Portfolio Review: January 4, 2016


Star Wars rockets to box-office record

At this rate, The Force Awakens, Disney's ($106; DIS) new addition to the Star Wars epic saga, might become popular enough to reach theatergoers in a galaxy far, far away. The movie's global box-office take topped $1 billion in just 13 days, one day quicker than Jurassic World, the mega-hit released in June by rival Comcast's ($57; CMCSa) Universal Studios. Disney's feat sounds even more astounding when you consider the Star Wars movie won't reach China, the world's second-largest movie market, until Jan. 9.

The new film also set other records by raking in $529 million in its first weekend and $100 million in IMAX theater ticket sales in its first 10 days. While Disney stands to benefit the most from The Force's success, both through ticket sales and such ancillaries as DVDs and merchandise, genuine blockbusters can lift the entire industry. Analysts already expected big things from The Force Awakens, but these sales figures could provide further upside to Disney's profits; consensus targets for fiscal years ending September 2016 and 2017 have already risen 1% over the last 60 days.

By one account, The Force Awakens had to generate $1.5 billion in ticket revenue to be considered a success, taking into account the $4 billion Disney paid for the Star Wars franchise. Of course, with the box office already topping $1 billion, a $1.5 billion milestone seems well within reach, and the movie could make a run at the global record of nearly $2.8 billion, held by Avatar. According to CNBC, Disney will keep more than 60% of ticket revenue, well above the estimated average of 53% since 2008. Disney is a Long-Term Buy. Comcast is a Focus List Buy and a Long-Term Buy.

California won't crash self-driving ambitions

Alphabet ($790; GOOGL) is reportedly talking with Ford Motor ($14; F) about forming a partnership to develop self-driving cars. According to published reports, Alphabet and Ford could announce their carpool as early as the first week in January, at the International Consumer Electronics show in Las Vegas.

The news comes less than a month after California's Department of Motor Vehicles proposed a ban on automated vehicles that lack a human driver. In 2012, California passed a law that allowed self-driving cars — provided they carried a passenger as an emergency driver. Perhaps the fact that that automated cars now seem more like an inevitability than science fiction spurred the state to consider stricter rules.

The regulations proposed in December require third-party testing of the automobiles, training for car buyers, and a data recorder in each car. While the rules make sense for safety, they effectively ban cars without human drivers, which kind of defeats the purpose of a self-driving car.

Alphabet slammed the proposal. The company has said it hopes to make cars without steering wheels or pedals, about as automated as you can get. However, California's proposal must go through several steps before it becomes law, and other states haven't proposed such speed bumps. Regardless of what happens in California, laws often change over time. As more and more automakers build features such as automatic parking or braking into existing cars, lawmakers should adapt to the new reality.

Researcher BI Intelligences estimates 10 million self-driving cars — either entirely automated or with features that accelerate, brake, or steer without driver assistance — will cruise U.S. roads by 2020. While some may quibble with the numbers, aggressive investment in self-driving cars by Alphabet and China's Baidu ($192; BIDU) — not to mention Alphabet's reputed Ford partnership — suggest major players on the technology side expect legal issues to sort themselves out over time.

Traditional carmakers also have their feet on the gas. Tesla Motors ($238; TSLA) offers Autopilot technology in some of its cars while General Motors' ($34; GM) Cadillac expects to launch its own Super Cruise feature in a year or so. European and Japanese rivals are also racing toward the automated prize. Alphabet is a Focus List Buy and a Long-Term Buy. Ford and GM are rated A (above average).

Corporate report

Community Health Systems ($26; CYH) announced plans to acquire majority stakes in two Indiana hospitals. After this deal, Community would operate 11 hospitals in Indiana. Community shares rallied on the deal news but remain down 52% over the last 12 months, hurt by fears about rising costs, sluggish demand, and uncertainty about Medicaid-insurance expansion. Community, a Buy and a Long-Term Buy, trades at less than seven times the $3.83 per share expected in 2016, a valuation that already reflects plenty of bad news.

J.P. Morgan Chase ($67; JPM) plans to increase the rate it pays on deposits made by some big clients this month, becoming the first of the big banks to announce such a move since the Federal Reserve raised its overnight lending rate Dec. 16. J.P. Morgan isn't expected to raise rates paid to retail customers.

In other news, J.P. Morgan said it will pay $307 million to settle U.S. charges that it failed to disclose conflicts of interest when selling wealthy clients its own proprietary investment products. Separately, J.P. Morgan agreed to pay $150 million to settle an investor lawsuit claiming the bank tried to hide about $6.2 billion in trading losses linked to the "London Whale" fiasco. J.P. Morgan Chase, yielding 2.6%, is a Buy and a Long-Term Buy.

U.S. energy producers will begin exporting crude oil this month, less than a month after Congress lifted a ban on exports in place since 1975. Since the end of the ban, the gap in price between U.S. and foreign crude oil has closed. Brent crude, the benchmark used pretty much everywhere outside the U.S., has traded at a premium for most of the last six years. Brent crude averaged a price 12% higher than U.S. crude (West Texas Intermediate) and at times more than 30% higher. As of Dec. 29, the Brent price was less than 2% above the WTI price.

At first blush, the new export rules would seem to favor producers, which gain access to new markets, at the expense of refiners, which lose their access to the cheapest prices for raw materials. However, given that the combination of bloated oil supplies and modest global demand is keeping oil prices low worldwide, we don't yet know how much benefit U.S. producers will reap, or how cost pressures will hit refiners.

Rising consumer confidence should encourage retailers

Consumer sentiment improved more than expected in December, according to the Conference Board's Consumer Confidence Index. Americans gained faith in their own economic prospects now and for the future, though they became slightly more pessimistic about business conditions. That improvement in sentiment likely contributed to strong retail sales.

According to a MasterCard ($99; MA) research report, retail sales excluding automobiles and gasoline rose 7.9% from Black Friday through Christmas Eve. Excluding autos but including gas, sales rose 6.4%, up from 5.5% in the same period a year ago. E-commerce sales jumped 20%, providing much of the unexpected strength. The U.S. Census Bureau will report retail sales for December on Friday, Jan. 11.

Rank Changes

No changes were made this week in Dow Theory Forecasts.

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