Portfolio Review: September 12, 2016
One new stock
Zions Bancorp ($31; ZION), a regional bank with operations concentrated in the western and southwestern states, joins the Buy and Long-Term Buy lists. Per-share profits grew 35% on 9% higher sales in the 12 months ended June. Net interest margin rose in each of the past two quarters and should continue to climb as the Federal Reserve increases interest rates.
Zions has exposure to the energy sector, with oil and gas loans representing about 6% of its total portfolio. However, bankruptcy risk within the sector may dissipate as oil prices stabilize. The stock trades at 18 times trailing earnings, a 6% discount to its five-year average. Zions raised its quarterly dividend 33% to $0.08 per share in July.
Alaska Air Group ($71; ALK) reported 9.0% higher traffic in August. Capacity expanded 10.3% last month, exceeding July's growth of 9.6% and also above management's target of 8% growth for the September quarter. In other news, the U.S. gave Alaska Air permission to launch daily flights between Los Angeles and Havana, Cuba. Alaska must still receive approval from Cuba. Alaska Air is a Buy and a Long-Term Buy.
Southwest Airlines' ($39; LUV) traffic grew 3.6% in August on 4.6% higher capacity. Southwest was also among four U.S. airlines to match Spirit Airline's ($41; SAVE) $5 fare hike in early September on one-way flights. Separately, Southwest struck a tentative five-year agreement with its facilities maintenance technicians. Southwest is a Focus List Buy and a Long-Term Buy.
The Food and Drug Administration granted Biogen ($312; BIIB) fast-track designation for aducanumab, an experimental Alzheimer's disease treatment. Aducanumab, currently in late-stage trials, is designed to remove beta amyloid plaques from the brains of patients with mild forms of the disease. The FDA's fast-track designation accelerates the review of drugs designed to address serious diseases or ailments with no alternative treatments. European regulators awarded aducanumab similar status in June.
Biogen says recent trials have yielded encouraging data for aducanumab's efficacy and safety. However, a drug that cures Alzheimer's disease has eluded drugmakers so far, and analysts at Goldman Sachs ($170; GS) put the odds of aducanumab eventually winning regulatory approval at 50%. Biogen is a Buy and a Long-Term Buy.
Centene ($67; CNC) shares fell about 5% after an analyst downgraded the stock on concerns the health insurer may fall short of consensus profit estimates in the coming year. The analyst also noted that Centene's Medicaid business may be peaking However, Centene has been one of few health insurers to make profitable use of government-run exchanges under the Affordable Care Act. The stock trades at just 14.5 times estimated earnings for the 12 months ending June, a 6% discount to the median managed-care stock in the S&P 1500 Index. Centene is a Focus List Buy and a Long-Term Buy.
Troubles for Mylan ($40; MYL) continue to simmer. After years of aggressive price hikes for its EpiPen allergy shot, Mylan's plans for a generic version that would sell at about half-price haven't stopped criticism. In addition, U.S. lawmakers have launched an investigation into claims the EpiPen was misclassified as "non-innovator" drug over the past two decades, resulting in a lower rebate paid to government programs. Mylan acquired the EpiPen in 2007. Mylan is rated A (above average).
D.R. Horton ($32; DHI) announced the acquisition of homebuilder Wilson Parker Homes for about $90 million in cash. Wilson Parker generated $201 million in revenue during the 12 months ended June and primarily operates in Atlanta and Augusta, Ga.; Raleigh, N.C.; Columbia, S.C.; and Phoenix, Ariz. D.R. Horton's sales totaled $11.60 billion in the past year. D.R. Horton is a Focus List Buy and a Long-Term Buy.
Spectra Energy ($42; SE), the majority owner of master limited partnership Spectra Energy Partners ($45; SEP), agreed to be acquired by Enbridge ($44; ENB) in an all-stock deal valued at $28 billion. Enbridge also operates its own MLP, Enbridge Energy Partners ($25; EEP). The deal between the parent companies has sparked speculation that the two MLPs may also merge, or that the parent company make take advantage of Spectra Energy Partners' low cost of capital to raise funds. However, the companies said they plan to keep Spectra Energy Partners independent, and that they plan to raise cash via asset sales. Spectra Energy Partners, yielding 5.9%, remains a member of our Top 15 Utilities portfolio.
Laboratory Corp. of America ($140; LH) completed its previously announced $371 million acquisition of Sequenom, a prenatal-testing company. LabCorp is a Focus List Buy and a Long-Term Buy.
China said it will investigate antitrust complaints concerning Comcast's ($66; CMCSa) acquisition of DreamWorks Animation. Comcast completed the $3.8 billion deal in August. Comcast is a Focus List Buy and a Long-Term Buy.
J.P. Morgan Chase ($67; JPM) received approval from Chinese regulators to open a wholly owned asset-management company. The bank already has some experience operating in China, gained from its joint venture with a state-run company to sell mutual funds. J.P. Morgan is a Long-Term Buy.
Nvidia ($62; NVDA) partnered with Baidu ($189; BIDU), an internet company in China, to develop software for self-driving cars. Nvidia is a Long-Term Buy.
U.S. auto sales tapped the brakes as seasonally adjusted sales fell to an annualized rate of 17 million vehicles in August, down 5% from July and down 4% from the same time last year. Car sales decreased 5% at both General Motors ($32; GM) and Toyota Motor ($121; TM), while Ford Motor ($13; F) reported a 9% decline. After rising for 66 straight months, retail auto sales have slipped in four of the past six months, reported The Wall Street Journal. Ford and GM are rated A (above average). Toyota is rated B (average). Auto-parts maker Lear ($117; LEA) is a Focus List Buy and a Long-Term Buy.
Apple shows iPhone, watch
For a company as closely watched as Apple ($108; AAPL), a steady stream of industry leaks leaves few surprises left by the time the product is unveiled. As expected, the new iPhone 7 features evolutionary, rather than radical, changes. The iPhone 7 comes with an upgraded camera and faster processor. Apple removed the device's jack for headphones, which now connect through its recharging port. Apple will begin offering wireless headphones, called Air Pods and priced at $159. Although expectations for the new iPhone are fairly low, Apple upwardly revised component orders by 10%, according to DigiTimes.
The company also introduced the second version of its smartwatch. The Apple Watch Series 2 still cannot connect to wireless networks without the owner's iPhone being nearby. But users can play the popular "Pokemon Go" game. Both devices are water resistant and will launch on Sept. 16.
In other news, CEO Tim Cook said Apple may repatriate at least $5 billion of cash held overseas in the coming year, potentially triggering a hefty U.S. tax bill. About 93% of Apple's $231.5 billion in cash and marketable securities is currently outside of the U.S. Apple is a Buy and a Long-Term Buy.
Zions Bancorp ($31; ZION) is being initiated as a Buy and a Long-Term Buy. After the addition, Vanguard Short-Term Corporate Bond ($81; VCSH) ETF makes up 16.0% of the Buy List and 16.8% of the Long-Term Buy List.