Portfolio Review: April 10, 2017


Lowe's fixes up well

We are upgrading Lowe's ($82; LOW) to the Long-Term Buy List. The second-largest home-improvement retailer, Lowe's is benefiting from the robust housing market. Unlike many retailers, Lowe's also appears well-insulated from Amazon.com ($909; AMZN) because many of its products are large and difficult to ship.  The stock's Overall score of 97 reflects strong operating momentum, a decent valuation, and favorable analyst-revision trends. For fiscal 2017 ended January, Lowe's grew sales 10%, per-share profits 27%, and cash from operations 17%. The stock has rallied 15% in 2017 but still looks attractively valued at 20.5 times trailing earnings, versus its five-year average of 22.5.

The retailer's $2.4 billion acquisition of Canadian rival Rona, completed in May, should help support Lowe's growth prospects. The consensus targets April-quarter earnings per share of $1.05, up 21%, on revenue growth of 11%. Per-share profits are projected to rise 16% for the year, followed by 14% growth next year. Encouragingly, analyst estimates have steadily risen in the past 60 days. Yielding 1.7%, Lowe's was previously rated A (above average).

Changes to our Monitored List

Today we're dropping 13 stocks from the Monitored List and adding 16 new ones.

We don't make such wholesale changes often because the Monitored List isn't a portfolio like the Buy List. We designed the Monitored List to track a cross-section of the most important and influential stocks in all market sectors. As such, most of the stocks on the list are large, well-known, and likely to still deserve a place on the list five years from now. The list also contains every stock we recommend — which is part of the reason for today's shake-up.

Many of our recommended stocks are midsize or niche companies that only make the Monitored List because of our fondness for them. Of course, no stock remains a Buy forever. Today we're purging some of those former favorites from the list, along with a few foreign stocks that have fallen on hard times. In exchange, we're adding some large, vibrant companies that add depth to our market coverage.

Our Monitored List contains 186 stocks, each ranked A (above average), B (average), or C (below average). Check out the list here.

Media & leisure update

According to the Recording Industry Association of America, the U.S. music industry's revenue rose 11% to $7.7 billion in 2016, its first growth in more than a decade. But as sales for CDs and digital downloads continued to dwindle, demand for streaming music flourished. Streaming music accounted for 51% of the U.S. music industry's revenue last year, up from 34% in 2015. Apple ($144; AAPL) is taking a larger share of this growing market. Apple's music service had 40.7 million mobile users in February, said industry researcher Verto, topping rivals Spotify (36.2 million users) and Pandora (30.4 million). In other news, Apple has reportedly approached HBO, Showtime, and Starz about offering a bundle of premium TV networks as a stand-alone product.

Separately, rumors swirled that supplier problems could postpone the launch of Apple's next iPhone until October or November. In each of the past five years, Apple has unveiled its new iPhone in the first two weeks of September and begun selling the device near the end of the month. Prior to that, Apple launched the iPhone 4S in first half of October 2011. Apple is a Buy and a Long-Term Buy.

Scrambling to stem the tide of lost advertisers, Alphabet ($849; GOOGL) says it has improved its ability to identify offensive YouTube videos and disable nearby ads. The company is also launching new tools to help advertisers monitor where their ads appear on YouTube. Last month, several clients began to boycott YouTube after their ads were placed near offensive videos. Fallout over the advertising flap has cost YouTube $750 million in sales this year, estimates analyst firm Nomura Instinet, or less than 1% of Alphabet's 2016 revenue. Alphabet is a Focus List Buy and a Long-Term Buy.

Major internet providers AT&T ($42; T), Comcast ($37; CMCSa), and Verizon Communications ($49; VZ) pledged to not sell customers' online-browsing data, after the Trump administration loosened rules for internet privacy. Separately, Comcast will unveil new details of its wireless service on April 6, after our deadline. In September, Comcast announced that it planned to launch in the middle of 2017 a wireless service that will run on its 15 million Wi-Fi hotspots and airwaves leased from Verizon. Comcast is a Buy and a Long-Term Buy. AT&T and Verizon are rated B (average).

Disney ($113; DIS) plans to spend an extra $450 million to help fund the expansion of its Hong Kong theme park over the next six years. The company announced plans in November to inject $1.4 billion in the struggling Hong Kong Disneyland, its smallest park. Disney is a Long-Term Buy.

Health-care review

A U.S. patent board ruled in Biogen's ($270; BIIB) favor, allowing the drugmaker to avoid paying a 10% royalty on Tecfidera sales to Forward Pharma, starting in 2021. In January, Biogen hedged against a potential defeat by agreeing to pay Forward Pharma $1.25 billion to license patents covering multiple sclerosis drugs. Tecfidera, a treatment for multiple sclerosis, generated $3.97 billion in sales last year, roughly 35% of Biogen's total revenue. Biogen is a Buy and a Long-Term Buy.

CVS Health ($77; CVS) failed to renew a contract for providing specialty pharmacy services for the Blue Cross and Blue Shield Federal Employee Program (FEP). The current contract, generating about $2.8 billion in annual sales, is scheduled to end at the end of 2017. Although the news is disappointing, CVS says the lost contract shouldn't have a material effect on its 2018 operating profit. CVS will continue to provide retail, mail, and clinical services for FEP, as part of a separate contract running through 2018. CVS, expected to deliver $184 billion in sales this year, is a Long-Term Buy.

Corporate roundup

Scana ($67; SCG) and Southern ($50; SO) are separately building the first new U.S. nuclear plants in more than 30 years. However, Westinghouse Electric, a major contractor for both projects, has filed for bankruptcy protection, threatening to disrupt construction. Scana and Southern have hired advisers to help them recoup possibly billions of dollars in cost overruns. Both companies have balked at renegotiating their contracts with Westinghouse. Scana says it would still prefer to complete the project, located in South Carolina, though it hasn't ruled out abandoning the construction. Scana is a member of our Top 15 Utilities Portfolio. Southern is rated A in our Utility Update.

Under its $1.2 billion stock buyback plan, VMware ($91; VMW) agreed to repurchase $300 million of its shares from Dell Technologies by Aug. 4. Recall, Dell paid about $67 billion in September to acquire EMC, which held an 83% stake in VMware's common stock. VMware has bought an additional $500 million of stock from Dell since the end of January. VMware is a Focus List Buy and a Long-Term Buy.

U.S. automobile sales were unexpectedly weak in March, as heavy promotional activity failed to spur consumer demand. Annualized car sales slowed to 16.6 million, down 1% from a year earlier and well off analyst estimates of 17.2 million. General Motors ($34; GM) reported 2% sales growth, while Ford Motor ($11; F) suffered 7% lower sales and Toyota Motor ($106; TM) posted a 5% decline. Lear ($133; LEA) shares fell on the news but remain up 30% over the past 12 months. Lear is a Focus List Buy and a Long-Term Buy. GM is rated A (above average). Ford and Toyota are rated B (average).

Rank Changes

Lowe's ($82; LOW) is joining the Long-Term Buy List. We also made a number of changes to the Monitored List.

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