Portfolio Review


Tech update

Skirmishes between smartphone makers have spilled into the courtroom in recent years, as companies aggressively petition to block the sale of rival products. In June, U.S. judges gave diverging views on the flurry of patent lawsuits. Judge Richard Posner squashed a high-profile case between Apple ($572; AAPL) and Google's ($565; GOOG) Motorola Mobility unit. In his ruling, Posner discounted Apple's argument that it had suffered from Motorola's alleged infringement and suggested that siding with Apple would have reduced "net social welfare." Neither company can resubmit their claims, though they can appeal his decision. In a separate Apple lawsuit, U.S. District Judge Lucy Koh issued a preliminary injunction to ban Samsung's Galaxy tablet. Koh wrote that Samsung does not have the "right to compete unfairly, by flooding the market with infringing products." The trial between Apple and Samsung is expected to begin July 30. Apple is a Focus List Buy and a Long-Term Buy.

Taking yet another crack at the smartphone market, Microsoft ($30; MSFT) introduced its Windows Phone 8 operating system. The new software will feature voice-recognition abilities and a "digital wallet" for mobile payments. Perhaps more importantly, Windows Phone 8 is closely linked to Microsoft's forthcoming operating system for tablets and personal computers, as Microsoft tries to emulate the unified ecosystem that serves Apple so well. However, Microsoft will not allow existing Windows Phone devices to upgrade to the new operating system, which could cause sales to sink ahead of the fall release. Although Microsoft recently laid out plans to build its own tablet, the company claims it has no such intention for phones. Separately, Microsoft agreed to pay $1.2 billion in cash for Yammer, an online social network for businesses that lets workers share documents and collaborate on projects. In other news, Microsoft lost its appeal to overturn a ruling made by the European Commission four years ago. But the European court did reduce Microsoft's fine by 4% to $1.07 billion; the fine stems from Microsoft allegedly ignoring orders to share product information with rivals. Microsoft is a Buy and a Long-Term Buy.

In a memo to Google employees, CEO Larry Page tried to dispel health concerns raised by his absence at Google's annual shareholder meeting. Page, age 39, says he will continue to run the company, though a voice ailment will also cause him to miss the June-quarter earnings call. On June 27, Google unveiled Nexus 7, a tablet closer in size and price to Amazon.com's ($226; AMZN) Kindle Fire than Apple's iPad. Priced at $199 and powered by a new Android operating system, the Nexus 7 is set to ship in the middle of July. Asustek Computer will build the device. Google is a Long-Term Buy. Amazon.com is rated C (below average).

Comcast earnings preview

Citing poor trends at NBCUniversal, two analysts have trimmed June-quarter estimates for Comcast ($31; CMCSa) in the past week. Those moves are not entirely unexpected considering CEO Brian Roberts told investors in June that some of the division's big movies had disappointed this spring. But the cable segment remains robust, and attendance at the NBCUniversal theme parks appears strong. The consensus calls for a 14% jump in per-share earnings to $0.48. Comcast will post results on Aug. 1.

Looking ahead, the 2012 Summer Olympics should produce solid sales growth, though it will likely lose money as the 2010 Winter Olympics did. Comcast still expects to purchase a larger stake in NBCUniversal in 2014 and take full possession of the business in 2017. In the meantime, management seems content to avoid any other major acquisitions. Shares have soared about 30% this year and trade at 18 times trailing earnings, a 6% discount to its five-year average. Scoring above 60 for all six Quadrix categories, Comcast earns an Overall rank of 95. The stock, yielding 2.1%, is a Long-Term Buy.

Big banks hit with downgrade

In a widely anticipated move, Moody's Investors Service downgraded the credit ratings of 15 global banks, including five of the six largest in the U.S. The downgrades will likely increase the banks' borrowing costs and require more collateral with trading partners. Moody's criteria favored banks with limited exposure to trading activities and backed stopped by big bases of retail deposits. J.P. Morgan Chase ($36; JPM), though downgraded, shared the highest rating among banks under review. Wells Fargo ($32; WFC) was not subjected to a review. Separately, Wells Fargo agreed to purchase a $6 billion loan portfolio from WestLB, a distressed German bank. The subscription finance portfolio contains revolving and term loans offered to private equity and real estate funds. Wells Fargo is a Focus List Buy and a Long-Term Buy. J.P. Morgan Chase is a Long-Term Buy.

Corporate roundup

Advance Auto Parts ($66; AAP) shares have been volatile as worries accumulate that the environment for U.S. auto-parts retailers is eroding. On June 26, O'Reilly Automotive ($83; ORLY) warned that same-store sales and earnings per share would miss expectations for the June-quarter. O'Reilly said that sales were weak in June, suggesting an extension of the "meaningful slowdown" that Advance Auto had observed in April. Although Advance Auto guided expectations lower for the June quarter in April, management reiterated its full-year guidance. In our view, unusual weather probably explains some of the industry's sales slowdown, and Advance Auto seems cheap at 11 times expected 2012 earnings. For now, Advance Auto remains a Buy and a Long-Term Buy.

CF Industries ($189; CF) shares have rallied 11% since the end of June, pushed higher by a heat wave that is wilting what had been forecasted as the largest U.S. corn crop in at least 75 years. According to Bloomberg, U.S. corn supplies are falling at the fastest pace since 1996. As a result, corn prices have jumped about 25% since June 15, which should support fertilizer demand as farmers to try squeeze out higher crop yields. CF is a Focus List Buy and a Long-Term Buy.

St. Jude Medical ($38; STJ) allayed some fears that its Durata lead could suffer from similar problems that plague its discontinued Riata model. In its investigation of a defective Durata, St. Jude found that the insulation was worn away from scraping against other internal body parts — not the "inside-out abrasion" that has repeatedly occurred in Riata leads. Shares bounced on the news and are now above the price at which they traded when reports of the faulty lead first surfaced on June 12. Defibrillator leads connect pacemakers to patients' hearts and can inadvertently short circuit when the wires break through the insulation. St. Jude Medical is a Long-Term Buy.

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