Portfolio Review


Two new stocks & other rank changes

We are initiating coverage of Packaging Corp. of America ($68; PKG) as a Buy. Often referred to as PCA, the company ranks among the four largest U.S. makers of containerboard, corrugated packaging, and sheet paper.  A standout in Quadrix, the stock earns an Overall score of 97, reflecting scores of 90 or higher for Momentum, Quality, and Earnings Estimates. At less than 15 times estimated current-year earnings, PCA trades at a 12% discount to paper packaging stocks in the S&P 1500 Index.

Sales and earnings growth have accelerated in recent quarters, partly reflecting the $2 billion acquisition of rival Boise in October. March-quarter results — the first full quarter with Boise — are set to be announced April 22. The consensus projects a 65% surge in per-share earnings to $1.02. That estimate was $0.92 three months ago. Revenue is projected to reach $1.42 billion, up 88%. PCA generates a lot of cash — $608 million over the past 12 months — with much of it earmarked for debt repayment.

Irish drugmaker Shire ($145; SHPG) is being initiated as a Long-Term Buy. The company has a strong, if somewhat choppy, growth history. Per-share profits have surprised to the upside at least 9% in each of the last four quarters, and the rising consensus calls for growth of 29% this year and 11% next year. While such growth warrants a premium price, at 15 times the 2014 estimate, Shire trades at a 15% discount to the median for S&P 1500 Index drug stocks.

Product sales rose 12% last year. ADHD treatment Vyvanse accounted for 25% of Shire's revenue and grew 19%, with the potential for double-digit annualized growth over the next five years. None of Shire's next 10 largest-selling drugs generates more than 11% of the company's revenue; eight of those 10 drugs posted sales growth last year. In January, Shire paid $4.2 billion in cash to purchase ViroPharma, whose lead drug Cinryze should complement Shire's fastest-growing medicine, Firazyr. Cinryze and Firazyr treat angioedema, which causes body tissues to swell. Shire earns a Quadrix® Overall score of 98, with scores above 90 in Momentum, Quality, Financial Strength, and Earnings Estimates.

Cigna ($81; CI) is being removed from the Long-Term Buy List. The stock's Overall score has fallen to 66 from 85 at the end of January due to weakening operating momentum, poor analyst-revision trends, and weak share-price action. The company also suffers from choppy operating cash flow, down in three of the past four quarters. Although Cigna's trailing P/E ratio of 12 is 17% below the median for S&P 1500 managed-care providers, it remains 24% above its own five-year average. The stock is now rated B (average).

Skyworks Solutions ($36; SWKS) is being removed from the Focus List. Shares have pulled back in the past couple weeks, though they are still up nearly 15% since we added the company to the Focus List in late January, compared to a 1% gain for the S&P 500 Index. That rally has taken a toll on the stock's Value score, down to 64 from 83. The Focus List is also heavily weighted toward technology (four of 15 Focus List stocks including Skyworks are in the tech sector), and this move allows us to scale back on our exposure.

Skyworks still ranks among our favorite 30 stocks for 12 month gains but no longer qualifies as one of our very best ideas. It scores a 99 in Quadrix for Overall and both sector ranks. Skyworks Solutions remains a Buy and a Long-Term Buy.

Monitored List changes

Today we are revamping the Monitored List. The list contains 180 stocks, including the largest and most influential U.S. firms. We assign each stock a rating of A (above average), B (average), or C (below average). All stocks on our recommended lists earn an A rating.

Check out the Monitored List supplement. We're adding more than 10 new stocks and retiring seven others, mostly smaller companies we once recommended for purchase but no longer warrant coverage.

You'll receive the Monitored List with the second issue of each month. Or you can find it at www.DowTheory.com/Go/Monitored.

Qualcomm still dominates game of phones

Qualcomm ($79; QCOM) showed off new high-end semiconductors that will begin powering smartphones in 2015, as it tries to maintain its edge over established rivals such as Intel ($27; INTC), as well as emerging players. Qualcomm took a 54% slice of the global market for smartphone semiconductors in 2013, according to researcher Strategy Analytics. Its share of baseband semiconductors, which manage radio functions, was 64%. Baseband share could shrink next year if Apple ($523; AAPL) follows through on plans to start developing its own processors for the 2015 iPhone, according to a published report.

Qualcomm scored a victory in Amazon.com's ($327; AMZN) new Fire TV, a television set-top box that streams online video from Amazon Prime Instant Video, Netflix ($349; NFLX), and Hulu. Qualcomm is reportedly making the main processor and four additional semiconductors used by Fire TV.

Both revenue and cash from operations have climbed at least 10% in five straight quarters. Shares trade at 14 times trailing operating cash flow, a 16% discount to their five-year average and below the median for the S&P 1500 technology sector. The stock's P/E ratio of less than 19 is also 15% below its historical norms and 8% below its industry median. Qualcomm is a Focus List Buy and a Long-Term Buy. Apple is a Buy and a Long-Term Buy. Intel is rated A (above average). Amazon.com is rated C (below average).

Corporate roundup

Alaska Air Group ($91; ALK) said increased capacity contributed to a 5% rise in traffic in March. The company's air traffic rose 3% in January and 4% in February. Analysts' profit estimates for the March quarter have drifted higher in the past 30 days, with the consensus currently expecting per-share profits of $1.00, up 61%. Alaska Air is a Buy.

In a report sent to U.S. regulators and in a meeting with a U.S. Senate panel, Comcast ($49; CMCSa) defended its proposed $45.2 billion acquisition of Time Warner Cable ($136; TWC) by arguing that the entry of new online players will help preserve competition in the video market. Together, Comcast and Time Warner Cable would take a 20% to 40% share of U.S. broadband subscribers. Opponents have challenged that the deal would give Comcast too much control over both negotiating programming fees and determining what Americans can watch on TV and online. Comcast is a Buy and a Long-Term Buy.

DirecTV ($79; DTV) reached a deal with The Weather Channel, ending a three-month blackout triggered by a dispute over programming fees. DirecTV agreed to a rate hike of less than a penny per subscriber; it had previously sought to slash the fees paid to the channel. For its part, The Weather Channel agreed to boost its weather coverage and air fewer reality shows. Just days earlier, DirecTV had signed WeatherNation, a channel it picked up during the blackout, to a multiyear contract. DirecTV is a Focus List Buy and a Long-Term Buy.

Rank Changes

Packaging Corp. of America ($68; PKG) is being initiated as a Buy. Shire ($145; SHPG) is being initiated as a Long-Term Buy. Cigna ($81; CI) is being dropped from the Long-Term Buy List. Skyworks Solutions ($36; SWKS) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. Vanguard Short-Term Corporate Bond ($80; VCSH) now accounts for 0.2% of the Buy List and 4.4% of the Long-Term Buy List. We are also making a series of changes to the Monitored List. Check out the supplement for details.

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