Portfolio Review

5/17/2010


Adds and upgrades

Newmont Mining ($58; NEM) is being added to the Buy List and Long-Term Buy List. With gold prices reaching record highs — helped by surging demand from Europeans alarmed at the plunging value of their currency — Newmont seems well positioned for continued earnings and cash-flow growth. Consensus estimates project per-share earnings will be up 26% to $3.52 in 2010, but that target is likely to prove low if gold prices stabilize near current levels. If gold continues to surge, Newmont will participate because it has removed its hedges.

The stock is very cheap versus historical norms, partly because mining stocks are no longer seen as the cleanest way to gain exposure to gold. But Newmont, benefiting from cost controls and modest production growth, has appeal based on its operating prospects. Newmont, with an Overall Quadrix score of 96, is a Buy and a Long-Term Buy.


Apple ($257; AAPL) is being upgraded to a Long-Term Buy. The company enjoys strong brand recognition with its computers and consumer devices and has carved out a strong position in the growing smart-phone market. The company holds more than $25 per share in cash and earns a Quadrix® Overall score of 98.

Don’t let the seemingly high share price fool you. The stock trades at 18 times estimated year-ahead earnings, 9% below the three-year average forward P/E ratio and only slightly above the average for computer-hardware companies despite Apple’s superior growth profile. The recent pullback represents an opportune time for investors to take a bite out of Apple.


Already a Long-Term Buy, Intel ($22; INTC) is being added to the Buy List. At 15 times trailing earnings, the stock trades 23% below the five-year average P/E ratio of 19. Although Intel’s valuation is unlikely to revert to historical norms right away, a combination of strong profit growth and modest P/E multiple expansion could drive solid capital gains.

To meet rising demand for computers in the year ahead, manufacturers will need to replenish their lean component inventories. This could set up favorable pricing conditions for Intel in the short-term. Citing both strength in computer demand and expansion into new markets, CEO Paul Otellini said Intel expects sales and per-share profits to grow at low double-digit rates over the next few years.

March-quarter earnings

In the March quarter, BMC Software ($37; BMC) said earnings rose 2% to $0.65 per share excluding special items but fell a nickel short of the consensus estimate. Revenue advanced 3% but was flat in constant currency. The company predicts per-share earnings between $2.84 and $2.94 for fiscal 2011 ending March, implying at least 6% growth and exceeding Wall Street expectations. BMC also pledged to repurchase up to $1 billion of stock, enough to trim the share count nearly 15% at current prices. BMC Software is a Focus List Buy and a Long-Term Buy.


DirecTV’s ($38; DTV) profits nearly tripled to $0.59 per share, exceeding the consensus by $0.14. Revenue rose 14% to $5.61 billion as the Latin America business grew 30%. DirecTV added 321,000 subscribers, including 100,000 in the U.S., where average revenue per user climbed 6%. DirecTV, which lowered its share count by nearly 8% over the last year, plans to remain an aggressive acquirer of its own stock and could consider introducing a dividend later this year or in early 2011. DirecTV is a Focus List Buy and a Long-Term Buy.

Retailers disappoint in April

On the road to recovery, the retail industry just hit a pothole. Same-store sales inched up 0.5% for U.S. retailers tracked by Thompson Reuters, well short of the 1.7% projection, hurt by an early Easter and damp, cool weather.

TJX’s ($46; TJX) same-store sales grew 4% in April, on top of a 9% gain during the same period last year, but fell short of the consensus. Ross Stores ($54; ROST) grew April same-store sales by 3%, short of Wall Street’s projection of 6.3%. TJX is a Buy and a Long-Term Buy. Ross is a Focus List Buy and a Long-Term Buy.

Tech and telecom review

Research In Motion’s ($68; RIMM) global share of the smart-phone market dipped to 19% at the end of March from 21% a year earlier, according to industry researcher IDC. Close behind is Apple ($257; AAPL), whose share jumped to 16% from 11%. Nokia ($11; NOK) remains the global leader with a 39% share. RIM maintains a comfortable lead in the U.S., with a 42% share versus Apple’s 17%.

But the mobile market just got cloudier for both handset makers and software providers. In a proposed $1.2 billion deal, Hewlett-Packard ($48; HPQ) is throwing its weight behind Palm ($6; PALM), a smart-phone maker with a dwindling market share but a strong operating system. H-P’s presence will likely put pressure on both rivals, though they enjoy a big head start. Hewlett-Packard and RIM are rated Buys and Long-Term Buys. Apple is a Long-Term Buy.


The Federal Communications Commission laid out a ’Net neutrality plan, an attempt to extend phone-service rules to the Internet. Regulators hope to prevent cable and Internet providers, such as Comcast ($18; CMCSa), from restricting or blocking access to Web sites. FCC has had trouble with this issue before. In April, a court ruled the agency lacked authority to regulate Comcast’s Web practices. Comcast is a Focus List Buy and a Long-Term Buy.


IBM ($127; IBM) projects earnings of at least $20 per share by 2015, up from the $11.27 Wall Street expects in 2010. IBM is a Focus List Buy and a Long-Term Buy.

Transocean under fire

Costs and liabilities swell as more oil gushes into the Gulf of Mexico. BP ($49; BP) has so far failed to control a deepwater oilwell leaking after a Transocean ($69; RIG) rig exploded and sank in April. Transocean said lost revenue would exceed $500 million and a rising tide of lawsuits could tie up its finances.

Called before the U.S. Senate, Transocean, BP, and Halliburton ($28; HAL) took turns blaming each other. BP said Transocean’s safety valve in the sea floor failed to stop the blowout. Transocean and Halliburton said BP departed from protocol by failing to plug the well before moving on to other work. BP told congressional investigators that the well failed a key test on the morning of the explosion. A preliminary investigation found four “significant” problems with the rig’s blowout preventer. Transocean, down 25% since the explosion, remains a Long-Term Buy. BP is rated B (average). Halliburton is rated C (below average).

  RANK CHANGES

Newmont Mining ($58; NEM) is being initiated as a Buy and a Long-Term Buy. Apple ($257; AAPL) is being added to the Long-Term Buy List. Intel ($22; INTC) is being added to the Buy List. The Vanguard Short-Term Investment-Grade ($10.73; VFSTX) now represents 7% of the Buy List and 10% of the Long-Term Buy List.


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