Portfolio Review: June 6, 2016
Focus List review
Our Focus List rarely contains stocks with Quadrix Overall scores below 80. Today it counts the following three such stocks as members:
Alphabet's ($748; GOOGL) Overall score has fallen to 58 from 84 at the end of February, hurt by unfavorable analyst-estimate trends, sluggish share-price action, and a modest deceleration in operating momentum. The stock has slipped 4% in 2016, swept up in the broad sell-off in S&P 1500 internet stocks, down 5% on average. But the company continues to generate double-digit growth for earnings per share, revenue, and cash from operations. While it's difficult to make the case that Google's stock is cheap, given its Value rank of 31, the trailing P/E ratio of 24.5 hovers near its lowest level since 2013.
Favorable news developments could help the stock gain ground. Alphabet prevailed in a $9 billion patent lawsuit after a federal jury found that the company's use of Oracle's ($40; ORCL) Java software in Android smartphones did not violate copyright laws. Oracle vowed to appeal the ruling. In other news, Alphabet said it will open a technology center outside of Detroit as it works with Fiat Chrysler Automobiles to develop a self-driving Pacifica minivan. Alphabet is a Focus List Buy and a Long-Term Buy. Oracle is rated B (average).
C.H. Robinson Worldwide ($74; CHRW) earns an Overall rank of 71, scoring 45 or higher for all six Quadrix categories. Long-term contracts have protected the company from lower spot rates for freight, a trend caused by truckers' overcapacity. Cash from operations climbed 20% to $722 million in the 12 months ended March, a record high.
The shares have returned 20% including dividends in 2016, ranking in the top 20% of our research universe. That rally has dragged the stock's Value rank down to 53. The shares trade at a premium to the median stock in both the S&P 1500 industrials sector and the logistics industry for trailing P/E, price/book, and price/operating cash flow ratios. The shares also trade below their own five-year norms for each of those metrics. While we may downgrade C.H. Robinson if the stock rallies sharply or begins to stumble operationally, it remains a Focus List Buy and a Long-Term Buy for now.
Comcast ($64; CMCSa) is generating steady operating momentum, with sales rising in 10 straight quarters and operating cash flow up in seven of the past 10 quarters. The cable business has grown its base of video subscribers in each of the past two quarters, while average revenue per customer has consistently risen 4% to 5% every quarter since the beginning of 2014. Management expects the Rio Olympics this summer to be more profitable than the 2012 London Olympics, noting stronger advertising sales.
Comcast's solid operating growth seems likely to continue, with per-share profits projected to rise 9% this year on 6% higher revenue. The stock seems attractively valued at 18 times estimated 2016 earnings, a 17% discount to the median cable and satellite stock in the S&P 1500 Index. Earning an Overall rank of 75, Comcast remains a Focus List Buy and a Long-Term Buy.
Pipeline dreams may pay off
Few S&P 1500 industries have fared worse in 2016 than pharmaceuticals (stocks average a negative total return of 5%) and biotechnology (-10%). Recent weakness coincides with heightened scrutiny of drug prices from politicians, insurers, and pharmacy-benefit managers. Yet rising medical utilization is benefiting a broad swath of the health-care sector, drugmakers included. U.S. prescription-drug spending advanced 5% last year, said Express Scripts ($76; ESRX), and should climb 7% in both 2016 and 2017. Prescription-drug sales rose 6% to 7% in each of the first three months of 2016, according to J.P. Morgan Chase ($66; JPM).
The sell-off leaves many drugmakers looking cheap relative to their historical norms. Nearly half of S&P 1500 biotechnology and pharmaceutical stocks have trailing P/E ratios below their five-year averages; a third trade more than 20% below their five-year average P/E. J.P. Morgan is a Long-Term Buy. Express Scripts is rated A (above average).
Below we present news from our recommended drug and biotech stocks:
U.S. regulators approved Zinbryta, an injectable multiple sclerosis drug marketed by Biogen ($287; BIIB) and AbbVie ($63; ABBV) that needs to be administered just once a month. The drug has also been recommended for approval in the European Union. In a trial, Zinbryta proved more effective than Avonex, which accounted for 24% of Biogen's 2015 revenue. Biogen is a Focus List Buy and a Long-Term Buy. AbbVie is rated A (above average).
An advisory panel recommended that the European Union approve Gilead Sciences' ($87; GILD) latest combination treatment for hepatitis C, which targets all six genotypes of the virus. In other news, both Gilead and Celgene ($106; CELG) are considering submitting separate bids for Medivation ($61; MDVN), reported Bloomberg. Medivation, which develops cancer drugs, has rejected an unsolicited $9.3 billion takeover offer from Sanofi ($41; SNY). At least one analyst has speculated that Gilead's decision to dial back stock repurchases for the rest of 2016 signals the drugmaker is seriously considering acquisitions. Gilead is a Buy and a Long-Term Buy. Celgene is rated C (below average).
Baxalta ($46; BXLT) shareholders approved Shire's ($191; SHPG) proposal to acquire the biotechnology company. Shire expected to complete the deal, announced in January, on or near June 3. Shire is a Long-Term Buy.
India continues to study Apple's ($98; AAPL) application to open retail stores in the country. India requires foreign single-brand retailers to purchase at least 30% of manufacturing materials from local suppliers. Unfortunately, few high-end components makers operate in India, making the requirement difficult to fulfill. The law has an exemption for retailers that sell "state-of-the-art" and "cutting-edge" technology not locally available. Although a panel recommended that India waive this requirement, the finance ministry reportedly wants to ensure Apple creates more jobs in the country. In the March quarter, Apple grew sales 56% in India. However, the U.S. company has less than a 3% slice of India's smartphone market.
Separately, Apple has met with charging-station companies to study how electric cars refill their batteries, reported Reuters. Apple has yet to publicly confirm it is working on an electric car, though it has reportedly hired at least four engineers who specialize in charging electric vehicles. In other news, Apple reportedly plans to sell $1 billion worth of bonds in Taiwan and is exploring the possibility of issuing more bonds in Australia. Apple is a Buy and a Long-Term Buy.
CBRE Group ($30; CBG) acquired Michael Horwitz & Co., a retail-property adviser based in London. CBRE is a Buy and a Long-Term Buy.