Portfolio Review


Holidays revive retailers

U.S. retail sales from the day after Thanksgiving to Christmas Eve climbed 5.5%, according to MasterCard ($87; MA). Among the strongest product groups were jewelry, women's apparel, furniture, and casual dining. Electronics sales were surprisingly light. The National Retail Federation has forecasted a 4% rise in retail sales in November and December, which would mark the largest gain since 2011. Shippers FedEx ($175; FDX) and UPS ($112; UPS) also reported strong volumes. Low gasoline prices and an improving labor market were credited for the retail growth, which bodes well for Foot Locker ($56; FL) and Macy's ($65; M).

Barron's ranked Macy's as one of its top 10 stocks for 2015, which may have helped push the shares to an all-time high in the final days of December. Since the end of October, the stock has climbed 13%. Yet the shares earn a Value score of 79 and trade at 15 times trailing earnings, a 4% discount to their 10-year average and 27% below the median for S&P 1500 consumer-discretionary stocks. The retailer's January-quarter profit estimates have also ticked higher in the past 30 days, with the consensus now projecting 4% growth. Foot Locker is a Focus List Buy and a Long-Term Buy. Macy's is a Long-Term Buy. FedEx is rated A (above average). UPS is rated B (average).

Technology update

Apple ($113; AAPL) has reportedly entered talks with British banks to bring Apple Pay to the United Kingdom, with the service possibly getting rolled out in the first half of 2015. In other news, Apple products accounted for 51% of new mobile devices activated around the world from Dec. 19 to Dec. 25, according to industry researcher Flurry. Samsung's share was 18%, and Microsoft ($47; MSFT) finished third with 6%. Among individual devices, the iPhone 6 experienced the most activations, while the larger iPhone 6 Plus ranked fifth. Apple is a Focus List Buy and a Long-Term Buy. Microsoft is rated A (above average).

Gmail, Google's ($535; GOOGL) e-mail service, was temporarily blocked in China. Google claims the outage, which lasted about four days, was not caused by any glitches on its end. Many of Google's other online services have also faced disruptions in China since June. China holds strict control over the internet, and Chinese leaders have said they want to encourage the development of the country's internet companies. China has about 667.5 million people with home access to the internet — more than double the number of U.S. users, according to Live Internet Stats. About 3.03 billion people use the internet globally, roughly 40% of the global population, up from 20% in 2007. Google is a Buy and a Long-Term Buy.

Micron Technology ($35; MU) has rebounded within 3% of the 12-year high reached in early December, helped by an improving 2015 outlook. Demand is rising for the type of memory components that Micron produces. Yet supplies remain tight, partly due to disciplined capacity expansion within the industry — and that could give Micron pricing power to improve profitability. Analyst profit estimates for fiscal 2015 ending August have risen in the past 30 days, with the consensus currently projecting 16% growth. Micron, which earns the maximum Quadrix Overall score of 100, is a Buy and Long-Term Buy.

Financial review

Since mid-October, the average financial stock in the S&P 1500 Index has rallied 13.8%. Helping financial stocks are their solid — though not spectacular — growth outlook. Banks should benefit from continued loan growth, while insurers should see gains in premiums and favorable pricing. Higher assets under management and advisory fees from merger and acquisitions should help investment-banking firms. For full-year 2015, the median financial stock's per-share profits are expected to increase 9%, up from 7% for 2014 but below the 12% growth for all S&P 1500 stocks.

Financials stack up well in Quadrix, where the sector covers 291 companies across 26 industry groups in the S&P 1500. The average Overall score is a solid 62, and 14% score above 90 — the highest percentage of the 10 broad sectors. The average Value score is 56. Financials trade at a reasonable 16 times estimated 2015 earnings, which is cheaper than all but the energy sector. We recommend seven financials on the Buy and Long-Term Buy lists, with our picks sporting an average Overall score of 86 and Value score of 75.

J.P. Morgan Chase ($63; JPM) finished first among banks for advising on global bond deals for the fourth straight year, according to Dealogic. J.P. Morgan helped clients issue $415 billion worth of bonds in 2014, nearly a 7% share of global deals. About $6.2 trillion of debt was issued in 2014 — only in 2012 has more debt been issued, based on data going back to 1995. J.P. Morgan is a Long-Term Buy.

In a lawsuit against Wells Fargo ($55; WFC), the National Credit Union Administration, an agency that oversees federal credit unions, accused the bank of neglecting its duties as trustee of $2.4 billion in mortgage-backed securities that eventually soured. The same agency has filed similar lawsuits against Bank of America ($18; BAC) and U.S. Bancorp ($46; USB). Wells Fargo is a Focus List Buy and a Long-Term Buy. U.S. Bancorp is a Long-Term Buy. Bank of America is rated B (average).

Corporate roundup

In the past week, shares of Gilead Sciences ($95; GILD) have bounced back 7% from the drubbing they received when Express Scripts ($86; ESRX) said it would eliminate coverage of the company's hepatitis C drugs in most cases. Analysts have stood by the stock, noting that Gilead still seems capable of maintaining a dominant share of the hepatitis C market and should be able to cut deals with other pharmacy-benefit managers without sacrificing too much on pricing. In other news, Gilead expanded its pact with Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson ($105; JNJ) for manufacturing and marketing an experimental HIV treatment in most countries. Gilead, earning an Overall rank of 96, remains a Long-Term Buy. Express Scripts is rated A (above average). J&J is rated B (average).

Walgreen ($76; WAG) grew November-quarter earnings per share 13% to $0.81 excluding special items to top the consensus by $0.06. Revenue advanced 7% to $19.55 billion as same-store sales climbed 5.7%. Walgreen said its share of the retail-pharmacy market slipped to 19.0% from 19.4% in the year ago quarter, offering more evidence that CVS Health ($98; CVS) is taking share. Walgreen is rated B (average). CVS is a Buy and a Long-Term Buy.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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