Portfolio Review

7/11/2011


BASF added as Long-Term Buy

BASF ($98; BASFY) is being initiated as a Long-Term Buy. Based in Germany, BASF makes chemicals, plastics, performance products, and insecticides. It scores above 80 in five of the six Quadrix categories and earns an Overall rank of 99. BASF generated $4.63 billion in free cash flow in the past year, up 174% on 18% higher revenue.

All six of BASF's operating segments reported at least 7% sales growth in the March quarter, boosting management's confidence about full-year results. At 11 times trailing earnings, BASF shares trade 24% below their three-year average and 27% below the average for diversified-chemical stocks in the S&P 1500 Index. BASF yields 2.3%, with the annual dividend paid each spring.

Technology wrap-up

A group of six companies, including Apple ($349; AAPL), EMC ($28; EMC), Microsoft ($26; MSFT), and Research In Motion ($29; RIMM), placed a winning $4.5 billion bid for a treasure chest containing more than 6,000 patents held by bankrupt telecom-equipment maker Nortel Networks. Google ($532; GOOG) reportedly dropped out at $4 billion and could be forced to pay royalties on patents swapped among the winning bidders. The consortium must still receive clearance from U.S. antitrust officials. The top bid — three times higher than some analysts expected — underscores the value placed on patents, a turf vigilantly protected by technology companies.

Meanwhile, Apple and Samsung have taken turns suing each other over patents used in their smartphones and tablet computers in recent months. Tensions have escalated in the past week, with both companies filing to block the U.S. import of each other's products. The legal skirmishes coincide with suppliers preparing for Apple's forthcoming iPad and iPhone, rumored to debut this fall. One manufacturer told The Wall Street Journal that Apple expects to sell 25 million iPhone 5 units by the end of 2011. Apple's share of U.S. smartphones sold in three months ended May rose to 17% from 10% for the previous three-month rolling period, according to researcher Nielson. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is a Long-Term Buy. Google and RIM are rated B (average). EMC is rated A (above average).


Hewlett-Packard ($36; HPQ) released its TouchPad, the latest entry into the crowded market for computer tablets. Based on early reviews, the device doesn't measure up to Apple's iPad. Its WebOS software won praise, but the TouchPad must overcome a bulkier frame, shorter battery life, and far, far fewer applications. The current model is exclusively Wi-Fi, though H-P is working on a version capable of connecting to cellular networks. H-P is a Buy and Long-Term Buy.


Intel ($22; INTC) is being investigated by the U.S. International Trade Commission for possibly infringing on patents held by X2Y Attenuators, a closely held company based in Pennsylvania. Intel is a Buy and a Long-Term Buy.

CEOs on the move . . . and staying put

Keith Calder ended his brief reign as CEO of Walter Energy ($121; WLT) due to differences of opinion concerning management philosophy. Calder took the post in April when Walter acquired Western Coal, where he had served as top executive. During the search to replace Calder, Joseph Leonard will serve as interim CEO, a title he held in the year leading up to the Western Coal acquisition. Despite the news, shares spiked on an analyst report that Walter could be ripe for a takeover, with its shares potentially fetching more than $200. Walter is a Focus List Buy.


Steve Ballmer denied a rumor that he would leave his post as CEO of Microsoft ($26; MSFT). Rumors of Ballmer's ouster have caused short-term jumps in the stock price. For the year, Microsoft shares are down 7%. Microsoft is a Long-Term Buy.

Financial review

J.P. Morgan Chase ($41; JPM) retained its top spot in the investment-banking business, grabbing the largest chunk of the sector's $42.4 billion in fees in the first half of 2011. The bank still battles a flurry of legal entanglements. J.P. Morgan seeks to dismiss a $19 billion lawsuit brought by Irving Picard, the trustee responsible with retrieving money lost by Bernard Madoff's former clients. A judge rejected J.P. Morgan's bid to dismiss a separate lawsuit, filed by eight homeowners who accuse the bank of tampering with their home-equity lines of credit without a permissible reason. J.P. Morgan is a Buy and a Long-Term Buy.


Spurned in separate deals in recent months, NASDAQ OMX Group ($26; NDAQ) and the London Stock Exchange Group might settle for a merger with each other. The LSE failed to gain shareholder support to complete its proposed $3.4 billion takeover of TMX Group, operator of the Toronto Stock Exchange. That marks the third exchange deal that has fallen apart this year. Although the LSE has rejected NASDAQ's advances in the past, its new management might be open to the possibility. To buy LSE, with a market capitalization of $2.86 billion, NASDAQ may have to shell out about $6.4 billion. NASDAQ is a Buy and a Long-Term Buy.

Corporate roundup

Exxon Mobil ($82; XOM) said a pipeline leaked up to 1,000 barrels of oil into the Yellowstone River in Montana. The contamination is concentrated to a 10-mile stretch. Exxon said it shut down the pipeline within six minutes after detecting a loss of pressure. The cause of the leak has yet to be determined. Separately, Exxon found itself on the wrong end of a trial that concluded with a jury awarding about $1.5 billion to victims of an underground leak from a gasoline station that contaminated groundwater in Maryland. The company has already spent about $50 million on fines and cleanup costs since the leak was discovered in 2006. Exxon plans to appeal. Exxon Mobil is a Focus List Buy and a Long-Term Buy.


Walgreen ($43; WAG) reported 4.8% higher same-store sales in June, exceeding the consensus estimate of 2.8%. Walgreen is rated A (above average).


Johnson & Johnson ($68; JNJ) received U.S. approval to market a new type of blood thinner that reduces blood clots in patients who have undergone knee and hip replacements. J&J is rated B (average).


A study linked Pfizer's ($21; PFE) smoking-cessation drug Chantix to a higher risk of heart problems. Pfizer is rated B (average).

Rank Changes

BASF ($98; BASFY) is being initiated as a Long-Term Buy, and the Long-Term Buy List's position in Vanguard Short-Term Investment-Grade ($10.76; VFSTX) falls to 9.5%.


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