Portfolio Review


Microchip sales dip, Altera off Buy List

Global semiconductor revenue growth slowed to 3% year-over-year in the three months ended July, according to the Semiconductor Industry Association, confirming some of the fears that have shaken chip stocks. For the month of July, semiconductor revenue fell 4%. Sales of microprocessors were stronger than normal for the seasonally weak three-month period, which bodes well for Intel ($20; INTC).

In related news, Altera ($35; ALTR) trimmed its September-quarter sales guidance. A maker of programmable logic devices, Altera said revenue will rise 1% to 5% year over year, versus its previous outlook of 6% to 10%. The company reported weakness in several markets, including telecom and wireless, industrial automation, and military. Altera shares rose less than 1% Sept. 7 on the news, while the NASDAQ Composite Index was up 3% and the iShares PHLX Semiconductor Sector Index jumped more than 4%.

Industrywide, pricing remains fairly strong and inventories lean, which could soften any semiconductor downturn. Altera is being dropped from the Focus List and Buy List but remains a Long-Term Buy. Intel is a Buy and a Long-Term Buy.

Walter takeover rumors surface

British miner Anglo American ($20; AAUKY) is reportedly considering a $120-per-share bid for Walter Energy ($94; WLT), a 60% premium to the stock's closing price prior to the announcement but in line with the price in late July. Walter operates primarily in North America, where Anglo America has only a modest presence, causing at least one analyst to question the accuracy of the report. But merger activity in this space has heated up in the last few months.

Takeover speculation has followed Walter ever since its CEO resigned in July, with one analyst saying a deal could be worth more than $200 per share. BHP Billiton ($79; BHP) is also rumored to have interest in Walter. Walter shares jumped more than 20% on the takeover speculation, but Walter said it "is not aware of any corporate developments to account for this activity." There is downside if the deal does not materialize. However, Walter retains its Focus List Buy rating for now, in part because we see the potential for another 25% upside if a bidder emerges in the near term.

Tech and telecom roundup

A German court banned the sale of a new version of Samsung's Galaxy tablet in Germany, Apple's ($380; AAPL) latest victory in a bitter patent battle with its Korean rival. Apple had already succeeded in temporarily banning a second Galaxy model until the court was to reach its final ruling Sept. 9. A similar patent skirmish is brewing in Australia. A judge there told Apple it may have to divulge the iPad's sales information to strengthen its case against Samsung. Apple is a Focus List Buy and a Long-Term Buy.

Hewlett-Packard ($24; HPQ) is trying to soothe the jitters of consumers and corporate customers. Last month, the technology giant announced plans to part ways with its personal-computer unit, the largest in the world by units shipped. While rivals swoop in to try to pick off clients, PC chief Todd Bradley is in Asia, meeting with suppliers.

Meanwhile, H-P is exploring licensing opportunities — and possibly potential buyers — for WebOS, the operating system it acquired from Palm that powers the short-lived TouchPad tablet. Encouraged by surging interest in its heavily discounted TouchPad — now priced at $99 versus the original $499 — HP is preparing to produce a final batch of the discontinued computers. H-P also plans to introduce PCs with touch screens or that combine the screen and electronics in a single unit. H-P is a Buy and Long-Term Buy.

A federal judge overturned a jury decision that had ordered SAP ($51; SAP) to pay Oracle ($26; ORCL) $1.3 billion, a record for a copyright-infringement lawsuit. Oracle, the judge said, had only proved that actual damages amounted to $272 million. A new trial appears likely, as Oracle vowed "to pursue the full measure of damages that we believe are owed." Oracle is a Focus List Buy and a Long-Term Buy. SAP is rated B (average).

DISH Network ($24; DISH), Amazon.com ($216; AMZN), and Yahoo ($13; YHOO) submitted separate bids between $1.5 billion and $2.0 billion for online video site Hulu, reported the Financial Times. DirecTV ($42; DTV) also submitted a bid, but it was too low to stay in the running. DISH hopes to make Hulu, which has about 875,000 paid subscribers for thousands of hours of popular TV shows, the cornerstone of its budding online business. Starting in October, DISH will reportedly offer a subscription-based service that streams online video. DirecTV is a Focus List Buy and a Long-Term Buy. DISH is a Buy. Amazon.com is rated C (below average).

IBM ($165; IBM) agreed to buy Algorithmics, a Toronto company that helps clients manage financial risk, for $387 million in cash. The deal marks IBM's second proposed acquisition of an analytics company in as many days and the 26th such purchase in the past five years. IBM is a Focus List Buy and a Long-Term Buy.

Corporate report

Rogers Communications ($38; RCI) is applying to Canadian regulators to launch a banking unit that would allow the cable giant to offer its own credit cards. Rogers is a Long-Term Buy.

St. Jude Medical ($44; STJ) won approval from European regulators to sell an implantable device that treats patients with chronic migraine headaches. St. Jude envisions a market of more than $1 billion for the device. St. Jude Medical is a Long-Term Buy.

Financial review

The Federal Housing Finance Authority, which oversees government-sponsored mortgage-funding agencies Fannie Mae and Freddie Mac, sued 16 U.S. financial companies for allegedly violating securities law in the sale of more than $200 billion in mortgage-backed securities. Those named in the lawsuit include J.P. Morgan Chase ($33; JPM), General Electric ($15; GE), Bank of America ($7; BAC), Citigroup ($28; C), Goldman Sachs ($105; GS), and Morgan Stanley ($15; MS). The agency filed separate lawsuits against Bank of America and its subsidiaries, taking aim at $58 billion in mortgage-backed securities sold to Fannie and Freddie.

Despite the overhanging liability and the recent announcements of several banks slashing jobs, J.P. Morgan said it does not anticipate reducing its work force. J.P. Morgan Chase is a Buy and a Long-Term Buy, representing our only recommendation in the banking group. General Electric is rated B (average). Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley are all rated C (below average).

Rank Changes

Altera ($35; ALTR) was dropped from the Focus List and the Buy List. The Buy List how holds 24.9% in Vanguard Short-Term Investment-Grade ($10.72; VFSTX).

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