Portfolio Review

6/27/2011


Rank changes and more big news

Aflac ($46; AFL) and J.P. Morgan Chase ($41; JPM) are being dropped from the Focus List, though they retain their Buy and Long-Term Buy ratings. Dover ($64; DOV), already a Buy and a Long-Term Buy, joins the Focus List. For more on these rank changes, read the What We're Thinking column starting on page 2.

For more news about the stocks on our Monitored List, read on.

Troubles weigh on banks

The White House withheld incentive fees from Bank of America ($11; BAC), J.P. Morgan Chase ($41; JPM), and Wells Fargo ($27; WFC), citing the banks' dismal performance in helping homeowners avoid foreclosure. Moreover, the U.S. Department of Housing and Urban Development said Bank of America "significantly hindered" a federal review of mortgage foreclosures by dragging its feet and supplying incomplete information. Bank of America could face another $27 billion in mortgage losses over the next two years, said one analyst, who added the bank would only need to raise capital if losses ballooned to $55 billion.

J.P. Morgan agreed to pay $154 million to settle charges that it deceived investors who bought mortgage securities before the housing market's historic collapse. Separately, J.P. Morgan and the Royal Bank of Scotland ($13; RBS) face lawsuits alleging they deceived five credit unions that bought $3 billion in mortgage bonds.

Citigroup ($39; C) said hackers accessed customer data for 360,000 credit-card accounts — up from the 210,000 accounts it had originally reported — equaling about 1.5% of its North American accounts. J.P. Morgan is a Buy and a Long-Term Buy. Wells Fargo is rated B (average). Bank of America and Citigroup are rated C (below average).

Pay-TV update

Upset by the placement of Bloomberg TV in Comcast's ($24; CMCSa) channel lineup, Bloomberg accused the cable giant of violating the terms of its NBC Universal acquisition in a complaint filed with the U.S. Federal Communications Commission. Separately, Comcast said it plans to use cash generated by NBC Universal to purchase the remaining 49% stake from General Electric ($19; GE). Finally, NBC Universal is reportedly discussing the sale of a video-game channel to UFC, the mixed-martial-arts fighting league, for up to $600 million. Comcast is a Long-Term Buy. General Electric is rated B (average).

DirecTV ($48; DTV) CEO Michael White said the regulatory environment has undergone a lot of changes — but not enough to clear a merger with DISH Network ($29; DISH). Regulators pulled the plug on such a deal in 2002, though DISH CEO Joseph Clayton has suggested that a merger deal might fly in the current landscape. In other news, DISH made the opening bid of $1.38 billion at an auction for the assets of bankrupt satellite-communications company TerreStar. DirecTV is a Focus List Buy and a Long-Term Buy. DISH is a Buy.

Tech review

Hewlett-Packard ($35; HPQ) will launch the Wi-Fi version of its TouchPad tablet computer July 1. The tablet runs on WebOS, the operating system H-P acquired via its $1.2 billion purchase of Palm last summer. In other news, H-P warned Oracle ($33; ORCL) that the database company is legally bound to continue developing software for H-P servers that use an aging semiconductor. Also, Oracle seeks $1.4 billion to $6.1 billion from Google ($493; GOOG) in a lawsuit originally filed last year. Oracle claims that Android, Google's operating system for smartphones, violates patents related to the Java programming language. Both H-P and Intel are rated Buy and Long-Term Buy. Oracle is a Focus List Buy and a Long-Term Buy. Google is rated B (average).

IBM ($166; IBM) is preparing a transition plan for the retirement of its current CEO, Sam Palmisano, reported The Wall Street Journal. In the next 12 to 18 months, IBM plans to name a chief operating officer or president designated to succeed the 59-year-old Palmisano, who has held the top job since 2002. Three of IBM's last four CEOs retired at age 60, though Palmisano says he has no plans to step down. IBM is a Focus List Buy and a Long-Term Buy.

The U.S. Supreme Court upheld a patent verdict against Microsoft ($25; MSFT) that ordered the software giant to pay $290 million to i4i, a tiny technology company in Toronto. Microsoft has already set aside funds to cover the cost, but its legal troubles continue. Days before Microsoft won U.S. approval to complete its $8.5 billion purchase of Skype, the Web video-phone company was sued in a U.S. federal court for allegedly infringing on two patents held by a Luxembourg company. The plaintiff has already filed similar legal complaints in Germany and Luxembourg. Microsoft is a Long-Term Buy.

Research In Motion's ($29; RIMM) May-quarter earnings per share slipped 4% to $1.33 in the May quarter, a penny above the consensus. But it was the BlackBerry maker's dreary guidance that caused the shares to plunge more than 21% on the news. RIM slashed its per-share-profit guidance for fiscal 2012 ending February to $5.25 to $6.00, versus the $6.28 consensus. RIM is rated B (average).

Dealmakers

Exxon Mobil ($81; XOM) paid $1.69 billion for two natural-gas producers. Last year, Exxon became the largest U.S. producer of natural gas when it acquired XTO Energy for $35 billion. Exxon Mobil is a Focus List Buy and a Long-Term Buy.

NASDAQ OMX Group ($24; NDAQ) confirmed it has bid for a minority stake in LCH.Clearnet, Europe's largest independent clearinghouse. NASDAQ is a Buy and a Long-Term Buy.

Travelers ($58; TRV) agreed to pay $410 million for a 43% stake in Brazilian insurer JMalucelli, which commands a 30% share of Brazil's surety insurance business. In other news, Travelers said spring storms will cause at least $1 billion in catastrophe claims after taxes in the June quarter — nearly equaling the total for the last two years. As a result, management plans to slow down its share repurchases for the rest of the year. Travelers, which repurchased $6.1 billion in shares over the five quarters ended March, is a Long-Term Buy.

Wal-Mart Stores ($53; WMT) completed its $2.4 billion purchase of a 51% stake in Massmart, a retailer with stores in more than a dozen African countries. Separately, the U.S. Supreme Court dismissed a class-action lawsuit against Wal-Mart. The lawsuit involved more than 1 million women who claimed Wal-Mart discriminated against them in pay and promotions. The court ruled that the women's experiences — holding varying positions at 3,400 stores and managed by thousands of different superiors — were too dissimilar to lump together in a single lawsuit. Wal-Mart Stores is a Long-Term Buy.

May-quarter earnings

Walgreen ($43; WAG) grew May-quarter earnings 22% to $0.66 per share excluding special items, exceeding the consensus by $0.04. Same-store sales increased 4.1%. But the shares fell after Walgreen said it ended negotiations to renew a prescription contract with Express Scripts ($55; ESRX) valued at more than $5 billion. Walgreen is rated A (above average). Express Scripts is rated B (average).

FedEx ($89; FDX) reported per-share profits of $1.75 in the May quarter, up 32% and $0.03 above the consensus. Revenue climbed 12% to $10.55 billion. The midpoint of FedEx's August-quarter profit outlook exceeded the consensus at the time of the announcement. FedEx is rated B (average).

Rank Changes

Aflac ($46; AFL) and J.P. Morgan Chase ($41; JPM) are being dropped from the Focus List but remain Buys and Long-Term Buys. Dover ($64; DOV) is being added to the Focus List. After these changes, the Buy List and Focus List have a recommended fund position of 12.9%, with 14.1% for the Long-Term Buy List.


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