology, facilities, and drug industries, with the average stock in each group down 18% or more since July. Some analysts have blamed weakness in these areas on profit-taking, though comments by politicians have also contributed to the decline. Shares of Gilead and Shire fell in sympathy with other drugmakers after Democratic presidential candidate Hillary Clinton pledged to lower prices for medicines.
Rick Scott, Republican governor of Florida, says he plans to propose new rules to increase the transparency of hospital prices. His plan would require hospitals to disclose online products and services at the list price — not the negotiated price that insurers typically collect, which is often significantly lower. Ultimately, this plan could skew public perception of the prices actually received by hospitals and potentially dampen demand for elective procedures. Florida is the largest market for both Community Health (13% of its hospitals in 2014) and HCA (25%). For now, hospitals remain optimistic that higher utilization rates will continue to offset pressure on prices. Both volumes and elective procedures at U.S. hospitals are expected to accelerate into 2016, based on a survey by Goldman Sachs ($174; GS).
Health care may become a popular battleground for politicians. And despite the sell-off, the average health stock trades at roughly 24 times trailing earnings and 22 times estimated 2015 earnings, above the broader index's average of 20 for both ratios. Still, investors are starved for operating growth, which is plentiful in the sector. The average health stock is projected to grow per-share profits 11% this year — nearly double the average growth rate for any other sector. Analyst profit estimates have also risen for 62% of health stocks in the past 90 days — no other sector has more than 47% of stocks with rising estimates.
We are standing by our four recommended health stocks until their underlying fundamentals tell us differently. They all look cheap relative to the sector's average forward and trailing P/E ratios. Their profit estimates have held up in the past 90 days, and all but Shire are expected to deliver above-average profit growth this year. Gilead and HCA are rated Focus List Buy and Long-Term Buy. Community Health is a Buy and a Long-Term Buy. Shire is a Long-Term Buy.
New iPhone thrives, Google shows off gadgets
Apple ($110; AAPL) said it sold more than 13 million iPhone 6S units during the device's opening weekend, up more than 30% from the 2014 launch to surpass analyst expectations. The latest iPhone debut included China; regulatory delays prevented Apple from launching the iPhone 6 last year until after the U.S. rollout. Sales also appeared to benefit from Apple's new upgrade program. Shares fell on the news, possibly because investors worry whether Apple can build on the strong opening weekend and keep the growth coming. Apple is a Focus List Buy and a Long-Term Buy.
The high-end tablet market got more crowded after Google ($638; GOOGL) introduced Pixel C, the first tablet to come from a brand previously connected to laptops. The tablet starts at $499, plus an additional $149 for an optional keyboard, and will be available in time for the holiday-shopping season. Google also unveiled two new Nexus smartphones, as well as the redesigned Chromecast, a device that streams online video on TVs, and the new Chromecast Audio, which streams audio to speakers.
In other news, Google continues to endure regulatory headaches. The U.S. Federal Trade Commission is reportedly investigating complaints that Google unfairly gives its own services priority on its Android platform. Google's Android business has also prompted investigations in the European Union and Russia. The EU launched a separate probe into Google and other internet companies in the hope of determining whether the industry requires tougher enforcement. Google is a Focus List Buy and a Long-Term Buy.
Comcast ($57; CMCSa) seeks to expand its presence in Asia. In September, the company agreed to buy a 51% stake in Universal Studios Japan. Last year it announced plans to build a theme park in Beijing, China. The theme-park business has helped drive Comcast's growth in recent years, with sales up 7% in 2013, 17% in 2014, and 29% in the first half of 2015. Parks are also the company's most profitable business segment. Comcast is a Focus List Buy and a Long-Term Buy.
Alcoa ($10; AA) announced plans to split into two publicly traded companies in the second half of 2016. The traditional raw-metals business will retain Alcoa's name. The new company combines the higher-growth engineered products and solutions business, makes parts for the automotive and aerospace industries, with other subsidiaries involved in construction and transportation, will be named later. Alcoa is rated C (below average).
Wells Fargo ($51; WFC) has more exposure to the energy sector than any other U.S. bank said an analyst at Raymond James Financial ($50; RJF). The energy sector accounts for about 2% of Wells Fargo's loan portfolio. Wells Fargo is a Long-Term Buy.