Portfolio Review

12/6/2010


Technology update

A jury awarded Oracle ($27; ORCL) $1.3 billion in damages in a copyright-infringement lawsuit against rival SAP ($47; SAP). The verdict is believed to be the biggest ever for copyright infringement, nearly equaling Oracle's August-quarter net income. Although SAP admitted guilt in the case, it vowed to appeal the size of the award. Oracle had sought up to $3 billion, while SAP thought it should pay closer to $40 million. Oracle is a Long-Term Buy.


Research firm Gartner ($32; IT) lowered its 2011 projection for shipments of personal computers (PCs) and now sees growth of 16%, down from the 18% increase it forecasted in September. The weaker outlook reflects the surging popularity of tablet computers, which Gartner sees displacing 10% of PCs by 2014.


Microsoft ($25; MSFT) is discussing with media companies ways to set up a new subscription service to watch network television shows online through devices such as the Xbox video-game console. Apple ($311; AAPL), Google ($556; GOOG), and Netflix ($206; NFLX) — among others — also seek to monetize television on the Web.

In other news, the U.S. Supreme Court will hear Microsoft's appeal in a lawsuit it lost to Toronto-based i4i regarding patents used in Word, the popular word-processing software. Last year, a jury awarded i4i $200 million in damages. Microsoft has removed the offending computer code from the software. Microsoft is a Buy and a Long-Term Buy. Apple is a Focus List Buy and a Long-Term Buy. Google is rated A (above average).


Shares of Research In Motion ($62; RIMM) rallied after an analyst upgraded the stock and made bullish comments about QNX, the operating system powering RIM's forthcoming PlayBook tablet computer. Research In Motion is a Buy and a Long-Term Buy.


Altera ($35; ALTR) reiterated its revenue forecast for the December quarter, which calls for growth of 49% to 53%, versus the 50% consensus. Altera is a Focus List Buy and a Long-Term Buy.


Google ($556; GOOG) is reportedly close to acquiring Groupon, a Website that offers local coupon deals, for about $6 billion. Separately, the European Union opened a probe into allegations that Google used unfair tactics to deflate competitors' search results and prevent business partners from placing online ads for its rivals. Google is rated A (above average).

Corporate roundup

A unit of Deutsche Bank ($48; DB) is suing J.P. Morgan Chase ($37; JPM) and the Federal Deposit Insurance Corp. on behalf of customers who bought mortgage-backed securities from Washington Mutual. The FDIC sold the failed bank to J.P. Morgan in September 2008, and now the entities are fighting in court over who must take responsibility for some of WaMu's liabilities. J.P. Morgan is a Buy and a Long-Term Buy.


Shares of Aflac ($52; AFL) have fallen more than 5% since Ireland applied for a financial bailout, reigniting fears about the creditworthiness of other European countries. Aflac holds $717 million in bonds issued by Ireland banks. The insurer's investment exposure to sovereign debt and financial institutions in Portugal, Ireland, Italy, Greece, and Spain (the PIIGS countries) has a fair value of $3.28 billion, a meaningful 3.8% of Aflac's portfolio. But while losses on the European debt would hurt, the insurer should be able to absorb them. Aflac is a Focus List Buy and a Long-Term Buy.


Johnson & Johnson ($62; JNJ) received what now seems like its weekly dose of bad news. First, J&J recalled about 9.3 million bottles of Tylenol products because their front label failed to disclose that the ingredients include a small amount of alcohol. Second, regulators uncovered procedural problems at a J&J manufacturing plant in Puerto Rico earlier this year. Third, a Dutch arbitration tribunal ruled that J&J must pay $130 million to former partner Basilea for violating a licensing agreement. J&J is rated B (average). 


General Motors ($34; GM) netted the world's biggest initial public offering after it sold $23.1 billion in common and preferred shares. GM lowered the U.S. Treasury Department's stake from 61% to 26%. We will add GM to the Monitored List next week.

Retail review

There were few signs of the Grinch in U.S. retail stores, as big discounts drove higher traffic and spending over the Thanksgiving weekend. Roughly 212 million shoppers visited stores or Websites, up nearly 9% from a year ago. These shoppers spent an average of $365, up 6%, according to a survey by the National Retail Federation.

Online purchases jumped 28% on Thanksgiving Day, according to comScore, triple the growth from last year. Wal-Mart Stores ($54; WMT) said its Website traffic jumped 50% on Thanksgiving and 30% on Black Friday.

Wal-Mart continued its foreign expansion by offering $2.32 billion to acquire a 51% stake in Massmart Holdings. Massmart owns 288 retail stores in 14 countries in sub-Saharan Africa, with its biggest presence in South Africa. Wal-Mart will initially try to introduce private-label products and offer more food in the stores. But it must also appease powerful trade unions that have opposed the deal. Wal-Mart said it plans to push further into Japan and emerging markets such as Brazil and China. Eventually, it could enter Russia. Wal-Mart Stores is a Long-Term Buy.

Corporate profits soar

Profits at U.S. companies jumped 28% to a record high ($1.66 trillion annualized) in the September quarter, according to the Bureau of Economic analysis. Adjusting for inflation, results from the September 2006 quarter came in higher.

Profit trends for publicly traded companies confirm the BEA data, as the S&P 500 Index posted 31% higher profits in the quarter, with all but nine companies having reported. About 73% topped consensus profit estimates for the quarter, while only 18% came up short.

The consensus projects S&P 500 profit growth of 31% in the fourth quarter.  Although growth should slow in 2011, analysts predict that the index's per-share profits will rise 13% to an all-time high on 6% higher revenue.

Earnings-growth leaders
The eight recommended stocks below have all seen consensus estimates rise over the last 30 and 90 days and are expected to deliver double-digit growth in per-share-profits in both the current fiscal year and the next year.
Est. EPS
— Growth —
— Change in Next-Year Est. —
Company (Price; Ticker)
Curr.
Year
(%)
Next
Year
(%)
Last 30 Days
— (% Chg.) —
Last 90 Days
— (% Chg.) —
Fiscal
Year End
Advance Auto Parts
($66; AAP)
31
16
0.23
(5.3)
0.24
(5.5)
December
Ameriprise Fin'l
($52; AMP)
51
17
0.06
(1.2)
0.29
(5.9)
December
Apple ($311; AAPL)
25
16
0.08
(0.4)
1.75
(8.6)
September
CSX ($61; CSX)
39
18
0.04
(0.9)
0.25
(5.6)
December
DirecTV ($42; DTV)
63
33
0.01
(0.3)
0.02
(0.6)
December
Newmont Mining
($59; NEM)
37
21
0.24
(5.5)
0.61
(15.2)
December
TJX Companies
($46; TJX)
19
10
0.01
(0.3)
0.03
(0.8)
January
Wal-Mart Stores
($54; WMT)
11
10
0.04
(0.9)
0.04
(0.9)
January

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