Portfolio Review

6/14/2010


Check hotline for rank changes

Subscribers often tell us they depend on Dow Theory Forecasts to help them keep up with fast-moving markets.

Many of you already know about our twice-weekly hotlines, recorded after the market close on Wednesdays and around noon Central time on Fridays. In recent weeks, we have announced stock downgrades on the Friday hotline. Subscribers should check the hotlines every week. You can access this information in three ways:

On the Web: The Internet offers the quickest route to our hotlines. At www.DowTheory.com, click on the Current Hotline link and log into our Subscriber Area using your customer number as both the user name and password. Once you log in for the first time, you can change your user name and password.

By phone: Subscribers can call (800) 931-2295 to hear the hotline. For the monthly passcode, check the Rank Changes box on page 6 of the Forecasts.

Via e-mail: Subscribers who provide us with an e-mail address and do not opt out should be receiving our hotlines. If you’re not getting yours, call (800) 233-5922 for assistance.

Walgreen snubs CVS Caremark

Walgreen ($31; WAG) said it will no longer fill prescriptions for patients with new or renewed pharmacy-drug plans offered by CVS Caremark ($31; CVS). Walgreen cited unpredictable reimbursement rates and poor communication as its reasons for ending the arrangement, but it left open the possibility of renegotiating with CVS in the future. These CVS plans generated about 7% of Walgreen’s sales, which have been lackluster recently. Walgreen’s same-store sales dipped 0.2% in May, while Wall Street expected a 1.5% rise.

CVS responded by moving to drop Walgreen from its retail-pharmacy network in 30 days. CVS suggested Walgreen’s move will have a minimal effect on consumers. But some analysts disagreed, saying that excluding Walgreen’s 7,500 stores and strong Midwest presence will be disruptive to patients and costly to CVS. Regardless, the dispute adds to the uncertainty as CVS reaches the close of its annual season for signing up new clients.

While concerns about the Caremark PBM are justified, CVS’ retail business, which accounted for 52% of total revenue and 59% of segment operating profit last year, is healthy and growing. Plenty of doubt is already baked into CVS’ shares, which trade at less than 12 times trailing earnings, 37% below the five-year average P/E ratio. CVS Caremark is a Focus List Buy and a Long-Term Buy. Walgreen is rated A (above average).

Monitored List changes

Check out the Monitored List supplement of this week’s Forecasts. Today we are making numerous rank changes. We rank stocks in three categories: A (above average), B (average), and C (below average). Among the notable trends are the rise in ratings for four energy stocks and three technology stocks. Stocks on our buy lists are always ranked A.

Technology update

Gartner ($24; IT), an industry research firm, raised its 2010 outlook for global semiconductor sales to $290 billion, up 27% from last year. Intel ($20; INTC) has been one of the first technology companies to participate in the recovery, with revenue rising 44% in the March quarter. Intel is a Buy and a Long-Term Buy . . . The market for external data storage grew 17% to $5 billion in the May quarter, according to researcher IDC. IBM ($124; IBM) held onto second place in the market with a 12% share on nearly 22% growth. Rivals EMC ($18; EMC), with a 24% market share, and NetApp ($37; NTAP), with an 11% share, also posted strong sales growth. IBM is a Focus List Buy and a Long-Term Buy. EMC is rated A (above average) . . . Oracle ($22; ORCL) disclosed that additional staffing cuts at newly acquired Sun Microsystems will primarily hit employees in Europe and Asia and cost $675 million to $825 million more than the $325 million originally expected. Oracle is a Buy and Long-Term Buy . . . Dell ($13; DELL) founder Michael Dell said he had once considered taking the company private. While the founder would not comment on whether he is currently interested in such an action, shares surged on the news. Michael Dell owns 11.6% of the company. Dell is rated B (average).

Retail roundup

Unseasonably cool weather, a late Memorial Day, and consumer caution contributed to modest U.S. same-store-sales growth of 2.6% in May.

Ross Stores ($55; ROST) grew same-store sales 5% in May, ahead of the 4% consensus estimate. Target ($52; TGT) reported 1.3% higher same-store sales for the month, narrowly beating the consensus forecast of 1.2%. The retailer also raised its quarterly dividend 47% to $0.25, payable Sept. 1. Target says the dividend hike, announced as this newsletter went to press, reflects cash generation well above the amount needed for reinvestment in its business.

In other news, Wal-Mart Stores ($51; WMT) announced plans to repurchase $15 billion of its own shares and hire 500,000 workers over the next five years. Ross is a Focus List Buy and a Long-Term Buy. Wal-Mart Stores is a Long-Term Buy. Target is rated A (above average).

Energy report

At last, BP ($35; BP) has made some headway toward controlling the Gulf of Mexico oil spill, placing a containment cap over the ruptured well. While the strategy is capturing much of the oil, the leak could continue into August, when a relief well is completed. The oil giant appears intent on distribut- ing its quarterly dividend of $0.84 per share, payable June 21, though rising political pressure for BP to slash or suspend the payout has made investors skittish. BP is rated B (average). Rather than match the market, BP is likely to either strongly outperform or strongly underperform in the year ahead. However, we are not confident enough in either outlook to give the stock an A or a C rating. BP carries a lot of risk, and we would not be owners at this time.


Transocean ($46; RIG) fell to an 18-month low on concerns about its potential liability for the oil disaster. The company has said its contract with BP provides “broad” protections, but doubts remain. In other news, contracts for ultra-deepwater rigs have stabilized at $445,000 per day. But inactivity in the gulf and other rigs coming off contract this year could push day rates under $400,000, potentially hurting drillers like Transocean. Transocean is a Long-Term Buy.


Citing the moratorium on deepwater drilling in the gulf, Oceaneering International ($43; OII) reduced its 2010 per-share-earnings guidance to a range of $2.80 to $3.10, below earlier guidance of $3.25 to $3.55. Oceaneering remains a Long-Term Buy.

As smart phones surge, RIM remains a wise investment

Research in Motion’s ($58; RIMM) BlackBerry controls a 35% share of the U.S. smart-phone market, ahead of Apple’s ($249; AAPL) iPhone (28%) and Google’s ($485; GOOG) Android (9%). Google’s device is gaining momentum with consumers, and Apple is making inroads with business customers, an area RIM currently dominates.

These concerns appear reflected in RIM’s stock, down 18% since April, compared to the 3% slide of the S&P 1500 Telecommunications Sector Index. However, RIM reportedly plans this summer to release a BlackBerry that combines a touch screen and traditional keyboard, functionality none of its rivals can match. RIM is a Buy and a Long-Term Buy. Apple is a Long-Term Buy. Google is rated A (above average).

News digest

Javelin Pharmaceuticals ($1; JAV) sued Hospira ($50; HSP) after Hospira twice delayed closing a deal to purchase Javelin following a drug recall. Hospira is a Focus List Buy and a Long-Term Buy.


Bank of America ($15; BAC) agreed to sell its 24.9% stake in Grupo Financiero Santander, located in Mexico, for $2.5 billion. Bank of America is rated C (below average).

  RANK CHANGES

No changes were made this week in Dow Theory Forecasts.


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