Portfolio Review: October 16, 2017

10/16/2017


Technology update

Alphabet ($1,006; GOOGL) found that Russian-linked groups bought political ads on its YouTube, Gmail, and Google search engine, countering its previous claim that no advertisements were sold to Russians seeking to disrupt the U.S. presidential election last year. These ads appear to originate from different groups than the ones that used Facebook ($173; FB) and Twitter ($18; TWTR) to meddle in the election. Microsoft ($76; MSFT) is now investigating whether Russian ads also appeared on its search engine and other digital products.

BUY LIST RETURNS
Our somewhat concentrated approach, with relatively few stocks and sector exposures sometimes far from that of the S&P 500 Index, does not win every year. But all our buy lists have outperformed handily since the introduction of our Quadrix rating system in 2000.
Focus
List
(%)
Buy
List
(%)
Long-Term
Buy List
(%)
S&P 500
Index
(%)
Since 2000 †
164.7
172.6
203.5
73.9
2017
24.8
21.6
20.2
14.1
2016
(2.2)
(1.8)
0.7
9.5
2015
(2.7)
(1.6)
(1.4)
(0.7)
2014
22.1
20.2
18.7
11.4
2013
36.0
42.8
42.7
29.6
2012
14.2
16.0
15.8
13.4
2011
(4.8)
(9.1)
(4.2)
0.0
2010
19.5
12.7
10.3
12.8
2009
40.0
37.6
30.6
23.5
2008
(48.8)
(46.3)
(36.5)
(38.5)
2007
22.8
19.2
10.8
3.5
2006
12.9
16.9
9.7
13.6
2005
8.1
13.2
4.1
3.0
2004
17.5
22.4
9.0
9.0
2003
20.2
29.2
24.6
26.4
2002
(28.9)
(25.8)
(18.2)
(23.4)
2001
(16.0)
(15.6)
0.3
(13.0)
2000
14.0
(1.4)
5.0
(10.1)
Notes: Returns are fully invested and exclude dividends and transaction costs. Buy List and Long-Term Buy List returns reflect target weightings for individual stocks. † Through Oct. 11.

Facebook has reportedly told clients that any advertisements involving politics, religion, and social topics will be manually reviewed. Facebook has promised to employ a staff of 1,000 reviewers to check digital ads placed on its social network, while lawmakers have begun to write a bill to boost disclosure requirements for online ads. Alphabet and Facebook are rated Focus List Buy and Long-Term Buy. Microsoft is rated B (average).


In its initial push into original video content, Apple ($157; AAPL) reached a deal with Steven Spielberg's Amblin Television and Comcast's ($37; CMCSa) NBCUniversal TV production unit. The companies plan to make 10 episodes of "Amazing Stories," a show that aired on NBC in the 1980s. Apple has set aside $1 billion to develop original shows for the coming year. Apple is a Buy and a Long-Term Buy. Comcast is a Focus List Buy and a Long-Term Buy.


CDW ($69; CDW) said CFO Ann Ziegler, a 10-year veteran of the company, plans to retire at the end of 2017. Collin Kebo, who joined CDW in 2008, will replace her. CDW is a Focus List Buy and a Long-Term Buy.

Amazon eyes new markets to exploit

As retailers have learned over the years, Amazon.com ($995; AMZN) has a knack for sucking the profits out of an industry. Amazon's massive scale and willingness to sell products at a loss support management's ruthless approach to gaining market share. When Amazon agreed to acquire Whole Foods in June, shares of Kroger ($21; KR) and Wal-Mart Stores ($86; WMT) slumped in anticipation that the new competition would pressure prices. Sure enough, upon completing its $13.7 billion deal, Amazon slashed food prices and announced plans to centralize stores' assortment decisions.

Beyond its recent foray into groceries, Amazon continues to eye new markets.

• Amazon has held talks about selling prescription drugs online, weighing on retail-pharmacy stocks CVS Health ($74; CVS) and Walgreens Boots Alliance ($69; WBA). Express Scripts ($58; ESRX) shares also fell on the prospect of lower drug prices. Amazon could decide by Thanksgiving whether it will enter the market.

• Amazon is also reportedly discussing ways to bring more advertisers to its video platforms, potentially encroaching on turf currently dominated by Alphabet ($1,006; GOOGL) and Facebook ($173; FB). Amazon could attract advertisers by disclosing the shopping and viewing habits of 310 million monthly customers who use its retail website and video-streaming service Amazon Prime. U.S. spending on online video ads is projected to grow 24% to $13 billion this year, says eMarketer.

• Finally, Amazon has begun to test its own delivery service, introduced in India a couple years ago, on the West Coast. Amazon is starting to pick up and deliver packages from third-party merchants that sell products on its website, a service typically handled by FedEx ($223; FDX) and United Parcel Service ($119; UPS). The move would let Amazon offer more products with free two-day shipping and ease congestion within its own warehouses.

Alphabet and Facebook are rated Focus List Buy and Long-Term Buy. FedEx is a Buy and a Long-Term Buy. Wal-Mart is rated A (above average). Amazon, CVS, Express Scripts, Kroger, and Walgreens are rated B (average). UPS is rated C (below average).

Corporate roundup

A U.S. appeals court lifted a ban against Sanofi ($50; SNY) and Regeneron Pharmaceuticals ($453; REGN) selling Praluent, a rival version of Amgen's ($184; AMGN) cholesterol drug Repatha. Praluent can remain on the market as a new trial begins for a patent lawsuit filed by Amgen. Amgen is a Buy and a Long-Term Buy.


D.R. Horton ($41; DHI) completed its acquisition of a 75% stake in Forestar Group ($17; FOR), a Texas-based real estate developer. The all-cash deal, first announced in June, is worth $520 million. D.R. Horton is a Buy and a Long-Term Buy.


Southwest Airlines ($59; LUV) reported 4.5% lower traffic and 1.6% lower capacity in September due to disruptions caused by a series of hurricanes that swept through the southeastern states, the Caribbean, and Puerto Rico. For the September quarter, traffic rose 2.5% on 3.1% higher capacity. Southwest Airlines is a Buy and a Long-Term Buy.

Stock up: ON Semiconductor

The average semiconductor stock in the S&P 1500 Index has returned 25% so far this year — less than half of the 52% managed by ON Semiconductor ($19; ON). Credit ON's outperformance to superior growth in sales, profits, and operating cash flow (up 45%, 60%, and 79% respectively over the last 12 months, more than triple the industry median).

Investors need not pay up for ON's growth. The shares trade for 19 times trailing earnings, 12% below the industry median; and 14 times expected current-year earnings, 32% below the median. ON's Quadrix Value score of 80 is among the highest in its industry, more than 30 points above the average for semiconductor stocks. ON is a Focus List Buy and a Long-Term Buy.


Rank Changes

No changes were made this week in Dow Theory Forecasts.


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