Portfolio Review

3/29/2010


Rogers added, Varian upgraded

Canadian conglomerate Rogers Communications ($34; RCI) is being added to the Buy List and Long-Term Buy List. Rogers operates three businesses — a wireless carrier, a cable company, and a media unit that owns television and radio stations, magazines, and the Toronto Blue Jays baseball team. Over the last year, per-share profits rose 59%, while per-share free cash flow more than doubled. At 14 times trailing earnings, Rogers shares trade at a discount of 19% to the average wireless carrier and 37% to the average broadcaster. Rogers raised its dividend in February and currently yields 3.2%.

Varian Medical Systems ($55; VAR), already a Buy and a Long-Term Buy, is being added to the Focus List. The company makes software and equipment to fight cancer with radiation treatments. Revenue, earnings, and cash flow rose during the recession, and the consensus projects 7% higher per-share earnings in fiscal 2010 ending September.

Top 15 Utilities changes

We are replacing two stocks in the Top 15 Utilities portfolio.

Going out: Dominion Resources ($40; D) and Southern Union ($26; SUG) have performed well for us, returning more than 20% over the last six months. However, operating momentum has eroded, and the stocks look expensive. Both Dominion and Southern Union are being removed from the Top 15 Utilities portfolio.

Coming in: UniSource Energy ($32; UNS) looks cheap relative to its peers and its own history and yields 4.8%. IDACORP ($35; IDA) seems poised to deliver steady sales and profit growth over the next few years. UniSource and IDACORP are being added to the Top 15 Utilities portfolio.

Quarterly earnings

Ross Stores’ ($54; ROST) profits surged 53% to $1.16 per share in the January quarter. Sales rose 14%, with same-store sales up 10%. For fiscal 2011 ending January, Ross expects per-share profits of $3.80 to $3.95, representing 7% to 12% growth. Ross is a Focus List Buy and a Long-Term Buy . . . In the January quarter, GameStop ($22; GME) earned $1.29 per share, down 4% excluding special items but a penny above the consensus estimate. Same-store sales dipped 7.9%. Shares jumped on the company’s outlook, which calls for 4% to 6% sales growth and at least 16% higher per-share profits in fiscal 2011 ending January. GameStop is a Buy . . . General Mills ($74; GIS) grew per-share earnings 23% to $0.97 excluding special items in the February quarter, $0.04 above the consensus on 3% sales growth. The company raised profit guidance for fiscal 2010 ending May, but the target was slightly below the consensus. General Mills is a Focus List Buy and a Long-Term Buy.

Health-reform update

President Obama signed a health-care reform bill into law. The legislation will broaden the addressable market for insurers, medical-device makers, and drug companies as insurance benefits extend to an estimated 32 million additional Americans by 2014. The net impact on individual drug and device companies is difficult to assess, in part because of fees that will be levied to help fund the changes.

The bill’s passage eliminated some of the uncertainty hanging over health-care stocks. Hospital stocks surged in anticipation that wider insurance coverage means fewer write-offs from charity cases. Also rising were shares of pharmacy-benefit managers, including CVS Caremark ($36; CVS), and drug distributors such as AmerisourceBergen ($29; ABC). Amerisource and CVS are Focus List Buys and Long-Term Buys.

Fund weighting changed

To boost the stock-market exposure of our fund portfolios, target weights have been adjusted. The new weights, have lifted total exposure to stock funds to about 73% for the Conservative Portfolio and 88% for the Growth Portfolio.

Both portfolios have sizable exposures to developed-market foreign stocks, while the Growth Portfolio also has 5% in an emerging-markets index fund. Overall, foreign stocks represent about 19% of the Conservative Portfolio and 23% of the Growth Portfolio.

So far in 2010, the Conservative Portfolio has gained 4.8%, versus 3.7% for its passive benchmark and 5.8% for the S&P 500 Index. The Growth Portfolio has gained 5.3%, versus 4.6% for its passive benchmark. Since the independent Hulbert Financial Digest began following our fund portfolios at year-end 1995, both have delivered higher returns than the U.S. stock market.

MUTUAL-FUND PORTFOLIOS CHANGING
Portfolio
— Target Weight —
Total Return &
——— Category Rank * ———
Fund (Price; Ticker)
Fund Category
Conser-
vative
(%)
Growth
(%)
YTD
—— (%) ——
Ann. 3-Yr.
—— (%) ——
Exp.
Ratio
(%)
Rating
Phone No.
(800)
American Century Heritage
($17; TWHIX)
Midcap growth
8
9
9.3
B
2.4
A
1.01
97
345-8765
Dreyfus Small Cap Stock Index
($18; DISSX)
Small-company blend
0
0
10.8
B
(2.9)
B
0.50
62
645-6561
Fidelity Export & Multinational
($20; FEXPX)
Large-company growth
7
8
4.1
D
(3.6)
D
0.91
51
544-8888
Fidelity Leveraged Company Stock
($25; FLVCX)
Midcap blend
0
0
8.4
C
(4.9)
D
0.92
73
544-8888
Heartland Select Value ($27; HRSVX)
Midcap value
7
9
9.0
C
0.5
A
1.27
96
432-7856
Heartland Value Plus ($26; HRVIX)
Small-company value
8
9
11.5
B
3.4
A
1.21
90
432-7856
T. Rowe Price International Discovery
($38; PRIDX)
Foreign small company
5
6
2.8
C
(3.7)
A
1.29
94
638-5660
T. Rowe Price New Horizons
($28; PRNHX)
Small-company growth
8
9
11.0
A
(0.3)
A
0.84
90
638-5660
Vanguard 500 Index ($109; VFINX)
Large-company blend
5
5
5.8
B
(4.4)
C
0.16
57
662-7447
Vanguard Dividend Growth ($14; VDIGX)
Large-company blend
8
9
3.7
E
(0.2)
A
0.36
98
662-7447
Vanguard Emerging Mkts. Stock Indx.
($26; VEIEX)
Emerging markets
0
5
1.2
C
4.6
B
0.40
96
662-7447
Vanguard GNMA ($11; VFIIX)
Government bonds
5
0
2.5
B
6.9
A
0.22
90
662-7447
Vanguard Intermed.-Term Tax Exempt
($14; VWITX)
Municipal bonds
0
0
1.7
D
4.7
B
0.20
82
662-7447
Vanguard International Value
($31; VTRIX)
Foreign large-co. value
8
6
0.8
B
(5.2)
B
0.45
98
662-7447
Vanguard Short-Term Invest. Grade
($11; VFSTX)
Short-term bonds
0
0
1.8
B
4.9
B
0.21
82
662-7447
Vanguard Total Bond Mkt. Index
($10; VBMFX)
Intermediate-term bonds
15
0
2.1
D
6.2
B
0.20
73
662-7447
Vanguard Total Int’l Stock Index
($15; VGTSX)
Foreign large-co. blend
6
6
1.0
B
(5.1)
B
0.27
98
662-7447
Vanguard Wellesley Income
($21; VWINX)
Balanced — 60% bonds
0
6
3.3
B
3.8
A
0.31
94
662-7447
Vanguard Wellington ($30; VWELX)
Balanced — 60% stocks
5
8
4.0
C
1.8
A
0.34
98
662-7447
Wells Fargo Advantage High Income
($7; STHYX)
High-yield bonds
5
5
2.7
E
4.1
C
0.92
40
222-8222
* Ranks and returns through March 23, from Morningstar.  
A = top 20% of fund category; B = next 20%; C = middle 20%; D = next 20%; E = bottom 20%.  

 

  RANK CHANGES

Varian Medical Systems ($55; VAR) is being added to the Focus List. Rogers Communications ($34; RCI) is being added to the Buy List and the Long-Term Buy List, lowering both lists’ position in the Vanguard Short-Term Investment-Grade ($10.70; VFSTX) fund.


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