Portfolio Review


List review

Our quest to improve our buy lists is never-ending. This week, we are making several changes to the Focus List, Buy List, and Long-Term Buy List.


We are adding Agilent Technologies ($41; A), already a Buy and a Long-Term Buy, to the Focus List. First upgraded in the Dec. 27 issue of Dow Theory Forecasts, Agilent makes instruments and measurement devices for the electronics and life-sciences markets. Surging profit estimates suggest Agilent can extend its strong operating momentum. Sales have jumped 22% over the past year, while free cash flow more than doubled to $597 million. Wall Street sees Agilent's per-share earnings climbing 24% in fiscal 2011 ending October and 13% in fiscal 2012.

Ameriprise Financial ($59; AMP) is being added to the Focus List. The company's financial-planning services target clients with more than $100,000 of investable assets. Per-share profits, expected to grow at a 14% annual rate over the next five years, should benefit from the retirement of baby boomers and renewed interest in investments. Analyst profit estimates are trending higher. Earning a Quadrix Overall score of 97, Ameriprise ranks above 80 in Momentum, Value, Earnings Estimates, and Performance.

Exxon Mobil ($75; XOM) is being added to the Long-Term Buy List. In its 130th year of operation, Exxon is the world's largest publicly traded oil and gas company and the No. 1 refiner and marketer of petroleum products. Armed with robust cash flow and a solid balance sheet, the company appears positioned for growth through its large portfolio of exploration projects. The stock's Overall Quadrix score of 95 is well above the average of 77 for the 20 integrated oil companies in our research universe. The shares have rallied 55% from the 52-week low set in July. But strong operating momentum and reasonable trailing P/E ratio of 13 point to further gains.


Apparel retailer TJX ($44; TJX) is being dropped from the Buy List and Long-Term Buy List. Recent stock-price action has been disappointing, and the Quadrix Overall score has dipped to 81, hurt by weak Performance (20) and Earnings Estimates (18) scores. While sales growth has been decent, rivals such as Ross Stores ($62; ROST) are showing better growth. Finally, cash-flow trends are uninspiring. TJX should be sold, and the stock is now rated B (average). Ross, our top retail selection, is a Focus List Buy and a Long-Term Buy.

Varian Medical Systems ($69; VAR) is being dropped from the Focus List. The Overall Quadrix score has fallen to 71, reflecting a below-average score for Value. For now, the stock remains a Buy and Long-Term Buy, partly because we expect the maker of cancer-therapy and X-ray products to deliver solid December-quarter results on Jan. 26. Per-share earnings are expected to rise 16% on an 8% sales increase, but Varian seems capable of exceeding expectations. If results fail to impress or the stock reaches $75 to $80 in the near term, we are likely to drop Varian altogether.   

New additions

Hess ($78; HES) is being initiated as a Buy and a Long-Term Buy. More sensitive to oil prices than most of its peers, Hess stands to benefit from a recovery in global demand for oil. Exploration and production generated 27% of revenue in the nine months ended September and virtually all of the company's net income. And the outlook for the refining business (73% of revenue) is improving.

Hess's Overall score of 99 reflects broad strength in Quadrix, as the company ranks above 66 in all six major categories. The stock also compares well to its peers, ranking at least 99 in our sector-specific scores. Hess has exceeded the consensus profit estimate in each of the last four quarters, including a 26% surprise in the September quarter. Analyst forecasts have risen in the past month, but the 2011 consensus, projecting 13% profit growth, still seems conservative.

We are initiating NASDAQ OMX Group ($24; NDAQ) as a Buy. The company operates the NASDAQ Stock Market, the largest electronic equity market in the U.S. NASDAQ also held a 33% share of the burgeoning U.S. options-trading market in December. Sales have slipped in the last five quarters, partly reflecting a shift in product mix toward a transaction-based business. Operating profit margins have risen sharply in the last four quarters, and sales growth seems poised to accelerate in 2011.

NASDAQ shrank its share count by 5% in the first nine months of 2010 and repurchased nearly 23 million shares from its largest shareholder, Borse Dubai Limited, in December, enough to lower the count by another 11%. At less than 13 times trailing earnings, the stock looks cheap relative to the financial sector and its own history. Wall Street expects 11% higher per-share earnings in the December quarter and 21% growth in 2011.

General Motors ($38; GM) is revving up its engines. But don't count on a smooth ride.

The automaker does have some operating momentum. Cash flow and profits have risen sharply in the last three quarters. GM saw U.S. sales of light vehicles rise 8% in December and 6% for the year, and the company projects U.S. auto sales to rise more than 10% industrywide in 2011. However, GM's slate of new products for 2011 is modest, and its projections sound fairly aggressive, given low consumer confidence and continued problems in the labor and housing markets.

The U.S. auto giant emerged from bankruptcy in July 2009 with a sparkling balance sheet, and last year it probably earned its first full-year profit since 2004. However, even after the public offering, the U.S. government still owns about one-third of GM. Uncle Sam will collect the more than $30 billion it is owed before shareholders receive a penny in dividends. Earning a Quadrix Overall score of 41, GM isn't quite roadworthy. We're adding it to our Monitored List with a rating of B (average).  

Corporate roundup

Advocacy groups are urging the U.S. Federal Communications Commission to request more documents from Comcast ($22; CMCSa) before deciding on the cable giant's pending acquisition of NBC Universal. Specifically, the groups want to know if Comcast's contracts with programming suppliers prohibit those companies from selling their shows to online rivals. The FCC appears unlikely to vote on the merger until mid-January at the earliest. Comcast is a Long-Term Buy . . . Shares of Anadarko Petroleum ($76; APC) rose on a report that BHP Billiton ($91; BHP), the world's largest miner, is mulling a $45 billion acquisition, pricing the company at $90 per share. Anadarko is rated C (below average) . . . Bank of America ($14; BAC) agreed to pay $2.8 billion to Fannie Mae and Freddie Mac, resolving some of the sour mortgages issued by its Countrywide Financial unit. Many analysts had expected the settlement to cost Bank of America more, and the news boosted shares of Bank of America and other banks with overhanging mortgage concerns, including Citigroup ($5; C) and J.P. Morgan Chase ($44; JPM). Bank of America must still contend with a slew of repurchase requests from insurers and private investors. Estimates of total liability range from $8 billion to $35 billion. Bank of America and Citigroup are rated C (below average). J.P. Morgan is a Buy and a Long-Term Buy . . . Motorola has completed its long-awaited split. The consumer handset division, Motorola Mobility Holdings, now trades under the ticker MMI. The rest of the business (roughly 88% of the old  Motorola) is now called Motorola Solutions, with the ticker MSI. Motorola Solutions will continue to be monitored, retaining its C (below average) rating . . . Research In Motion ($59; RIMM) offered to install a data-analysis system in India that will decode data in instant messages sent over its network and prevent intercepted information from escaping the country. RIM stressed that the new system would not access secure corporate e-mail. Research In Motion is a Buy and a Long-Term Buy.


Rank Changes
Ameriprise Financial ($59; AMP) and Agilent Technologies ($41; A) are being added to the Focus List. Hess ($78; HES) and NASDAQ OMX Group ($24; NDAQ) were initiated as Buys, with Hess also a Long-Term Buy. Exxon Mobil ($75; XOM) was added to the Long-Term Buy List. Varian Medical Systems ($69; VAR) was dropped from the Focus List but remains a Buy and a Long-Term Buy. TJX ($44; TJX) was dropped from the Buy List and the Long-Term Buy List.

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