Portfolio Review


New names and rank changes

Both Gilead Sciences ($122; GILD), reviewed in Quadrix Spotlight, and Comcast ($60; CMCSa), reviewed in Analysts' Choice, are joining the Focus List. Both were already rated Buy and Long-Term Buy. The other rank changes are as follows:

New stocks and upgrades

Community Health Systems ($55; CYH), which operates about 200 hospitals in 29 states, is being initiated as a Buy and a Long-Term Buy. Per-share profits, sales, and operating cash flow all rose more than 35% in the 12 months ended March. The $7.3 billion acquisition of Health Management Associates in January 2014 and an influx of newly insured patients via federal health reform contributed to recent growth. Same-hospital admissions are on the rise.

Community Health has a fairly large presence in states that rely on the federal government to run their health exchanges. That means the stock should rally if the Supreme Court votes to keep health subsidies for states that rely on federal exchanges. Should the subsidies be struck down, management says operating profits could slip 2% to 3% in the absence of a nationwide fix. Shares trade at 14 times estimated 2015 earnings, a 27% discount to the median for S&P 1500 health-care facility stocks.

Disney ($114; DIS) is being upgraded to the Long-Term Buy List. At 24 times trailing earnings, the shares are not cheap. But we like Disney's fundamentals: sales growth of at least 7% in seven straight quarters, cash from operations up in eight of the past nine quarters, and expansion of profit margins over the last four years.

Disney's business model allows it to pay up for premium entertainment franchises — it has acquired Pixar, Marvel Entertainment, and Lucasfilm over the past decade — because it milks content through retail stores and theme parks. Per-share profits are projected to rise 12% in the June quarter and 29% in the September quarter, which would mark nine straight quarters of double-digit growth. In June, Disney declared a first-half dividend of $0.66 per share payable July 29, up 15% on an annualized basis. The company, which has long paid dividends annually, is switching to a semiannual schedule.

Goodyear Tire & Rubber ($31; GT), the largest U.S. manufacturer of tires, is being initiated as a Long-Term Buy. Goodyear, an aggressive pick that tends to deliver volatile results, seems positioned for growth over the next one to three years and still looks cheap, considering its Value rank of 94.

Despite declining sales, operating profit margins are expanding and cash from operations has increased in three straight quarters. In June, Goodyear said it will dissolve a global joint venture, a move that should reduce sales but boost per-share profits.

HCA Holdings ($83; HCA) is being added to the Focus List. The stock is hitting all-time highs yet looks attractively valued from multiple angles. The stock scores 67 or higher for more than half of the factors that comprise its Value rank of 76. Cash from operations jumped 48% and free cash flow 95% in the 12 months ended March. The upcoming Supreme Court decision on federal health subsidies presents some risk to the stock, but HCA's business would have limited exposure to an adverse ruling. HCA was already a Buy and a Long-Term Buy.

ADT ($34; ADT) is being removed from the Focus, Buy, and Long-Term Buy lists. The stock has slumped 16% since we first recommended it in the March 30 issue. ADT posted disappointing March-quarter results, and eroding earnings estimates bode poorly for the current quarter. The stock looks cheap with a Value rank of 89 but could be dead money without a rebound in profit growth. With an Overall rank of just 66, ADT is being dropped from coverage and should be sold.

Aetna ($128; AET) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. The stock has surged 44% so far in 2015, including 8% in June alone. Aetna's valuation now appears somewhat stretched following the wave of merger speculation in the managed-care industry.

UnitedHealth ($119; UNH) has reportedly approached Aetna about a deal, but there is uncertainty over whether Aetna is a takeover target or potential acquirer. Aetna has proposed to acquire Humana ($184; HUM). Meanwhile, Anthem ($168; ANTM) reaffirmed its $47.5 billion bid to acquire Cigna ($166; CI), which itself appears interested in Humana.

Given the uncertainty over its takeover prospects, a rich valuation, and middling Overall score of 68, Aetna no longer ranks among our very favorites  for year-ahead gains. Aetna remains a Buy and Long-Term Buy. Anthem, Cigna, and UnitedHealth are rated A (above average).

We are dropping Schlumberger ($88; SLB) from the Long-Term Buy List; it retains its Monitored List rating of A (above average). Schlumberger remains our favorite energy stock, but the energy sector has rallied ahead of any rebound in fundamentals. Up 16% from its January low, Schlumberger now trades at a lofty 25 times estimated 2015 earnings. Earning an Overall rank of 68, the stock no longer ranks among our top picks for two- to three-year gains and should be sold.

Travelers ($99; TRV) is being removed from the Long-Term Buy list and is now rated B (average).The Overall score has fallen to 72, hurt by slowing operating momentum and declining profit estimates. Cash from operations has fallen more than 40% and lagged net income in each of the past two quarters. The stock should be sold.

Corporate Roundup

Kroger ($73; KR) grew April-quarter earnings per share 15% to $1.25, topping the consensus by $0.03. Total revenue was essentially flat at $33.05 billion, though it rose more than 6% excluding fuel. Same-store sales excluding fuel rose 5.7%, topping expectations. Kroger also raised its full-year guidance for same-store sales excluding fuel, now projecting growth of 3.5% to 4.5%. Kroger is a Focus List Buy and a Long-Term Buy.

Skyworks Solutions ($108; SWKS) doubled its quarterly dividend to $0.26 per share, payable Aug. 27. Skyworks is a Buy and a Long-Term Buy.

Teva Pharmaceutical Industries ($59; TEVA) has increased its stake in Mylan ($71; MYL) to 4.6%, the  threshold required to challenge Mylan's takeover defense in the Dutch courts. Mylan is a Buy and a Long-Term Buy.

Rank Changes

Comcast ($60; CMCSa), HCA Holdings ($83; HCA), and Gilead Sciences ($122; GILD) are being added to the Focus List. Aetna ($128; AET) is being dropped from the Focus List but remains a Buy and a Long-Term Buy. ADT ($34; ADT) is being dropped from the Focus, Buy, and Long-Term Buy lists and from coverage. Community Health Systems ($55; CYH) is being initiated as a Buy and a Long-Term Buy. Disney ($114; DIS) and Goodyear Tire & Rubber ($31; GT) are joining the Long-Term Buy List. Schlumberger ($88; SLB) and Travelers ($99; TRV) are being dropped from the Long-Term Buy List. In the wake of these changes, Vanguard Short-Term Corporate Bond ($80; VCSH) ETF accounts for 14.5% of the Buy List and 14.7% of the Long-Term Buy List.

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