Portfolio Review


Bear-market moves: 4 sells

With the Aug. 2 close of the Dow Industrials and Dow Transports below their June lows, the Dow Theory has moved into the bearish camp. In response, the Forecasts is raising its recommended bond-fund position to 21% to 22% of equity portfolios. For more analysis of the breakdown, see the Market Commentary on page 3.

To raise the needed cash, we sold four stocks on a special Aug. 2 hotline:

While Corning ($15; GLW) shares look very cheap at eight times trailing earnings — a 47% discount to their five-year average — we worry that they may remain cheap for quite awhile longer. Exposure to the consumer-electronics market — particularly televisions — has dragged on operating results. In addition, while management still expects robust growth from key product Gorilla Glass, it lowered the 2011 sales target. Corning's free cash flow turned negative in the past two quarters, and its Quadrix scores have rapidly deteriorated over the last month. Corning was dropped from the Buy List and Long-Term Buy List and should be sold. The stock is now rated B (average).

Hess's ($66; HES) production declined 10% in the June quarter, limiting its ability to capitalize on higher oil prices. While some oil stocks can power through near-term production shortfalls, Hess struggled yet again, missing the profit consensus for a third straight quarter. Consensus profit estimates have been trending lower for two months. The weak June quarter contributed to a decline in Hess's Quadrix Overall score, hurt by subpar ranks for Performance (25) and Earnings Estimates (8). We believe investors can find other energy stocks, such as Exxon Mobil ($78; XOM), with better near-term prospects. Hess was dropped from the Focus List, Buy List, and Long-Term Buy List and is now rated B (average). Exxon is a Focus List Buy and a Long-Term Buy.

NASDAQ OMX Group ($23; NDAQ) disappointed investors in July when it projected higher-than-expected expenses for 2011. But just as worrisome is the overall investment environment. The securities-exchange operator is sensitive to trends in the financial markets. Both operating results and the share price would probably suffer in the event of a prolonged market downturn. NASDAQ's failure to make an acquisition despite multiple attempts could also erode investors' confidence in management. NASDAQ was dropped from the Buy List and Long-Term Buy List, and dropped from coverage.

Travelers' ($54; TRV) Overall score has slumped to 49, down from 92 at the end of April as operating momentum has eroded. Cash provided by operations has declined in four of the past six quarters. Unlike many of its peers, the property-and-casualty insurer remained profitable during the great recession. But it fared poorly in the June quarter, taking a loss because of a series of devastating storms and tornados. The profit consensus is falling, with Wall Street now projecting 2011 per-share profits of $4.00, versus $4.30 one month ago and $6.30 two months ago. Travelers was dropped from the Long-Term Buy List and is now rated B (average).

June-quarter results

Exxon Mobil ($78; XOM) earned $2.18 per share in the June quarter, up 36% but $0.14 short of the consensus. Upstream profits surged 60%, while downstream earnings grew 11%, slowed by maintenance projects that temporarily shut down some operations overseas. Total production rose 10%, in part the result of Exxon's acquisition of XTO Energy in June 2010. Exxon is a Focus List Buy and a Long-Term Buy.

MasterCard ($298; MA) delivered per share profits of $4.76 per share in the June quarter, up 36% and $0.54 above Wall Street's target. Net revenue, climbing 22% to $1.67 billion, also exceeded the consensus as processed transactions rose 17% and gross dollar volume increased 16%. Shares rallied on the results. MasterCard is a Focus List Buy and a Long-Term Buy.

Newmont Mining's ($56; NEM) June-quarter results fell short of Wall Street targets. Excluding special items, per-share earnings climbed 17% to $0.90, missing the consensus by $0.09. Revenue increased 11%, short of Wall Street's target. Average realized prices for gold rose 25%, while copper surged 62%, helping to offset escalating costs. Production dropped 5% for gold and 45% for copper due to lower-grade ore and stockpiles, yet Newmont reaffirmed its 2011 production outlook. The stock remains a Buy and a Long-Term Buy.

BASF ($86; BASFY) earned 1.75 euros per share excluding special items, up 17%, in the June quarter. Sales climbed 14% to 18.46 billion euros on higher prices and volumes. BASF backed its 2011 guidance but cautioned that it sees slower economic growth in the second half of the year. BASF is a Long-Term Buy.

Comcast ($23; CMCSa) said per-share profits grew 27% to $0.42 excluding one-time charges, a penny above the consensus. Bolstered by the acquisition of a majority stake in NBC Universal, sales jumped 50% to $14.33 billion, well ahead of analyst estimates. Comcast is a Long-Term Buy.

Duke Energy ($19; DUK) earned $0.33 per share in the June quarter, down 3% excluding special items but $0.02 above the consensus estimate. Revenue also exceeded analyst expectations, climbing 8% to $3.53 billion. Duke, rated B (average), is a component of our Top 15 Utilities Portfolio.

Technology update

IBM ($178; IBM) sold more than 1,000 patents to Google ($592; GOOG), ranging from microprocessing chips to memory fabrication. Google seeks to bolster its patent portfolio after losing out on Nortel's trove of wireless patents auctioned off to a consortium led by Apple ($389; AAPL) and Microsoft ($27; MSFT). The U.S. Justice Department has escalated its probe into the patent auction, reported The Wall Street Journal. Regulators worry that the consortium might barrage rival smartphone makers that use Google's Android operating system with patent lawsuits that could unfairly disrupt competition.

Google's Android has taken a 48% share of the global smartphone operating-system market, well ahead of Apple's 19% share, according to researcher Canalys. But Apple was the world's largest smartphone seller in the June quarter, shipping 20.3 million iPhones. Apple and IBM are both Focus List Buys and Long-Term Buys. Microsoft is a Long-Term Buy. Google is rated B (average).

DISH Network ($29; DISH) is reviewing the financial records of Hulu, an online video service that has put itself up for sale. Apple, Google, Yahoo ($13; YHOO), and AT&T ($29; T) have also reportedly shown interest in the company, co-owned by Comcast ($23; CMCSa), Disney ($37; DIS), and News Corp. ($15; NWSa). Hulu could fetch more than $2 billion. DISH has already agreed to purchase three companies this year for a total of more than $3 billion. CEO Joe Clayton told the Los Angeles Times that DISH aims to “provide a whole suite of services to the customer,” including a video-streaming service to challenge Netflix ($257; NFLX). DISH is a Buy. Comcast is a Long-Term Buy. AT&T, Disney, and News Corp. are rated B (average).

Rank Changes

Corning ($15; GLW), Hess ($66; HES), NASDAQ OMX Group ($23; NDAQ), and Travelers ($54; TRV) have been sold from our recommended lists. The Vanguard Short-Term Investment-Grade ($10.80; VFSTX) fund now accounts for 21.9% of the Buy List and 21.0% of the Long-Term Buy List.

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