Portfolio Review: April 24, 2017


Rank changes

As the brunt of earnings season nears, we reviewed our rankings and made several adjustments to our buy lists. Lowe's ($82; LOW), featured as the Analysts' Choice, joins the Buy List. The stock is also a Long-Term Buy. The other rank changes are as follows:


Cruise-operator Carnival ($59; CCL) is being added to the Focus List. The stock has rallied 13% since we first recommended Carnival in the Nov. 28 issue, outpacing the 6% advance by the S&P 1500 Index. More importantly, the shares appear to have room to run higher following Carnival's impressive February-quarter results. In the weeks since that report, analyst estimates have risen for fiscal 2017 ending November, with the consensus now projecting 7% higher per-share profits. Shares still look cheap at less than 16 times estimated 2017 profits, versus a median of 19 for S&P 1500 hotel, resort, and cruise-line stocks. Carnival is also a Long-Term Buy.

We are upgrading drugmaker Celgene ($123; CELG) to the Focus List. Celgene grew per-share profits, revenue, and operating cash flow more than 20% last year. The stock earns a modest Value score of 48 but looks cheap versus peers. At 17 times estimated 2017 earnings, Celgene shares trade 20% below the median S&P 1500 biotech stock. For the March quarter, Celgene is expected to report 24% higher per-share profits on 21% revenue growth. Scheduled to report its results on April 27, Celgene is also a Long-Term Buy.

Facebook ($142; FB), scoring above 60 for five of six Quadrix categories, joins our Buy List. Digital advertising appeared robust in the March quarter. Facebook's user engagement has never been stronger, positioning the company to take a larger share of advertisers' spending. Facebook has also fended off competition by swiftly incorporating new video and camera features into its social-network platform. The stock earns a Value rank of just 32. But its forward P/E to five-year estimated profit growth (PEG ratio) is just 0.9, ranking among the cheapest 20% of stocks in our research universe. Facebook is also a Long-Term Buy.


EQT Midstream Partners ($77; EQM) is being dropped from the Buy List but remains a Long-Term Buy. A master limited partnership (MLP), EQT Midstream operates a network of storage facilities and pipelines. The stock has traded sideways for nearly a year, and its growth prospects look muted, with per-share profits projected to rise 5% in 2017 and 1% in 2018. But the stock's ability to deliver steady dividend growth remains attractive for income investors with long-term time horizons. EQT Midstream is also a member of our Top 15 Utilities portfolio.

FedEx ($184; FDX) is being removed from the Focus and Buy lists. We have become more cautious on FedEx given its mixed February quarter, deteriorating Quadrix scores, and soft share-price action. FedEx's sluggishness coincides with a spate of disappointing results from truckers and transportation-logistics companies. Yet we still like FedEx's long-term prospects, especially as the retail industry undergoes a structural shift that favors online shopping. FedEx remains a Long-Term Buy.

We are pulling the plug on Biogen ($272; BIIB). The stock earns an Overall score of 94, and the company recently won a favorable ruling involving its multiple sclerosis drug Tecfidera. But our concerns center on Biogen's ability to deliver new products to support growth. Sales of a new drug for spinal muscular atrophy have been soft, possibly due to its $750,000 price tag for the first year. Setbacks with Biogen's pipeline have also put a lot of pressure on efforts to develop a treatment for Alzheimer's disease, which has had a high failure rate for drugmakers. Adding to our pessimism, analyst profit estimates for both 2017 and 2018 have steadily eroded over the past 90 days. The stock is being dropped from the Buy and Long-Term Buy lists. Biogen is now rated B (average) and should be sold.

Earnings season kicks off


Several of the largest U.S. banks posted sharply higher trading revenue as investors reshuffled their portfolios to account for the Federal Reserve's March rate hike, its second such move in three months. But enthusiasm for the otherwise strong results was tempered by some concern over decelerating loan growth. Rising interest rates sapped demand for mortgages, while rising defaults on auto loans caused banks to impose more stringent lending standards. Plus, lawmakers have struggled to advance initiatives that would encourage more lending.

J.P. Morgan Chase ($84; JPM) reported March-quarter earnings per share of $1.65, up 22% and $0.13 above the consensus. Revenue, up 6% to $25.59 billion, also topped expectations. Trading revenue jumped 13% to $5.82 billion. Net interest margin was 2.33%, rising for the fourth time in five quarters to reach its highest level since the March 2013 quarter.

J.P. Morgan's average core loans increased 9%, down from 12% growth in the December quarter and 17% growth in the year-ago quarter. Wells Fargo ($52; WFC) said its average loans rose 4%, versus 6% growth in the December quarter.

Citigroup ($58; C) lowered its 2017 expectations for loan expansion after its global consumer operations generated 8% growth last quarter. Signs of slowing loan growth could portend weakness at regional banks, which tend to lack the trading businesses of their larger peers. Citizens Financial Group ($34; CFG) was slated to post its quarterly results on April 20, followed by Zions Bancorp ($40; ZION) on April 24, both after our deadline. J.P. Morgan is a Buy and a Long-Term Buy. Citizens and Zions are rated Focus List Buy and Long-Term Buy. Citigroup is rated A (above average). Wells Fargo is rated B (average).


Lam Research ($136; LRCX) reported March-quarter earnings per share of $2.80, up from $1.18 earned in the year-ago quarter. The consensus had projected earnings of $2.55 per share. Revenue surged 64% to $2.15 billion, while operating cash flow more than doubled to $423 million. The midpoints of management's June-quarter guidance ranges call for per-share profits of $3.00, up 67%, on revenue of $2.3 billion, up 48%. Both targets topped analyst expectations. The strong report pushed Lam shares to a record high. Lam is a Focus List Buy and a Long-Term Buy.

Corporate roundup

Alphabet ($857; GOOGL) formed partnerships with five banks, including Bank of America ($23; BAC), that will directly link the Android Pay mobile-payment application to users' bank accounts. In other news, Alphabet launched two mobile applications in India that let users order home services and food delivery from their smartphones. Alphabet is a Focus List Buy and a Long-Term Buy. Bank of America is rated A (above average).

Verizon Communications ($49; VZ) CEO Lowell McAdam said he would consider merger deals from CBS ($69; CBS), Comcast ($38; CMCSa), and Disney ($114; DIS). Comcast could be a natural fit, considering its push into wireless service and partnership to use Verizon's network. But Comcast's balance sheet already contains $61.05 billion in debt, versus just $3.40 billion cash. Debt also heavily outweighs cash for CBS and Disney.

The industry is awaiting word from U.S. regulators on AT&T's ($40; T) proposed $85.4 billion acquisition of Time Warner ($100; TWX). But any merger with Verizon would be on an entirely different scale. Verizon ranks among the 20 largest companies in the S&P 500 Index, with a market value of $199.49 billion. CBS is a Focus List Buy and a Long-Term Buy. Comcast is a Buy and a Long-Term Buy. Disney is a Long-Term Buy. AT&T, Time Warner, and Verizon are rated B (average).

Rank Changes

Carnival ($59; CCL) and Celgene ($123; CELG) are joining the Focus List. Lowe's ($82; LOW) and Facebook ($142; FB) are being added to the Buy List, while FedEx ($184; FDX), EQT Midstream Partners ($77; EQM), and Biogen ($272; BIIB) are coming off the list. Biogen is being dropped from the Long-Term Buy List as well.

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