Portfolio Review

4/12/2010


Focus List review

No matter how much analysis you do, you won’t get every one of your stock picks right. Sometimes you’ll buy too early; sometimes you’ll sell too late; and sometimes you’ll be blindsided by unexpected news.

Minimizing the number of such mistakes is crucial, and we go to great lengths to make sure our Focus List selections truly represent our best ideas for year-ahead gains. Just as important, we have a system that allows us to overcome periodic setbacks without being panicked into knee-jerk reactions — or frozen into inaction for fear of making another mistake.

Since its December 1994 inception, the Focus List has gained 250.8% on a fully invested basis excluding dividends and transaction costs, versus 158.7% for the S&P 500 Index. Including the impact of our recommended cash position, the Focus List has gained about 297.0%.

So far in 2010, the Focus List has gained 8.9% on a fully invested basis and about 7.5% including our cash position, versus 6.7% for the S&P 500 Index.

FOCUS PRICE CHANGES
Year
Focus
List
(Fully
Invested)
(%)
Focus List
(Including
Cash Position)
(%)
S&P 500
Index
(%)
1995
30.4
30.4
34.1
1996
23.9
23.9
20.3
1997
26.6
26.6
31.0
1998
23.2
20.6
26.7
1999
22.9
19.3
19.5
2000
14.0
12.9
(10.1)
2001
(16.0)
(11.2)
(12.1)
2002
(28.9)
(24.3)
(24.2)
2003
20.2
19.1
26.4
2004
17.5
16.1
9.0
2005
8.1
7.6
3.0
2006
12.9
12.5
13.6
2007
22.8
21.5
3.5
2008
(48.8)
(38.6)
(38.5)
2009
40.0
31.8
23.5
2010
8.9
7.5
6.7
Total *
250.8
298.6
156.2
* From 12/23/94 inception through 4/6/10.

 

Amid the extremely broad rally of the past 12 months, most of our mistakes have come in the form of laggards that have not kept pace with the market. Now seems an especially bad time to sell quality stocks simply because they have lagged in a market favoring the most aggressive names.

After trading sideways for most of 2009, Comcast ($19; CMCSa) has surged 23% since early February. For now, Comcast has apparently weathered Verizon Communications’ ($31; VZ) launch of FiOS, a new service designed to compete with cable providers. FiOS gained traction in the areas where Verizon upgraded its copper phone lines with optical fiber, such as New York City, Philadelphia, and Washington. But Verizon is scrapping plans to push into new cities in the near future.

Comcast shares seem capable of reaching $22 over the next six to nine months. Comcast is a Focus List Buy and a Long-Term Buy.


CVS Caremark ($36; CVS) has rebounded to levels reached in early November, when the stock slumped 20% on news that its pharmacy-benefit-management (PBM) unit had lost $4.8 billion in 2010 contracts. CVS has since hired a new PBM president, who says the problems that led to the setback were isolated.

Multiple states are reviewing antitrust complaints related to CVS’ 2007 acquisition of Caremark. One potential outcome could require CVS to erect a firewall between the retail and PBM units. Divesture is also a possibility.

Despite the regulatory uncertainty, the stock looks like a bargain at less than 14 times trailing earnings — 27% below its five-year average and well below the P/E ratio of rival drugstore Walgreen ($37; WAG) and other PBMs. CVS is a Focus List Buy and a Long-Term Buy.


IBM ($129; IBM) has been a bit of a laggard. The technology giant exceeded consensus profit estimates for the December quarter, though investors were disappointed by soft revenue growth and a conservative outlook.

Some investors are now calling for bolder moves, similar to the splashy deals Hewlett-Packard ($54; HPQ) and Oracle ($26; ORCL) made to accelerate revenue growth. Incidentally, those stocks have more than doubled IBM’s 6% price gain over the last six months. Bloomberg reports that IBM says it is open to a big acquisition, most likely under $10 billion. IBM is a Focus List Buy and a Long-Term Buy.


Seeking to settle patent litigation, Hospira ($57; HSP) agreed to suspend U.S. sales of its oxaliplatin injection, a treatment for colon cancer, from June 30, 2010, until August 2012. Hospira, which launched the generic injectable in August 2009, said the settlement will not affect its 2010 earnings guidance. Hospira is a Focus List Buy and a Long-Term Buy.

Lubrizol on Buy List

Lubrizol ($94; LZ) is being initiated as a Buy. The company produces lubricant additives for engine oil, as well as other additives for gasoline, drugs, and specialty materials. For 2010, the consensus forecasts 6% higher profits on 8% higher sales, targets Lubrizol should be able to exceed.

The stock has surged on recent results, up 37% from February lows but still fairly cheap relative to both specialty-chemical peers and its own history. Lubrizol trades at 12 times trailing earnings, 17% below the five-year average P/E. If Lubrizol meets the current-year profit consensus and the trailing P/E returns to the five- or 10-year norm, the stock would trade between $115 and $120 early next year.

RIM, DirecTV reviews

Shares of Research In Motion ($70; RIMM) sold off after the maker of the BlackBerry smart-phone missed Wall Street’s profit and revenue targets in the February quarter. Some analysts questioned the vitality of RIM’s U.S. business. Others seemed concerned that RIM, in chasing after the lower end of the consumer market, could alienate customers who want more sophisticated devices.

The quarterly results also signaled factors tilting in RIM’s favor. First, lower component costs helped widen RIM’s profit margins. Second, the decision to expand overseas seems to be working. Sales outside of North America represented 48% of the quarter’s total revenue, up from 29% in fiscal 2009 ended February.

The company gave bullish sales and profit guidance for the May quarter. Wall Street now expects per-share-profit growth of 36% for the quarter and 22% for fiscal 2011. Research In Motion is a Buy.


DirecTV ($35; DTV) Chairman John Malone plans to resign from the satellite-TV company’s board and trim his voting stake to 3% from 24%. In swapping 21.8 million Class B shares (each worth 15 votes) for 26.5 million Class A shares, Malone satisfies federal antitrust conditions set when his Liberty Media ($16; LINTA) purchased an interest in DirecTV in 2008.

This marks DirecTV’s latest step to simplify its ownership structure, possibly leading to a takeover. The company’s long-term growth record makes DirecTV an attractive stock in its own right, regardless of takeover speculation. DirecTV is a Focus List Buy and a Long-Term Buy.

News roundup

Software developer CA ($23; CA) said it expects earnings for fiscal 2010 ended March at the low end of its December guidance because of a restructuring charge. While the near-term guidance is disappointing, CA still seems capable of delivering double-digit profit growth in fiscal 2011 ending March. The stock remains a Buy and a Long-Term Buy.


TJX ($45; TJX) boosted its quarterly dividend 25% to $0.15 per share, payable June 3. TJX is a Buy and a Long-Term Buy.

  RANK CHANGES

Lubrizol ($94; LZ) is being added to the Buy List, reducing the list’s position in Vanguard Short-Term Investment-Grade ($10.68; VFSTX) to 7.0%.


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