Portfolio Review

1/25/2010


Obama targets big U.S. banks

President Obama proposed that major U.S. banks pay about $90 billion over 10 years to recover losses incurred by the $700 billion financial rescue program. The fee would target banks with assets in excess of $50 billion, including those that did not receive aid or have already repaid their loans. The White House says even these banks benefited from stability provided by the TARP program, so they should shoulder some of the costs.

The effect on the profits of individual financial firms is difficult to estimate, though some analysts have projected reductions of 10% or more in the 2011 earnings of some companies. The sector can ill afford new drains on its profits, as heavy credit losses are likely to continue in 2010.

Citigroup ($4; C) lost $0.33 per share, better than the $3.40 loss posted in the year-earlier quarter, and in line with the consensus. Loan losses of $7.14 billion were down 10% from September-quarter levels but up 16% from a year ago. J.P. Morgan Chase’s ($43; JPM) profits jumped to $0.74 per share from the $0.06 reported in the December 2008 quarter, beating the consensus by $0.13. However, strong results from investment banking drove that growth, and J.P. Morgan reported heavy loan losses, stemming from higher defaults for home-equity loans and mortgages. Charge-offs rose more than 50% to $6.6 billion for the quarter.

J.P. Morgan was the only major U.S. credit-card company to report rising delinquency rates for December. Charge-offs — debts considered unrecoverable — fell at four of the six top credit-card issuers, the exceptions being Bank of America ($16; BAC) and Capital One Financial ($43; COF).

Bank of America lost $0.60 per share including dividends on preferred stock and a $4 billion charge related to paying off government loans. Credit losses jumped 18% to $10.11 billion, while consumer credit-card losses swelled 49% to $4.87 billion. Wells Fargo ($28; WFC) swung to a profit, earning $0.08 per share, versus the $0.84 loss reported in the year-earlier quarter and the $0.01 loss projected by Wall Street. Net charge-offs were flat or lower for all major loan categories except commercial real estate. J.P. Morgan and Wells Fargo are rated B. Bank of America, Citigroup, and Capital One are rated C.

Technology report

IBM ($134; IBM) earned $3.59 per share in the December quarter, up 10% and $0.12 above the consensus. Sales edged up 1% to $27.23 billion in constant currency on higher revenue from software and global services. For 2010, IBM expects profits of at least $11.00 per share, above Wall Street expectations and implying at least 10% growth. IBM is a Focus List Buy and a Long-Term Buy . . . Shares of Intel ($21; INTC) jumped after the company said it earned $0.40 per share, up from $0.04 in the 2008 comparable quarter and $0.10 above the consensus. Excluding a $1.25 billion legal settlement and related tax issues, Intel earned $0.55 per share. Sales advanced 28% to $10.57 billion, lifted by 47% growth in the Asia-Pacific region. For the March quarter, Intel expects sales of $9.3 billion to $10.1 billion, implying growth of at least 30%. Intel is rated B . . . Global shipments of personal computers rose 15% in the December quarter, said industry research firm IDC. The recovery was more pronounced in the U.S., where shipments jumped more than 24%. Hewlett-Packard ($53; HPQ) increased shipments 23%, stretching its leading market share to 21% while rival Dell ($15; DELL) lost share. H-P is a Buy and Long-Term Buy. Dell is rated C . . . The European Union is reportedly on pace to approve Oracle’s ($25; ORCL) $7.4 billion acquisition of Sun Microsystems ($9; JAVA) before the Jan. 27 deadline. The deal appears likely to close in early February, at which time Oracle could slash Sun’s workforce by as much as 50%. Oracle is a Buy and Long-Term Buy.

Corporate roundup

Four months into a bitter standoff, Kraft Foods ($29; KFT) finally got Cadbury’s ($55; CBY) board to bite. Cadbury, the world’s second-largest candy and chocolate maker, accepted Kraft’s $19.6 billion bid, sweetened by roughly $3 billion from the initial September offer. The deal includes 60% cash, a special dividend, and a breakup fee of about $193 million. In the days leading up to Kraft’s latest offer, Hershey ($37; HSY) was reportedly drafting one of its own. A counterbid now appears unlikely. Kraft is rated B . . . Johnson & Johnson ($65; JNJ) expanded its recall of the Tylenol pain reliever and other over-the-counter products following reports that they carried a moldy odor. The speed of the recall drew criticism from the Food and Drug Administration, which said J&J was first alerted to the problem in 2008 but failed to investigate or notify U.S. regulators until a year later. Separately, the U.S. Justice Department  charged J&J with allegedly offering illegal kickbacks to Omnicare ($26; OCR) to boost drug sales in nursing homes. J&J says its practices complied with the law. J&J is a Long-Term Buy . . . The video-game industry grew sales 4% to $5.53 billion in December, a monthly record, on 16% gains from hardware such as game consoles. This may not be good news for beleaguered GameStop ($21; GME), as sales of the games themselves fell 7%. GameStop is rated Buy . . . Chevron ($80; CVX) announced plans to restructure its downstream business, including slashing the work force and possibly withdrawing from some markets. In other news, plaintiffs from Ecuador asked the U.S. to block Chevron’s efforts to move the longstanding $27 billion environmental lawsuit into international arbitration. Chevron is a Long-Term Buy . . . Abbott Laboratories ($56; ABT) was cleared by European regulators to market HE4, an ovarian cancer test still under review in the U.S. Abbott is a Long-Term Buy . . . Boeing ($61; BA) said its 787 Dreamliner passed initial airworthiness tests, allowing for more extensive testing. Boeing is rated C.

Sometimes there is no wrong answer

Suppose a value investor who buys just the cheapest of the cheap tussles with a momentum investor who buys stocks only when they are performing well. If each insists the other’s strategy doesn’t work, which side do you take?

The correct answer is neither side. In this case, both investors are using systems proven to be effective if used with discipline. Academic research, as well as our own work, suggests that stocks with attractive valuations tend to outperform, as do stocks with strong share-price momentum.

SCREEN OF THE MONTH
—–— Value Stats —–—
— Performance Stats —
Company (Price; Ticker)
Quadrix
Score *
Trailing
P/E
P/E on
Next-Yr.
Est.
Quadrix
Score *
3-Mo.
Total
Return
(%)
12-Mo.
Total
Return
(%)
Quadrix
Overall
Score *
Aflac ($52; AFL)
93
11
10
77
15
61
93
AmerisourceBergen
($27; ABC)
83
16
13
74
16
51
98
Medtronic ($46; MDT)
72
15
13
70
26
48
87
National Oilwell
($47; NOV)
95
11
15
70
(1)
116
95
NII Holdings
($37; NIHD)
82
19
14
93
14
100
96
Stryker ($57; SYK)
72
20
17
73
26
44
96
* Percentile ranks, with 100 the best.

Based on rolling 12-month returns since 1992, the average Dow Jones U.S. Index stock in the top one-fifth as measured by the Quadrix® Performance score outperformed the average stock in the index by an average of 2.4%. However, the top Value scorers managed 3.8% outperformance.

In our Screen of the Month, we try to take advantage of both trends. Partly because rising stock prices tend to raise Performance scores and lower Value scores, relatively few companies score well in both. But there are a few. Above we list six A-rated stocks that earn both Value and Performance scores of at least 70.

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

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