Portfolio Review

8/29/2011


CF on Buy List

CF Industries ($179; CF), a recent addition to the Long-Term Buy List, is being added to the Buy List. The fertilizer company's stock has been a standout performer in recent weeks, rallying to new highs as the broader market slumped. CF remains reasonably valued at nine times expected 2011 earnings, as profit estimates have jumped sharply since CF announced strong second-quarter results in August. CF also announced a fourfold increase in its quarterly dividend to $0.40 per share. A tight global market for nitrogen should help sustain favorable pricing in the near term, and high crop prices are expected to keep plantings and fertilizer demand high. CF, which earns the maximum Quadrix Overall score of 100, is a Buy and a Long-Term Buy.

H-P lowers outlook, changes direction

Technology giant Hewlett-Packard ($25; HPQ), the world's largest seller of personal computers, announced plans to buy British software company Autonomy ($41; AUTNF) for about $10 billion in cash and potentially sell or spin off the PC business that generates nearly one-third of H-P's revenue. These changes would remake the American icon, and the market's initial response to the facelift was a 20% sell-off. The chief of the PC business values the unit at more than $10 billion, though whether any suitor would pay that much is uncertain.

H-P CEO Leo Apotheker, who has a background in software, said the company needs to focus on higher-growth businesses, such as software and services. In connection with this change of direction, H-P is abandoning its TouchPad tablet computer and smartphones just six weeks after their launch. The devices failed to meet internal growth targets.

In the July quarter, H-P earned $1.10 per share, up 2% on 1% revenue growth. H-P lowered its revenue target for fiscal 2011 ending October, the third trim in as many quarters.

While the market is understandably skittish, H-P is not without appeal. Sans the PC business, H-P should have higher profit margins, stronger growth, and a smoother revenue stream. Rumors of a potential takeover of H-P by Oracle ($26; ORCL) have begun to circulate, and while we do not advise readers to buy or hold a stock on takeover speculation, H-P may be cheap enough to appeal to Oracle or another tech titan seeking to diversify its product portfolio.

At less than five times trailing earnings, H-P is the cheapest tech stock in the S&P 500 Index, currently selling at a discount of at least 60% to both its peer group and its own five-year average. H-P has fallen to at least 10-year lows in price/earnings,
price/sales, and price/cash flow. H-P, which now yields 2.0%, seems oversold. The stock remains a Buy and a Long-Term Buy, though a near-term rebound might spur a sale from the Buy List.

Mobile-phone, tablet update

Speculation about new versions of Apple's ($374; AAPL) popular iPad tablet computer continues to swirl. Published reports suggest that the iPad 3 will feature a wider screen and launch in 2012. Pay-TV providers including Comcast ($20; CMCSa), DirecTV ($43; DTV), and DISH Network ($22; DISH) have prepared applications that allow iPad subscribers to play video and continue to push content providers for the right to stream live video to the tablets.

Broadcasters are also exploring other strategies for tapping into wireless communications. Comcast is one of several cable companies in talks to partner with Clearwire ($3; CLWR), which builds and operates mobile broadband networks. DISH has asked the Federal Communications Commission for permission to use wireless spectrum it acquired from TerreStar to build its own network.

In other news, Apple is reportedly working on a cheaper version of its iPhone 4, which would compete more directly with phones that use Google's ($519; GOOG) Android operating system. In addition, news outlets have reported that Apple hopes to launch its iPhone 5 in late September. Nearly 20 million phones using Apple's operating system sold in the June quarter, representing about 18% of the market, well below Android's 43% share. Research In Motion ($28; RIMM), the embattled maker of the BlackBerry, captured less than 12% of the market. Apple and DTV are Focus List Buys and Long-Term Buys. DISH is a Buy and a Long-Term Buy. Comcast is a Long-Term Buy. Google and RIM are rated B (average).

Corporate roundup

Exxon Mobil ($74; XOM) has received permission to restart a 20-mile section of pipeline in Montana. The pipeline shut down after a leak released up to 1,000 barrels of oil in July, and portions still remain closed. Exxon estimates cleanup costs at nearly $43 million. Exxon is a Focus List Buy and a Long-Term Buy.


Intel ($20; INTC) wants to expand its presence in the server industry, selling more than microprocessors. The semiconductor giant has agreed to buy a company that makes chips for Ethernet switches. Intel could use this deal as a conduit to designing a variety of chips for corporate data centers. Intel is a Buy and a Long-Term Buy.

Bank of America can do nothing right

The financials are reeling. So far this year, 68 banks have failed, in the wake of 157 failures in 2010 and 140 in 2009. In contrast, 25 banks failed in 2008. The S&P 1500 Financial Sector Index is down 21% this year, by far the worst performance of the 10 market sectors. But the Banks and Diversified Financial Services groups have performed even worse.

While sob stories abound, one company stands alone in its ineptitude — Bank of America ($6; BAC). Bank of America shares fell 15% over the week ended Aug. 22, battered by a batch of bad news. Bargain hunting and merger speculation lifted the shares Aug. 23, but the company quickly dismissed those reports as "baseless." Mortgage-securities investors are clamoring for more than the $8.5 billion Bank of America agreed to pay in a legal settlement, and another case could leave the company on the hook for another $9 billion.

Analyst estimates of Bank of America's total mortgage-related liability vary, with one pundit projecting the need to raise at least $100 billion in capital. Some of the estimates border on fanciful, and it is impossible to predict the company's final tab, except to say that the bill could get very large. Bank of America is proceeding with aggressive cost cuts, but it will take more than a leaner cost structure to make this house habitable. The stock is rated C (below average).

Rank Changes

CF Industries ($179; CF) is being added to the Buy List, and the list's position in Vanguard Short-Term Investment-Grade ($10.72; VFSTX) will fall to 21.3%.


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