Portfolio Review

9/20/2010


Tech roundup

Hewlett-Packard ($39; HPQ) agreed to purchase ArcSight ($44; ARST) for $1.5 billion, or $43.50 per share, a 24% premium to the stock’s price prior to the deal’s announcement. ArcSight makes software that monitors corporate networks for security threats. The deal would be H-P’s second since the departure of former CEO Mark Hurd, and it would extend H-P’s push into higher-margin software businesses. The company is also reportedly pursuing another software company, Radware ($39; RDWR), in a deal potentially worth more than $900 million.

Shares of H-P have slumped 15% since the company aired its messy divorce with the former CEO on Aug. 6. While Hurd is widely credited with turning around H-P through a series of successful acquisitions and cost cuts, it’s difficult to build the case that he alone is worth $18 billion in lost market value. Also contributing to the share-price decline are concerns about slowing growth in personal computers and recent news that the U.S. is widening its probe into kickbacks H-P allegedly paid to Russian officials to secure a $45 million contract.

But H-P trades at just nine times trailing earnings, a 43% discount to its five-year average P/E ratio, and earns a Quadrix® Value score of 94. Wall Street projects H-P will increase per-share profits at an annual rate of 10% over the next five years, growth not reflected in the current share price. H-P is a Buy and Long-Term Buy.


Can two kings share one kingdom? Investors certainly believe so, driving Oracle’s ($25; ORCL) stock up 11% since CEO Larry Ellison hired former H-P chief Mark Hurd as co-president. Hurd should find Oracle’s profit margins in good shape, and the proven dealmaker could actually accelerate the pace of acquisitions. Oracle appears to be following IBM’s blueprint of becoming an integrated, full-service technology provider. Oracle, which was slated to report August-quarter earnings Sept. 16, is a Long-Term Buy.


An executive at AT&T ($28; T) said he was surprised at the slow adoption rate of Research In Motion’s ($45; RIMM) latest smart phone. Some of RIM’s corporate clients are reportedly exploring alternatives to the BlackBerry smart phone, potentially good news for Apple ($268; AAPL) and Google ($480; GOOG). Research In Motion, which was expected to post quarterly results Sept. 16, is a Buy and a Long-Term Buy. AT&T and Google are rated B (average).


Apple ($268; AAPL) eased restrictions that required software developers who design applications for the iPhone and iPad to use only development tools approved by Apple. The previous policy had drawn antitrust complaints from Adobe Systems ($32; ADBE), whose Web tools Apple had disallowed. Now designers can more easily adapt their programs to Google’s Android operating system, potentially weakening Apple’s edge. Apple is a Focus List Buy and a Long-Term Buy. Adobe Systems is rated C (below average).


Cisco Systems ($21; CSCO) said it will launch a dividend with a yield of 1% to 2% during the current fiscal year, ending July 2011. Cisco Systems is rated B (average).

Mutual-fund change

Fidelity Export & Multinational ($19; FEXPX) is being dropped from coverage, reflecting middling performance and a poor fund rank of 39. Buffalo Growth ($22; BUFGX), a top pick among large-cap growth funds, is being added to the recommended Growth Portfolio with an 8% weighting and the Conservative Portfolio with a 7% position. With a fund rank of 90, Buffalo invests in high-quality stocks benefiting from international expansion and growth in emerging markets. On June 30, the fund held 54 stocks, with an average market capitalization of $16 billion. Leading sector exposures include technology (27% of assets) and health care (15%). Buffalo, which posted a 33% gain in 2009, is down 2% so far in 2010. The fund’s expense ratio of 1.03% is below the peer-group average of 1.40%.

News digest

Global regulators drew up new rules for the world’s banks, in hopes of curbing the risky business practices that unraveled economies across the globe. The rules will phase in gradually, with most in place within the next decade. Included are tougher capital requirements; the bigger cash reserve should help banks absorb losses and encourage lending in downturns. J.P. Morgan Chase ($41; JPM) CEO James Dimon warned that the restrictions would increase lending costs for bank customers. But the new standards, which include a common-equity requirement of 7%, aren’t expected to pose much of a challenge for most major U.S. banks. The largest U.S. banks have a median tier 1 capital ratio (equity as a percentage of risk-weighted assets) of 8.79%. Shares of J.P. Morgan rose along with other major U.S. banks as the cloud of uncertainty lifted. Banks are now more likely to resume dividend hikes and stock buybacks in coming months. J.P. Morgan is a Buy and a Long-Term Buy . . . Laboratory Corp. of America ($75; LH) agreed to buy Genzyme’s ($70; GENZ) genetic-testing business for $925 million in cash. The unit generated revenue of $371 million in 2009. Laboratory Corp. of America is a Buy and a Long-Term Buy . . . Phillip Morris International ($55; PM) raised its quarterly dividend 10% to $0.64 per share, payable Oct. 8. Phillip Morris is rated B (average).

  RANK CHANGES

In our mutual-fund portfolios, Buffalo Growth ($22; BUFGX) replaces Fidelity Export & Multinational ($19; FEXPX). No changes are being made to our stock buy lists.


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