Portfolio Review

12/28/2009


2009 tax tips

Here are two ways to trim your investment taxes for 2009:

Consider reducing realized capital gains by selling losers. Taxes alone should not drive investment decisions. Still, it sometimes makes sense to sell losing stocks for tax purposes. Remember, you can offset realized gains with realized losses dollar for dollar and deduct an additional $3,000 per year in losses to offset ordinary income.

Some investors sell stock to realize a loss with the intention of buying back the security later. That practice is legal, but to claim a tax-deductible loss you cannot purchase the same or “substantially identical” securities for 30 days before or after the sale.

Be sure to include reinvested dividends in your cost basis. The cost basis is the amount you paid for the stock, adjusted for such corporate actions as spin-offs or special dividends.

When figuring their cost basis, many investors forget to include reinvested dividends for stocks and mutual funds. Reinvested dividends boost your cost basis, thus reducing capital gains and the taxes on those gains. The amount of reinvested dividends can be found on your brokerage or fund statements.

November-quarter earnings

Accenture ($41; ACN) reported per-share earnings of $0.67, down 9% but $0.02 ahead of the consensus. Accenture anticipates February-quarter revenue below the consensus, but the company raised profit guidance for the year ending August roughly in line with expectations. Accenture is a Buy and a Long-Term Buy.

General Mills ($71; GIS) grew per-share profits 13% to $1.54 excluding special items, beating the consensus estimate by $0.09. Revenue rose 2%. General Mills hiked guidance for fiscal 2010 ending May, implying profit growth of at least 14%. For the second time in fiscal 2010, General Mills raised its quarterly dividend, this time a 4% boost $0.49 per share, payable Feb. 1. General Mills is a Buy and a Long-Term Buy.

Oracle ($24; ORCL) earned $0.39 per share excluding special items, up 15% and $0.03 better than Wall Street expectations. In other news, Oracle said it expects the European Union to approve the proposed $7.4 billion acquisition of Sun Microsystems ($9; JAVA) in January. Oracle appears to have appeased EU antitrust concerns by pledging to foster the growth of open-source database MySQL. Oracle is a Buy and Long-Term Buy. Sun is rated Neutral.

Health-care review

AmerisourceBergen ($26; ABC) said it expects profits will exceed the consensus estimate of $0.43 per share for the December quarter. Revenue growth should top 10% on strong sales of generic drugs. Amerisource is a Focus List Buy and a Long-Term Buy . . . A U.S. regulatory panel voted to support the broader use of AstraZeneca’s ($46; AZN) Crestor, despite the cholesterol drug’s link to diabetes. A study had found that Crestor reduced deaths, heart attacks, and strokes in middle-aged patients with healthy cholesterol levels but who had showed signs of the inflammation associated with heart disease. In other news, AstraZeneca agreed to pay $350 million in cash plus up to $75 million in milestone payments for Novexel, a French drugmaker. AstraZeneca is a Buy and a Long-Term Buy . . . CVS Caremark’s ($32; CVS) pharmacy-benefit-management (PBM) unit is showing signs of life following the November disclosure that it had lost $4.8 billion in 2010 contracts. The PBM signed the Teacher Retirement System of Texas to a two-year, $998 million contract. CVS also named industry veteran Per Lofberg as the PBM’s new president. CVS is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Exxon Mobil ($69; XOM) plans to acquire XTO Energy ($47; XTO) for roughly $31 billion in an all-stock deal that will make the energy giant the biggest U.S. producer of natural gas. Exxon will issue 0.7098 shares for every share of XTO, a 25% premium to XTO’s closing price prior to the announcement, and will also inherit about $10 billion of debt. The decision to pay for the deal with common shares is disappointing, and Exxon Mobil is being downgraded to Neutral . . . Microsoft ($31; MSFT) agreed to let users of its Windows operating system choose from among 12 Web browsers, settling a dispute with European regulators that stretched over the past decade. In other news, a U.S. appeals court ruled that Microsoft must stop selling its popular Word and Office software by Jan. 11 because of a patent infringement. But the company expects to have a version of the software — sans the offending computer code — ready by the deadline. Microsoft is rated a Long-Term Buy . . . After more than two years of delays, Boeing’s ($55; BA) 787 Dreamliner completed its first flight. Boeing hopes to produce seven of the jets each month by 2011. Boeing is rated Neutral . . . Bank of America ($15; BAC) appointed Brian Moynihan, head of its consumer-banking business, to replace Ken Lewis as CEO. Bank of America is rated Neutral.

  RANK CHANGES
Abbott Laboratories ($54; ABT) is being initiated as a Long-Term Buy, and Oceaneering International ($59; OII) is being added to the Long-Term Buy List. Exxon Mobil ($69; XOM) and Schlumberger ($64; SLB) are being downgraded to Neutral.

We're not ready to buy the banks

The eight large financial-services firms in the nearby table received a total of nearly $170 billion in funds from the Troubled Asset Relief Program (TARP). By the end of this month, those companies will owe the federal government nothing. Most will have been repaid, while $25 billion of the money lent to Citigroup ($3; C) has been converted into common shares the government plans to sell gradually.

Many question whether some TARP recipients — Citigroup, Bank of America ($15; BAC), and Wells Fargo ($27; WFC) in particular — are strong enough to survive another economic downturn. Another major worry is share dilution. That dilution is already reflected in profit estimates for the five companies that have not issued shares since September. However, the true effects of the dilution on Bank of America, Citigroup, and Wells Fargo are not yet apparent. Higher share counts tend to drive per-share-profit estimates down. But the 2010 consensus targets have risen since the share news broke, possibly reflecting increased confidence in the banks’ business prospects.

As the table below illustrates, some banks look cheap based on 2010 profit estimates, but not Bank of America, Citigroup, U.S. Bancorp ($23; USB), or Wells Fargo. Consensus estimates project strong profit growth in 2011 — including 162% for Bank of America and 400% for Citigroup — and all of the financials in the table seem attractively valued based on 2011 targets.

However, we are not that confident in the 2010 estimates, let alone targets for 2011. The asset quality of the big banks remains in question. Given the likelihood of further credit losses and an increasingly tough regulatory and political climate for banks, we are not sold on the rosy growth projections. In our opinion, all of the financials in the nearby table are too risky to qualify as Buys at current prices.

BIG-NAME FINANCIALS DILUTE SHARE BASE
The current share count reflects the count at the end of September, plus any share offerings planned or executed since then. Citigroup’s ($3; C) count is estimated because share offering has not been finalized.
Share Count
—– (Millions) —–
—— P/E Ratio ——
Company (Price; Ticker)
Current
End of
2008
Chg. in
Share
Count
(%)
2010
EPS Est.
(30-Day Chg.)
On
2010
Est.
5-Yr.
Avg.
(Trailing)
Bank of America
($15; BAC)
9,920
4,957
100
0.83
14
18
12
Bank of New York
Mellon ($28; BK)
1,197
1,151
4
2.41
0
11
17
Citigroup ($3; C)
17,194
5,347
222
0.07
17
48
13
Goldman Sachs
($165; GS)
577
459
26
18.6
(2)
9
11
J.P. Morgan Chase
($42; JPM)
3,962
3,738
6
3.18
(2)
13
16
Morgan Stanley
($30; MS)
1,300
1,011
29
3.31
0
9
14
U.S. Bancorp
($23; USB)
1,917
1,764
9
1.51
1
15
14
Wells Fargo
($27; WFC)
5,196
3,594
45
1.86
3
15
17

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