Portfolio Review

8/24/2009


Forecasts' lists beating market

Our Focus List, Buy List, and Long-Term Buy List are all outperforming the S&P 500 Index this year.

Excluding dividends and transaction costs, the Focus List was up 18.3% through Aug. 18 on a fully invested basis, with the Buy List up 16.8% and the Long-Term Buy List up 13.4%. In contrast, the S&P 500 Index was up 9.6%. All three of our recommended lists overweight technology relative to the broader market, and the S&P 500 Technology Sector Index is up 35%.

Technology makes up 36% of the Focus List, 32% of the Buy List, and 28% of the Long-Term Buy List excluding cash holdings, versus 18% for the capitalization-weighted S&P 500 Index. Our lists’ weightings are based on equal-dollar positions in each stock.

All three lists have also outperformed the S&P 500 by at least eight percentage points since 2003. Our lists offer something for any type of stock investor. The Buy List is a diversified selection of stocks we think will outperform over the next 12 months, and the Focus List is a subset of the Buy List containing our top picks for the year ahead. The Long-Term Buy List contains stocks we think can top the market’s performance over the next two to four years.

Wal-Mart, H-P top expectations

Despite a boost from the popular cash-for-clunkers program, retail sales slipped 0.1% in July from June levels and were down more than 8% from a year earlier, well below Wall Street’s expectations. In that rough environment, even bellwether Wal-Mart Stores ($51; WMT) had trouble generating growth. Profits from continuing operations rose just 2% to $0.88 per share in the July quarter, but topped the consensus by nearly 4%. Sales dipped 1% to $100.08 billion but would have increased 3% at constant currency. U.S. same-store sales slipped 1.2% excluding fuel. For fiscal 2010 ending January, Wal-Mart raised profit guidance. Wal-Mart is a Long-Term Buy.

Hewlett-Packard’s ($44; HPQ) July-quarter profits rose 6% to $0.91 per share excluding special items, a penny better than the consensus estimate. Revenue slipped 2% to $27.45 billion, as the acquisition of consultant EDS helped offset weakness in other businesses. Operating cash flow jumped 15%. H-P predicts per-share earnings of about $1.12 in the October quarter, up 9% and $0.06 above the consensus. H-P is a Buy and Long-Term Buy.

Health-care report

Hospira ($39; HSP) halted shipment of a generic treatment for colon cancer because the Food and Drug Administration suspended the drug just three days after it was approved. The FDA could lift the ban after a court reviews arguments from Hospira and Sanofi-Aventis ($32; SNY), which claims the generic infringes on its patent for Eloxatin. Hospira is a Focus List Buy and a Long-Term Buy . . . Johnson & Johnson ($60; JNJ) won support from an FDA panel for a new hip replacement designed to be more durable than existing implants. Separately, the FDA warned J&J about improperly monitoring two clinical trials for ceftobiprole, an experimental antibiotic that treats skin infections. J&J is a Focus List Buy and a Long-Term Buy . . . A group of drug distributors and health insurers sued Merck ($31; MRK), alleging an improper patent and unfair tactics regarding the popular asthma drug Singulair. Merck won a separate lawsuit involving the same drug when a judge ruled that Teva Pharmaceuticals’ ($51; TEVA) generic version of Singulair violated Merck’s patent, which expires in August 2012. Merck is rated Neutral . . . An FDA probe cleared a Mylan Laboratories ($14; MYL) plant in West Virginia, refuting published reports of poor quality control. Mylan Labs is rated Neutral . . . A federal court invalidated the patent that had sheltered Eli Lilly’s ($33; LLY) cancer treatment Gemzar until 2013, though another patent protects the drug until 2010. Lilly plans to appeal. In other news, Eli Lilly said it won’t seek FDA approval on experimental osteoporosis drug arzoxifene. Eli Lilly is rated Neutral . . . The U.S. regulators warned diabetics that certain blood-sugar tests, including some made by Abbott Laboratories ($44; ABT), can produce inaccurate results when patients are also taking other medications. Abbott Labs is rated Neutral.

Aerospace/defense review

Boeing ($44; BA) says it stopped production on two sections of the 787 Dreamliner in June after discovering wrinkles in the fuselage skin. The company says it can correct the problem with a “fairly simple patch,” adding that the defects should not further delay the plane’s first flight. Boeing fell 4% on the news, though shares of 787 supplier Precision Castparts ($74; PCP) fell less than 1%, roughly in line with the market. Boeing is rated Neutral. Precision Castparts is a Buy and a Long-Term Buy.

A private research group recommended the Pentagon consider cheaper options to Lockheed Martin’s ($84; LMT) F-35 Joint Strike Fighter jets. Several of the research group’s top people now serve in senior positions for the Obama administration. Lockheed Martin is rated Neutral.

Tech and telecom update

Microsoft ($24; MSFT) asked a federal appeals court to halt an injunction that would prevent the company from selling its popular word-processing software, Word. Earlier this month, a U.S. court ruled that some of the technology used in Word infringed a patent held by a Toronto company called i4i. Microsoft is rated a Long-Term Buy . . . Qualcomm ($45; QCOM) denied accusations that it forced Japanese companies to sign cross-licensing agreements that prevented them from filing patent lawsuits. Japan’s Fair Trade Commission has ordered Qualcomm to modify the contracts, but Qualcomm says the agreements were voluntary. Qualcomm is a Long-Term Buy . . . Dolby Laboratories’ ($40; DLB) audio technology will be used in the Windows 7 operating system, slated for release by Microsoft this fall. Dolby is a Focus List Buy. Microsoft is a Long-Term Buy . . . Seeking new growth avenues, DirecTV ($24; DTV) said it is testing the NFL Sunday Ticket on the Internet and exploring 3-D programming for television. DirecTV is a Focus List Buy and a Long-Term Buy.

Energy roundup

Chevron ($67; CVX) began a five-year project using one of Transocean’s ($74; RIG) ultra-deepwater drillships at a day rate of $469,000 for the first three years. Chevron is a Long-Term Buy. Transocean is a Focus List Buy and a Long-Term Buy . . . Exxon Mobil ($66; XOM) will partner with PetroChina ($110; PTR) in a $41 billion deal for liquefied natural gas extracted from the Gorgon project off the coast of Australia. Exxon Mobil is a Long-Term Buy . . . Oceaneering International ($51; OII) won a contract from an Exxon Mobil subsidiary to supply umbilical tubing for a production project off the coast of West Africa. Oceaneering did not release financial terms of the deal. Oceaneering International is a Focus List Buy.

Financial news

Investment banks Morgan Stanley ($29; MS) and Goldman Sachs ($160; GS) repurchased warrants given to the U.S. Treasury during the financial bailout. Goldman paid $1.1 billion for the warrants, while Morgan paid $950 million. Goldman and Morgan are rated Neutral . . . In a deal that will dilute its share base by about 6%, Delphi Financial ($21; DFG) plans to issue 3 million common shares at $21 per share, a 10% discount to the price at the time of the announcement. Delphi is rated Neutral.

  RANK CHANGES
No changes were made this week in Dow Theory Forecasts.

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