Portfolio Review

9/28/2009


Buy List, Focus List top S&P 500 Index

As of Sept. 22, the Forecasts Buy List was up 28.4% for the year, versus 18.6% for the S&P 500 Index. Our Focus List performed even better, rising 31.2%. Both lists have outperformed the S&P 500 by at least 20 percentage points since 2003, as shown in the chart on page 6. The Buy List contains our top picks for 12-month returns, and the Focus List represents our favorites among those Buys.

We strive to keep only our top selections on the Buy List. This week, as discussed in the following paragraphs, we are adding a couple more. For more on how and why we assign Buy ratings, and for additional rank changes, check out What We're Thinking.

With its outsourcing and consulting services, Hewitt Associates ($36; HEW) handles many of the functions of a human-resources department. The outsourcing unit, accounting for about 70% of sales, manages employee-benefit programs. The consulting segment, contributing the remaining 30% of revenue, advises clients on benefit and contribution plans, restructuring, and mergers.

Sales have fallen in the last few quarters, a trend expected to reverse in fiscal 2010 ending September. Wall Street expects per-share profits to increase 30% in fiscal 2009 and another 8% in fiscal 2010. Hewitt has topped profit expectations in the past three quarters, and estimates are rising. Shares trade at 14 times trailing earnings, 43% below the three-year average P/E. We are initiating coverage of Hewitt as a Buy.


Aflac’s ($43; AFL) Quadrix® Overall, Value, and Financial Strength scores rank among the top 10% of stocks in our research universe. With fears about the risks of investments in European banks subsiding, shares have nearly tripled from March lows.

Wall Street predicts per-share earnings will jump 18% in 2009 and 7% in 2010. Despite the recent surge, Aflac shares seem reasonably valued relative to expected profits, trading at eight times the conservative 2010 estimate. Already a Long-Term Buy, Aflac is being added to the Buy List.

Health-care review

AstraZeneca ($46; AZN) has agreed to acquire the rights to two experimental drugs from Nektar Therapeutics ($10; NKTR). One of the drugs, still in early development, aims to treat pain without the side effect of constipation. The second drug, designed to alleviate constipation caused by pain relievers, could be submitted for U.S. regulatory approval by 2013. Nektar says annual sales of the constipation drug could exceed $1 billion. AstraZeneca will pay $125 million up front, plus royalties for development and sales goals. AstraZeneca is a Buy and a Long-Term Buy.


Rebuffed by the management of Facet Biotech ($17; FACT), Biogen Idec ($51; BIIB), has appealed directly to the company’s shareholders. Biogen extended a cash tender offer of $14.50 per share, a 64% premium to the stock’s closing price prior to the announcement. However, the stock has since risen 18% above the offer price, a sign that the market expects a substantially higher bid to emerge. Separately, the Food and Drug Administration said multiple sclerosis drug Tysabri does not need a new warning label because the incidence rate of a rare brain infection remains below one per 1,000 patients, the rate currently on the label. Biogen is a Focus List Buy and a Long-Term Buy.


Hospira ($44; HSP) hiked its guidance for 2009 per-share earnings by $0.10 to $2.80 to $2.85, representing growth of 11% to 13%. The company also raised its target for 2009 revenue, now projecting growth of 5% to 7% at constant currency, partly on the strength of its pipeline of generic injectable drugs. The shares trade at 16 times the low end of 2009 profit guidance, a reasonable price considering Hospira’s growth potential. Hospira is a Focus List Buy and a Long-Term Buy.

Tech report

With a prolonged review by European regulators delaying its takeover of Sun Microsystems ($9; JAVA), Oracle ($21; ORCL) said Sun is losing roughly $100 million a month. Oracle has promised to increase investment in the company upon completion of the deal. But in the meantime, Sun has been forced to curb spending as sales slump and clients defect to rivals. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.

Dell ($16; DELL) agreed to buy technology-services provider Perot Systems ($30; PER) for $3.9 billion, a hefty 68% premium to Perot’s price at the time of the announcement. The move will lessen Dell’s dependence on personal computers, which currently represent 60% of sales, as it tries to increase its scale in a market dominated by IBM ($122; IBM) and Hewlett-Packard ($47; HPQ). Dell expects the deal to add to earnings in fiscal 2012 ending January, somewhat later than we like to see with acquisi tions. Dell is rated Neutral. IBM is a Focus List Buy and a Long-Term Buy. H-P is a Buy and a Long-Term Buy.

Dolby Laboratories ($40; DLB) said its Axon sound technology will be used in an online role-playing game, ZT Online, made by Giant Interactive Group ($8; GA). Dolby is a Focus List Buy.

Responding to claims that it had ignored crucial evidence, the European Commission released details of its $1.55 billion ruling against Intel ($20; INTC). Intel is rated Neutral.

Texas Instruments ($24; TXN) raised its quarterly dividend 9% to $0.12 per share, payable Nov. 16. Texas Instruments is rated Neutral.

News roundup

Comcast ($17; CMCSA) is rolling out a wireless service in some U.S. cities. The cable giant plans to allow customers to watch TV shows via their mobile devices. Comcast is a Focus List Buy and a Long-Term Buy.

Best Buy ($38; BBY) is exploring the market for used video games but won’t say if that interest extends to acquiring GameStop ($26; GME). Speculation sparked a 4% jump in GameStop’s shares, but the uncertain outlook for digital rights could trip up a potential deal. The used-game market may also find a new player in Wal-Mart Stores ($51; WMT), which now lists used video games for sale on its Web site. GameStop is a Buy. Wal-Mart is a Long-Term Buy. Best Buy is rated Neutral.

The U.S. Navy plans to deploy Lockheed Martin’s ($80; LMT) F-35 fighters to its aircraft carriers six months earlier than expected. The revamped schedule could reduce the Navy’s demand for Boeing’s ($63; BA) F/A-18 jet. Boeing and Lockheed Martin are rated Neutral.

FedEx’s ($76; FDX) per-share earnings slid 53% to $0.58 in the August quarter, as expected after a preannouncement earlier this month. Before the announcement, the consensus had projected $0.43 per share. Sales fell 20% to $8.01 billion. FedEx is rated Neutral.

  RANK CHANGES
In the wake of several rank changes, the Buy List’s position in the Vanguard Short-Term Investment-Grade ($10.52; VFSTX) fund is falling to 27.2%, while the Long-Term Buy List’s position remains at 29.6%. Aflac ($43; AFL) is being added to the Buy List. Hewitt Associates ($36; HEW) is being initiated as a Buy. Laboratory Corp. of America ($67; LH) is being dropped from the Buy List but remains a Long-Term Buy.

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