Portfolio Review


Apple introduces two new iPhones, but no China deal

Apple ($495; AAPL) unveiled its high-end iPhone 5S smartphone and the cheaper and more colorful iPhone 5C, putting an end to any doubt about the worst-kept secret on Wall Street. The company said the iPhone 5S is twice as fast as the iPhone 5, with an improved camera, a new microchip, and a fingerprint sensor.

The iPhone 5C, available for $99 with a two-year contract, may prove more important for Apple's fortunes. At first blush, the 5C model looks like an attempt to regain market share in China and other foreign markets where the current models cost too much for most consumers. Researcher Gartner estimates Apple held a 14.4% share of the global smartphone market in the fourth quarter, less than half of industry leader Samsung Electronics' ($1,290; SSNLF) 31.7% share.

Apple stock fell during the company's presentation Sept. 10, then again Sept. 11. Some analysts suggested consumers expected more from the 5S, which stepped up the features relative to the iPhone 5 but didn't offer anything consumers can't find on other phones. In addition, many worry the 5C model — which Apple says will cost $549 in the U.S. without a contract and about $730 in China — isn't cheap enough to help regain lost ground outside the U.S. Apple seems to seek a balance between gaining market share, maintaining high profit margins, and preserving its brand cachet. Yet it's too early to predict the price consumers will pay for the phones, as Apple can always lower prices later.

The lack of a deal to sell iPhones through China Mobile ($57; CHL) to its more than 700 million subscribers also weighed on Apple shares. However, the companies continue to negotiate, and numerous published reports suggest a deal is imminent.

A CNET poll found that 54% of respondents consider Apple a leading innovator, while 46% see it falling behind; we still side with the majority. Apple, trading at just 12 times projected year-ahead earnings, is a Buy and a Long-Term Buy.

Wells Fargo still a top pick

The average interest rate on a 30-year fixed rate mortgage has moved above 4.7%, up from 3.6% at the end of April. As a result, mortgage refinancings have plunged, dropping 71% from their May peak to the lowest level since June 2009. Wells Fargo ($42; WFC), which financed about 25% of U.S. mortgages in the June quarter, says it has cut 3,000 mortgage-related jobs since July. The bank says it expects to do $80 billion in mortgage originations in the September quarter, down from $112 billion in the June quarter.

Yet profit estimates for the September quarter have held steady over the past 60 days — with the consensus projecting a 10% year-to-year increase in earnings per share — on expectations of lower loan losses and expense reductions. At 11 times expected 2013 earnings, Wells Fargo trades at a 25% discount to the average bank stock in the S&P 1500. At 1.5 times book value, Wells Fargo trades in line with peers but below its 10-year norm of 2.0 times. Wells Fargo, yielding 2.8%, is a Focus List Buy and a Long-Term Buy.

Technology roundup

Google ($889; GOOG) proposed new concessions to European Union regulators to settle an ongoing antitrust case. The three-year old lawsuit stems from complaints that the company abused its internet-search dominance and favored its own products and services. Google's search service has an estimated 90% market share in Europe and a 70% share in the U.S. A potential settlement would allow regulators to levy fines of up to 10% of the company's annual sales.

In other news, Google is reportedly working to enhance encryption of the information sent across its global data centers. Such encryption may slow surveillance efforts by the National Security Agency (NSA). The agency's surveillance program collects data from a handful of tech giants, including Apple ($495; AAPL), Microsoft ($32; MSFT), and Yahoo ($29; YHOO). Separately, Google lost an appeal in the long-running case regarding its cars' collection of personal data as they drove past open Wi-Fi networks. The court equated the company's snooping to a wiretap. Google and Apple are rated Buy and a Long-Term Buy. Microsoft is rated B (average).

Smartwatches have commanded plenty of air time in recent days; given a British research firm's projection that the market for wearable technology could top $60 billion by 2018, we understand the hype. Earlier this month, Samsung unveiled its Galaxy Gear smartwatch the same day that Qualcomm ($70; QCOM) presented its Toq, beating rivals Apple and Google, both of which are reportedly working on their own products. Sony ($22; SNE) already sells a smartwatch.

Qualcomm's Toq will be available only in limited numbers; the company sees Toq as a showcase for its components, which it hopes to sell to other makers of wearable tech. Qualcomm is a Focus List Buy and a Long-Term Buy.

Cisco Systems ($24; CSCO) plans to purchase storage-chip maker Whiptail Technologies for $415 million in cash and retention incentives. Cisco is a Focus List Buy and a Long-Term Buy.

Health-care review

The Food and Drug Administration approved a new use for Celgene's ($149; CELG) Abraxane, treating a form of late-stage pancreatic cancer. The FDA has not approved a drug for this manifestation of cancer in nearly eight years. Abraxane has already earned approval for treatment of one form of breast cancer and one form of lung cancer. Celgene is a Buy and a Long-Term Buy.

Johnson & Johnson ($89; JNJ) has reportedly put its Ortho Clinical Diagnostics unit up for sale. By some estimates, the business is worth about $5 billion. J&J is rated B (average).

Corporate digest

Reflecting several ongoing investigations into the company, J.P. Morgan Chase ($54; JPM) will raise its legal reserve at least $1.5 billion in the third quarter to help cover potential claims. The company also announced that it expects to lose money on home lending in the second half of the year as a result of rising interest rates and a decline in mortgage volume, as well as up to a 5% decline in revenue from stock and bond trading. The recent spate of negative news has not put a big dent in the stock price, as shares have fallen only 6% from their 52-week high of $56.93. While J.P. Morgan is vulnerable to headline risk, the stock, yielding 2.8%, remains a Focus Buy and Long-Term Buy.

Continental Resources ($104; CLR) expects to boost oil and natural-gas production 26% to 32% next year, helped by $4.05 billion in capital expenditures. The company reaffirmed its 2013 targets for production growth (38% to 40%) and capital spending ($3.6 billion). Continental is a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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