Portfolio Review


Rank changes

With the Dow Industrials and Dow Transports dropping below their June lows, the Dow Theory is in the bearish camp. In response, we’re lifting our recommended cash position to a range of 25% to 30%. To align our buy lists with this advice, we’re making the following changes:

On the Buy List, we’re dropping General Mills ($37; GIS) and Oracle ($22; ORCL). Both companies posted decent May-quarter results (see reviews below). But the stocks have among the lowest Overall Quadrix® scores of any of the names on our Buy List, and we’d prefer to emphasize higher-ranked stocks in a potentially adverse market environment. General Mills and Oracle are quality companies, and we feel comfortable holding both as Long-Term Buys for two- to four-year returns.

On the Long-Term Buy List, we’re dropping Oceaneering International ($44; OII) and Transocean ($47; RIG). The stocks have the lowest Overall Quadrix scores of any on our buy lists, and recent weakness in oil prices suggest the operating environment for oilfield services will continue to deteriorate. While cheap relative to historical norms, these stocks seem unlikely to outperform in a bear-market environment. Oceaneering is being dropped from our Monitored List, while Transocean is being downgraded to B (average).

Also, we’re cutting the target weights of all remaining recommendations. On the Buy List, the target weight for each of the remaining 25 stocks is being reduced to 3.0%. On the Long-Term Buy List, the target weight for each of the remaining 32 stocks is being cut to 2.3%. The Focus List always has the same recommended cash position as the Buy List. Unless your trading commissions are very low, it may not be cost-effective to sell shares in all your holdings. So, look to trim your positions in your biggest holdings, using common sense to get most of your positions close to our target weights.

Oracle and General Mills

Oracle ($22; ORCL) grew earnings 30% to $0.60 per share in the May quarter, exceeding the consensus by $0.06. Bolstered by its takeover of Sun Microsystems, Oracle’s revenue jumped 39% to $9.51 billion. Sales of new software licenses rose 14%. Oracle has gained more confidence that Sun, which contributed $400 million in operating income during the quarter, will meet or exceed profit targets for fiscal 2011 and 2012 ending May. The stock bounced on the earnings release but has since retreated to seven-month lows, and earnings estimates for the August quarter have dropped over the past month. Oracle is being dropped from the Buy List but retained as a Long-Term Buy.

General Mills ($37; GIS) said May-quarter profits slipped 5% to $0.41 per share excluding special items, in line with the consensus. Revenue dipped 2% due to lower prices, divestitures, and one less week of sales. Excluding the divestitures and the lost week, sales rose 5%. The top end of management’s profit guidance for fiscal 2011 ending May calls for 8% growth, below the 9% consensus. Separately, General Mills raised its quarterly dividend 17% to $0.28 per share, payable Aug. 2, and announced plans to repurchase up to 100 million shares, representing more than 15% of shares outstanding. While quarterly results and guidance were disappointing, General Mills remains one of the better picks in the food group. The stock is being dropped from the Buy List but retained as a Long-Term Buy.

May-quarter earnings

Accenture ($39; ACN) earned $0.73 per share in the May quarter, up 7% and $0.04 more than Wall Street’s forecast. Sales advanced 8% to $5.57 billion, also above the consensus. For fiscal 2010 ending August, Accenture said it sees per-share profits toward the lower half of its previously stated range of $2.61 to $2.69, roughly in line with the consensus. Accenture is rated B (average).

In the May quarter, Research In Motion ($50; RIMM) reported profits of $1.38 per share, up 41% and exceeding the consensus by $0.04. Yet the shares swooned 11%, and analysts are becoming increasingly concerned about RIM’s competitive position. Revenue rose 24% to $4.24 billion but fell short of RIM’s guidance. BlackBerry shipments jumped 43% and the subscriber base swelled 60% from year-earlier levels, but both metrics were toward the low end of the company’s projections. The BlackBerry phone’s average selling price slipped an estimated 16% to $300, a result of RIM’s renewed efforts to promote smart phones in the consumer market. At 10 times the lowest estimate for fiscal 2011 ending February, RIM’s price reflects plenty of bad news. The company plans to ship two new phones in the August quarter and release a new version of its operating software by the end of September. Research In Motion is a Buy and a Long-Term Buy.

Corporate roundup

Abbott Laboratories ($47; ABT) is shopping the flu-vaccine business it acquired in a $6.6 billion deal for Solvay’s pharmaceutical unit. The division, potentially worth more than $600 million, offers exposure to Eastern Europe, a region with excellent growth opportunities. Abbott is a Buy and a Long-Term Buy . . . Companies in the S&P 500 Index repurchased $55.3 billion of their own shares in the March quarter, up 80% from the same period a year ago. The index’s all-time high is $171.95 billion in buybacks, set in the September quarter of 2007. In the latest quarter, 251 companies participated in buyback programs, up 29% from a year earlier. Most active were IBM ($125; IBM), Wal-Mart Stores ($49; WMT), and Exxon Mobil ($57; XOM), which spent a total of $9.5 billion on their own shares. IBM is a Focus List Buy and a Long-Term Buy. Wal-Mart Stores is a Long-Term Buy. Exxon Mobil is rated B (average) . . . A midstage clinical study found that an experimental Johnson & Johnson ($59; JNJ) diabetes drug, in concert with another drug, improved the control of blood sugar levels and helped with weight loss. J&J is a Long-Term Buy . . . Medtronic ($36; MDT) raised its quarterly dividend 9% to $0.225 per share and also reported that its insulin pump and monitoring device was more effective than injectable treatments at controlling blood glucose levels. Medtronic is rated A (above average).

Financial reform is here

Committees from the U.S. House and Senate hammered out an expansive piece of legislation billed by President Obama as the toughest financial reform since the laws spawned by the Great Depression. Federally insured banks would be limited in their ability to trade derivatives, which could lead to the spin-off of their trading desks. However, intense lobbying by the banking industry helped avoid some of the more draconian proposals.

Both the Federal Reserve and the Securities and Exchange Commission would receive additional regulatory authority. A new oversight council would monitor the financial stability of banks, and regulators would have authority to liquidate financial companies teetering toward collapse. Many financial stocks climbed on the news, suggesting investors had expected even tougher regulations. The bill could be voted into law by July 4.


General Mills ($37; GIS) and Oracle ($22; ORCL) were dropped from the Buy List. Transocean ($47; RIG) was dropped from the Long-Term Buy List and now has a rating of B (average). Oceaneering International ($44; OII) was dropped from coverage.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com