Portfolio Review


Whiting off Focus, EOG off Buy, LT Buy

EOG Resources ($88; EOG) has seen its Overall score drop to 82, hurt by lower scores for Earnings Estimates and Performance. While we remain optimistic on the company's long-term prospects for production growth, EOG is only marginally free-cash-flow positive. Unless oil prices rebound, the company may be forced to slow its capital spending, so consensus expectations of 10% profit growth in 2015 may prove optimistic. Using the lowest estimate for 2015 earnings, EOG is the most expensive of our energy stocks. EOG is being dropped from the Buy and Long-Term Buy Lists, as the stock is our least favorite pick in the group. EOG is now rated A (above average).

Whiting Petroleum ($57; WLL) is also vulnerable to production shortfalls, as the company has negative free cash flow. But the stock is cheap relative to peers and its own history, and its pending all-stock purchase of Kodiak Oil and Gas ($10; KOG) will make Whiting the leading player in North Dakota's Bakken shale oil formations. Whiting is being dropped from the Focus List but retained as a Buy and a Long-Term Buy.

Quanta sold last week

Quanta Services ($31; PWR) was downgraded on the Oct. 10 hotline, in part because of weak Quadrix scores and concerns that potential spending cutbacks by energy companies could pressure 2015 earnings. The stock is no longer being monitored and should be sold.

Energy review

Global oil prices have dipped to a four-year low amid surging supply and lackluster demand, triggering a sharp decline among shares of energy-related companies. Saudi Arabia and other major exporters have cut their official prices in a battle for market share, and some analysts speculate Saudi Arabia would like to see prices low enough to curtail North American shale-oil production.

Heading into this week, our Buy List had 13.4% in energy stocks, versus 10.2% for the Long-Term Buy List and 9.3% for the S&P 500 Index. While our recommendations hinge mostly on the merits of individual stocks rather than top-down analysis, the sell-off in oil prices has already begun to impact the Quadrix scores of our energy names.

Our picks in oilfield services, Halliburton ($51; HAL) and Schlumberger ($89; SLB), have seen their profit estimates for 2015 trimmed only slightly. But both stocks are likely to face negative profit-estimate revisions unless oil prices rebound. Still, spending on North American energy projects should continue to grow if oil prices stabilize near current prices. Both stocks look attractive relative to long-term norms for price/earnings and price/cash flow.

September-quarter earnings

Wells Fargo's ($48; WFC) earnings per share rose 3% to $1.02, in line with the consensus estimate. Revenue increased 4% to $21.21 billion, topping the consensus, on 5% growth from community banking and 7% growth at the wealth, brokerage, and retirement unit. Mortgage originations declined 40%, with more than two-thirds of the amount purchases rather than refinances. The company expects mortgage originations to fall further in the December quarter. However, commercial and industrial loans jumped 13%, while total average deposits climbed 10%. Net interest margin slipped to 3.06% from 3.39% a year earlier. Wells Fargo is a Focus List Buy and a Long-Term Buy.

J.P. Morgan Chase ($56; JPM) earned $1.36 per share, down 4% from the year-ago quarter that excluded massive legal costs, missing the consensus by $0.02. Including the costs, J.P. Morgan lost $0.17 per share in the year-earlier quarter. Revenue rose 5% to $24.25 billion, ahead of expectations, with growth driven by gains of 9% from asset management and 7% from the corporate and investment bank. Home-loans remain weak, with mortgage originations slumping 48% year-over-year, though they were up 26% from the June quarter. Core net interest margin was 2.59%, slightly below the year-ago quarter's 2.60%. J.P. Morgan Chase is a Long-Term Buy.

Corporate roundup

Skyworks Solutions ($50; SWKS) shares surged after management raised its September-quarter guidance. Skyworks now expects per-share profits of $1.08, implying 69% growth and exceeding the consensus of $1.01 at the time of the announcement. Sales are projected to jump 51% to $718 million, compared to the consensus of $679 million. Semiconductor stocks had been under pressure since Microchip Technology's ($38; MCHP) Oct. 9 profit warning and assertion that the semiconductor market had entered a correction. Skyworks, scheduled to report quarterly results Nov. 6, is a Buy and a Long-Term Buy.

U.S. regulators approved Harvoni, a new pill made by Gilead Sciences ($96; GILD) to cure hepatitis C. Harvoni, comprised of Gilead's blockbuster Sovaldi and another drug, should be more effective and carry fewer side effects than the current regimen of Sovaldi plus two older drugs. Harvoni has a price tag of $94,500 for a 12-week treatment cycle, though Gilead says nearly half of patients can be cured after eight weeks, resulting in a cost of $63,000. Sovaldi costs $84,000 for a 12-week course. Gilead Sciences is a Long-Term Buy.

Merger update

Qualcomm ($71; QCOM) agreed to pay $2.5 billion in cash for CSR ($55; CSRE), a semiconductor company based in the U.K. best known for making chips for products that use Bluetooth wireless technology. Qualcomm is a Long-Term Buy.

AbbVie ($55; ABBV) says it is reconsidering plans to acquire Ireland-based Shire ($170; SHPG) for $54 billion in cash and stock. New U.S. rules have made it more difficult for acquirers to realize tax benefits from buying foreign companies. Less than a month ago, AbbVie had emphasized the deal's merits rested on strategic — not tax — benefits, and its sudden waffling may be a tactic to renegotiate a lower takeover price. But the new U.S. stance on so-called tax inversions has dampened both the likelihood of future deals and the price foreign companies could fetch. Ireland is revamping its own tax code, with plans to eliminate by 2020 tax shelters used by Apple ($98; AAPL) and Google ($541; GOOGL). AbbVie is rated B (average). Both Apple and Google are Focus List Buys and Long-Term Buys.

U.S. railroad stocks rallied on a report that CSX ($33; CSX) rejected a takeover offer from Canadian Pacific Railway ($187; CP) earlier this month. While the takeover interest is encouraging, any deal combining large railroads would draw a lot of regulatory attention. CSX is rated A (above average).

Hewlett-Packard ($33; HPQ) reportedly called off merger talks with EMC ($27; EMC) after the two parties failed to settle on a price. EMC is a Long-Term Buy. H-P is rated A (above average).

Rank Changes

EOG Resources ($88; EOG) is being dropped from the Buy and Long-Term Buy List. Whiting Petroleum ($57; WLL) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. On Oct. 10, Quanta Services ($31; PWR) was dropped from the Buy and Long-Term Buy lists and from coverage. Vanguard Short-Term Corporate Bond ETF ($80; VCSH) now accounts for 12.5% of the Buy List and 13.2% of the Long-Term Buy List.

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