Portfolio Review


Two new stocks in Top 15 Utilities

Our Top 15 Utilities portfolio is replacing two of its component stocks. For more information about utilities and our portfolio, check out Utility Spotlight. Below, we discuss the portfolio changes:

The arrow is pointing up at NV Energy ($18; NVE), where sales rose 10% in the June quarter after nine consecutive quarterly declines. The consensus projects profit growth of 58% this year and 2% next year, and estimates are on the rise in the wake of profit surprises in the March and June quarters. The company raised its dividend 31% in May and now yields 3.8%. NV says it generates sufficient cash flow to support both dividend hikes of about 10% a year going forward, with enough left over to retire some debt as well. NV Energy is being upgraded to A (above average) in our Utility Update and added to the Top 15 Utilities portfolio.

Sunoco Logistics Partners ($49; SXL), a master limited partnership, doesn't operate a utility. However, pipeline and storage companies make up a crucial part of the utility infrastructure, and Sunoco Logistics joins fellow pipeline operator Plains All American ($91; PAA) on the Top 15 Utilities portfolio. In recent months, it has become harder to find attractive utilities, and Sunoco Logistics compares favorably to most utility stocks. In each of the last four quarters, Sunoco Logistics' sales rose at least 19% and per-share profits at least 50%. In the wake of a 65% profit surprise in the June quarter, earnings estimates are jumping.

Laclede Group ($42; LG) has posted four consecutive quarters of lower sales. Despite poor stock performance in recent months, Laclede still looks expensive relative to historical norms. With weak dividend growth and few sources of profit growth other than acquisitions, we see no catalysts for outperformance in the year ahead. Laclede Group is being dropped from the Top 15 Utilities portfolio and now earns a B (average) rating in our Utility Update.

Sempra Energy's ($65; SRE) 12-month return of 28% is among the best in the utility sector. But the stock's operating momentum doesn't justify such performance, with sales and profits falling in the last two quarters. The shares look expensive relative to their history. Sempra is being dropped from the Top 15 Utilities portfolio and is now rated B (average) in the Utility Update.

Dow Industrials add UnitedHealth

UnitedHealth Group ($55; UNH) will replace Kraft Foods ($40; KFT) in the Dow Jones Industrial Average Sept. 24. Kraft, which joined the blue-chip index four years ago in place of American International Group ($34; AIG), will spin off its North American grocery business Oct. 1. Managers of the average cited Kraft's smaller size as a reason for dropping it. UnitedHealth becomes the first health insurer in the Industrials, and its inclusion reflects the importance of health-care spending to the U.S. economy.

Although rising medical-utilization rates could hamper the insurer's profitability in coming quarters, revenue growth remains strong, rising at least 7% in nine straight quarters. Despite its solid growth, UnitedHealth trades at 11 times trailing earnings, 28% below the 10-year average. UnitedHealth is a Focus List Buy and a Long-Term Buy. Kraft is rated C (below average).

Earnings reports

Bed Bath & Beyond ($68; BBBY) posted per-share earnings of $0.98 in the August quarter, up  5% but $0.04 below the consensus on higher costs. Same store sales grew 3.5%, while total revenue advanced a better-than-expected 12%. For the November quarter, management expects per-share profits to rise 4% to 9%, versus Wall Street's target of 7%. The news is disappointing, but for now Bed Bath & Beyond remains a Focus List Buy and a Long-Term Buy.

FedEx ($87; FDX) said earnings per share slipped 1% to $1.45 in the August quarter, a nickel above the consensus. Revenue advanced 3% to $10.79 billion, also ahead of analyst expectations. For the second time this month, FedEx lowered its outlook. The company now projects about $6.40 in per-share profits for the fiscal year ending May 2013, down from its prior target of $7.15; FedEx earned $6.59 in fiscal 2012. FedEx is rated A (above average).

Credit-card news

The Federal Reserve reported a decline in credit-card balances in July, confirming an earlier report that showed balances, delinquencies, and the number of credit-card accounts fell in the June quarter. But two of our recommended stocks are bucking that trend. American Express ($59; AXP) reported year-over-year growth of 5% in credit-card loans in both July and August. Visa ($134; V) said its U.S. volume of credit-card payments rose 7% in July and 12% in August, helped by market-share gains and an aggressive marketing campaign. Amex is a Focus List Buy and a Long-Term Buy. Visa is a Buy and a Long-Term Buy.

Alliance Data Systems ($142; ADS) said average receivables at its private-label credit-card business topped $6.2 billion at the end of August, up 29% from a year earlier. The delinquency rate declined to 4.1% from 4.8%. In other news, Alliance agreed to pay $145 million for a portfolio of credit-card receivables from apparel seller Talbots. Alliance Data is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Apple ($702; AAPL) shares rallied to an all-time high after the company reported that it received more than 2 million pre-orders for the iPhone 5 in the first 24 hours — more than doubling its prior record. The consensus estimate for Apple's September-quarter earnings jumped 4% to $8.79 per share in the past week. Apple is rolling out the new device more aggressively than it has prior models. The iPhone 5 will arrive in most of Europe this month and be available in 100 countries by the end of the year. Apple is a Focus List Buy and a Long-Term Buy.

Chevron ($117; CVX) said once it restarts operations in Brazil, production will be less than half of levels seen before the offshore oil spill in November. Brazil accounted for less than 2% of Chevron's total production in 2011. Chevron is a Buy and a Long-Term Buy.

Wyndham Worldwide ($53; WYN) agreed to buy Shell Vacations for $102 million in cash and the assumption of $153 million in debt. Shell operates 19 resorts in North America. Wyndham is a Buy and a Long-Term Buy.

Microsoft ($31; MSFT) raised its quarterly dividend 15% to $0.23 per share, payable Dec. 13. Microsoft is a Buy and a Long-Term Buy.

Fifth Third Bancorp ($16; FITB) raised its quarterly dividend 25% to $0.10 per share, payable Oct. 18, following through on plans approved by the Federal Reserve last month. Fifth Third is a Focus List Buy and a Long-Term Buy.

The state of Arizona has sued McKesson ($87; MCK) for allegedly inflating medicine prices. McKesson fell on the news but remains a Buy and a Long-Term Buy.

Rank Changes

The Forecasts is making no changes to its Focus, Buy, or Long-Term Buy Lists. We are adding NV Energy ($18; NVE) and Sunoco Logistics Partners ($49; SXL) to the Top 15 Utilities portfolio, replacing Laclede Group ($42; LG) and Sempra Energy ($65; SRE).

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