Portfolio Review

6/1/2009


Keep Aflac, St. Jude
Earlier this year, fears about troubles with Aflac’s ($36; AFL) investment portfolio lumped the insurer into the motley crowd of rogue financials and caused the shares to tumble. Those concerns centered on possible nationalization of European banks and may have been overblown. About $8 billion, or 12%, of Aflac’s investment portfolio is in risky hybrid securities.

In the March quarter, Aflac reported only $6 million, or $.01 per share, of realized losses on investments. More losses will probably come this year, but Aflac has shown it can raise capital to backstop shortfalls, and the overall quality of the investment portfolio suggests minimal risk of insolvency. Aflac is a Long-Term Buy.


St. Jude Medical ($37; STJ) earns a Quadrix Overall score of 74, the lowest on our Buy List, but we like the stock for several reasons. The shares have performed well, rising 12% in 2009 compared to the S&P 500 Index’s 1% gain. In contrast to the volatility shaking much of the economy, St. Jude reports stable trends in pricing, customer inventory, and procedure volumes.

The company also enjoys an outstanding track record relative to Wall Street’s expectations, meeting or beating the consensus in at least the last nine quarters. The consensus projects per-share profits will rise 5% in the June quarter and 8% for the year, targets St. Jude may be able to top. St. Jude Medical is a Focus List Buy and a Long-Term Buy.

GameStop still a good play
In the April quarter, GameStop’s ($23; GME) per-share profits rose 13% to $0.43 excluding debt-retirement costs, topping the consensus by a penny. Revenue climbed 9% to $1.98 billion, though same-store sales declined 1.5%. Management anticipates lower per-share profits and same-store sales for the July quarter, due in part to a weak release schedule for new video games, well below the 12% growth Wall Street expected at the time of the announcement.

The company sees performance improving in the second half of the year and still expects per-share-profit growth of 18% to 22% for the year ending January. While the news is disappointing, GameStop is a bargain at just eight times the low end of company guidance for fiscal 2010 ending January. The stock remains a Buy.

Energy roundup
Chevron ($66; CVX) suspended production of 100,000 barrels of crude oil per day in Nigeria after militants bombed a company pipeline as part of a larger strike against the oil industry. Chevron is a Long-Term Buy . . . Oil giant Petrobras ($42; PBR) said Brazil’s major offshore oil reserves are profitable with oil prices at $45 a barrel. With oil prices back above $61 per barrel, the profit picture in other regions of the world should also be improving. Any increase in spending from oil companies should benefit our recommended drillers and oilfield suppliers — Transocean ($74; RIG), Oceaneering International ($50; OII), National Oilwell Varco ($37; NOV), and Schlumberger ($54; SLB).

News report
Microsoft ($20; MSFT) called off its defense hearing scheduled for June 3 to June 5 because top European antitrust regulators could not attend. Antitrust regulators can move forward with their ruling even if a hearing does not take place. In other news, Yahoo ($15; YHOO) CEO Carol Bartz said she would consider an Internet-search deal if Microsoft offered “boatloads of money.” Microsoft is rated a Long-Term Buy. Yahoo is rated Neutral . . . Accenture ($31; ACN) plans to change its country of incorporation to Ireland from Bermuda, subject to shareholder approval. This action does not change our expectations for Accenture, a Buy and a Long-Term Buy . . . Boeing ($44; BA) affirmed its 2009 profit forecast and said enough financing is available to support commercial aircraft deliveries through early 2010. That’s good news for United Technologies ($53; UTX) and Precision Castparts ($82; PCP). In 2008, Boeing generated 6.5% of sales for United Technologies’ Pratt & Whitney segment, which makes plane engines. Precision Castparts supplies several of Boeing’s newer programs, including the 787 Dreamliner. Boeing is rated Neutral. Precision Castparts and United Technologies are both rated Buy and Long-Term Buy . . . General Electric ($13; GE) CEO Jeff Immelt said he expects slower growth from the global economy after the recession ends because the American consumer will be forced to save more. GE is rated Neutral . . . U.S. cigarette companies lost their appeal of a 2006 ruling that found them guilty of hiding the dangers of tobacco. Altria Group’s ($17; MO) Phillip Morris USA unit and the other companies were ordered to present “corrective statements” through television and newspaper advertisements and to amend the copy on their Web sites. Altria is rated Neutral . . . A General Motors ($1; GM) bankruptcy appears inevitable after unsecured bondholders rejected an offer to exchange $27 billion of debt for a 10% equity stake in the company. The government now believes it may have to spend $50 billion more than expected to get GM through bankruptcy and is likely to end up owning about 70% of the restructured company. Common shareholders are likely to receive little or nothing. GM is an Underperform . . . Boston Scientific ($9; BSX) gained FDA approval to sell Taxus Liberte Atom, a drug-coated stent that holds open small blood vessels in the heart. Boston Scientific is rated Neutral.

Drug update
Johnson & Johnson ($55; JNJ) agreed to acquire cancer-drug firm Cougar Biotechnology ($43; CGRB) for about $970 million in cash. In other news, civil lawsuits were filed against J&J alleging the company promoted Levaquin as safe even though it allegedly knew the antibiotic could lead to tendon ruptures and tendinitis. J&J is a Focus List Buy and a Long-Term Buy . . . A federal court blocked an unauthorized generic version of AstraZeneca’s ($42; AZN) asthma drug Pulmicort Respules. Teva Pharmaceutical Industries ($47; TEVA) will begin selling an authorized generic in December. AstraZeneca is a Buy and a Long-Term Buy . . . Biogen Idec ($51; BIIB) said two proxy advisory companies recommend that investors vote against the board of directors nominees proposed by billionaire investor Carl Icahn. A third advisory firm supported two of Icahn’s four candidates. Icahn says Biogen should consider splitting in two — we are not in favor of such a break-up. We rate Biogen a Focus List Buy and a Long-Term Buy not because of a possible takeover, but because of its strong pipeline and solid growth potential . . . Eli Lilly ($35; LLY) moved solanezumab, an experimental treatment for Alzheimer’s disease, into late-stage clinical trials. This marks the company’s second Alzheimer offering in Phase III clinical trials. Eli Lilly is rated Neutral.

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No changes were made this week in Dow Theory Forecasts.

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