Portfolio Review: October 19, 2015
Three rank changes
On the Friday, Oct. 9 hotline, we added Robert Half International ($52; RHI) to the Buy List.
Centene ($57; CNC) is being upgraded to a Buy and a Long-Term Buy. Caught up in the sell-off in health care, the shares have shed 10% in the past month. But Centene enjoys outstanding operating momentum, with per-share profits, sales, and operating cash flow all climbing more than 45% in the 12 months ended June. Both sales and per-share profits seem likely to grow by double-digits through 2016.
Centene may be paying a hefty price for its pending $6.3 billion acquisition of Health Net ($62; HNT), but the cash-and stock deal appears strategically sound and promises to make Centene the largest private administrator of Medicaid. The insurer also stands to benefit from rising demand for generics and biosimilars, copycat medications that typically cost less than the original branded drugs. Quadrix category scores of 93 for Momentum, 82 for Value, and 97 for Quality contribute to an Overall rank of 96. Centene was previously rated A (above average).
We are adding Wells Fargo ($52; WFC) to the Buy List. The bank reported per-share profits of $1.05, up 3%, to meet the consensus estimate. Revenue climbed 3% to $21.88 billion, ahead of analysts' projections. Management continues to see incremental improvements in the U.S. economy, most recently evident by consumers spending their savings from lower fuel costs on goods and services. The bank's total loans rose 8% on broad growth across commercial and industrial (up 15%), commercial real estate (up 10%), and mortgages (up 7%). Wells Fargo also increased its provision for bad loans due to deterioration in the energy sector, still just 2% of its outstanding loans. Wells Fargo shares look attractively priced, earning a Value rank of 76.
In other news, Wells Fargo agreed to acquire General Electric's ($28; GE) commercial lending and leasing business with $32 billion in assets. In the deal, Wells Fargo takes on a $30 billion portfolio of commercial-finance loans, which tend to offer higher yields — and higher potential losses — than other loans. Separately, U.S. officials are reportedly investigating Wells Fargo's student-loan servicing. Citigroup ($51; C) and Discover Financial Services ($55; DFS) have faced similar probes. Wells Fargo is the second-largest originator of private student loans. Wells Fargo is also a Long-Term Buy. Citigroup is rated B (average). GE is rated C (below average).
Stick with J.P. Morgan
J.P. Morgan Chase ($60; JPM) earned $1.32 per share in the September quarter excluding special items, down 3% and $0.05 below the consensus. Net revenue, down 6% to $23.54 billion, also fell short of analyst expectations, hurt by a 15% decline in trading operations. Net income slumped for three of the bank's four units, the exception being consumer and community banking, up 4% on a 29% jump in mortgage banking. Total core loans grew 15%. While quarterly results were disappointing, operating momentum in key business units provides reason for optimism. J.P. Morgan remains a Buy and a Long-Term Buy.
EMC ($27; EMC) agreed to sell itself to Dell for $67 billion in a cash-and-stock deal that would be the biggest acquisition ever in the technology sector. The deal values EMC at about $33 per share and will give EMC shareholders about $24 per share in cash, plus a special stock that tracks VMware's ($68; VMW) share price. EMC owns 80% of VMware. The takeover promises to extend Dell's reach into cloud storage at a time when the personal-computer market continues to contract. PC shipments fell 11% in the September quarter, according to industry researcher IDC, worse than a forecasted decline of 9%. Both EMC and VMware are rated B (average).
Apple ($110; AAPL) says it plans to launch Apple Pay in some Starbucks ($59; SBUX) stores by the end of 2015 and expand to all 7,500 U.S. stores by the close of 2016. Although more than a million stores now accept Apple Pay, the mobile-payment service has struggled to gain widespread acceptance, accounting for just 1% of all U.S. retail transactions. In other news, Apple has not completely escaped the sluggish PC market, as its Macintosh computers posted their slowest quarterly sales-growth rate in two years, according to industry researchers Gartner and IDC. Hoping to create further separation from rival PCs, Apple refreshed its line of desktop iMacs earlier this month, now equipped with sharper displays and faster processors. Apple is a Focus List Buy and a Long-Term Buy. Starbucks is rated A (above average).
Alphabet ($680; GOOGL), formerly Google, said search queries made on mobile devices exceeded those on personal computers this summer, a first for the company. The shifting landscape underscores both opportunities and challenges for Alphabet. The company has a greater share of searches made on mobile devices than its PC market share. However, mobile-device users tend to spend more time in applications than browsing the web. Alphabet also charges lower rates for ads that appear on mobile screens than on PCs, though that gap appears to be narrowing. Alphabet is a Focus List Buy and a Long-Term Buy.
Shares of Wal-Mart Stores ($60; WMT) plunged after the retail giant warned sales would hold flat in fiscal 2016 ending January due to unexpectedly unfavorable foreign-exchange rates. It also forecasted 6% to 12% lower per-share profits in fiscal 2017. Kroger ($36; KR) shares fell in sympathy, though investors should note a key distinction between the two retailers. Like Wal-Mart, Kroger could feel the effects of higher wages and investment in digital initiatives. But Kroger operates entirely in the U.S., while Wal-Mart relied on foreign markets for 28% of fiscal 2015 sales. Kroger is a Buy and a Long-Term Buy. Wal-Mart Stores is a B (average).
Southwest Airlines ($41; LUV) reported 11.4% higher traffic on 8.4% capacity growth in September, boosting its load factor, a key efficiency metric, to 82.7% from 80.5% in September 2014. Southwest Airlines is a Buy and a Long-Term Buy.
U.S. regulators granted Shire ($201; SHPG) a priority review that could expand the usage of Cinryze, currently used to treat a rare genetic disorder. Shire is a Long-Term Buy.
Centene ($57; CNC) is being added to the Buy and Long-Term Buy lists, and Wells Fargo ($52; WFC) is being added to the Buy List. On the Oct. 9 hotline, we added Robert Half International ($52; RHI) to the Buy List.Â
To increase the equity exposure of our portfolios, we're increasing the target weights for each of our recommendations, as shown in the table on page 7. After these changes, Vanguard Short-Term Bond ETF ($80; VCSH) will account for 20.3% of the Buy and Focus Lists and 22.0% of the Long-Term Buy List.
Unless you can trade for free, you may not want to buy every single name up to the new percentages. Instead, look to add to the stocks where your positions are smallest, especially among the Focus List picks.