Long-Term Buy List review


So far this year, the Forecasts’ Long-Term Buy List has substantially outperformed the S&P 500 Index of large-company stocks.

As of July 21, the Long-Term Buy List — which contains mostly large-capitalization blue chips — was down 6.2% for the year on a fully invested basis, versus a 13.0% decline for the S&P 500. Adjusted for our cash position, the Long-Term Buy List is down just 4.7%. The list contains a diversified mix of 33 stocks that offer superior two- to four-year potential.

Market expectations for large-cap stocks are modest, but several of our favorites have delivered excellent June-quarter results. In the following paragraphs, we discuss some Long-Term Buys with strong operating momentum.

IBM’s ($130; NYSE: IBM) per-share earnings rose 32% to $1.98 in the June quarter, $0.17 above consensus estimates. Revenue rose 13% to $26.82 billion, keyed by double-digit gains in services and software. The company also raised 2008 profit estimates. At 14 times projected year-ahead profits of $9.16 per share, IBM seems reasonably valued for an industry leader capable of consistent double-digit growth. IBM is a Focus List Buy and a Long-Term Buy.

Lockheed Martin’s ($104; NYSE: LMT) June-quarter profits rose 18% to $2.15 per share, exceeding the consensus estimate of $1.88. Revenue rose 4% to $11.04 billion. Management increased its per-share-earnings guidance for 2008 to a range of $7.45 to $7.60, versus the $7.46 consensus. Lockheed is a Focus List Buy and a Long-Term Buy.

Oilfield-services giant Schlumberger ($104; NYSE: SLB) earned $1.16 per share from continuing operations in the June quarter, up 14% and $0.04 above the consensus. Revenue rose 20%. The company said high energy prices have sparked increases in producers’ capital spending, a trend likely to continue over the next several years. Consensus estimates project per-share-profit growth of 22% in the second half of 2008 and 25% in 2009. Schlumberger is a Long-Term Buy.

Sigma-Aldrich ($59; NASDAQ: SIAL) earned $0.70 per share in the June quarter, up 17% and $0.03 higher than the consensus. Sales rose 14% to $581 million, with organic growth of 7% and the rest coming from currency gains. All four business units managed organic sales growth of at least 5%. Sigma is a Long-Term Buy.

United Technologies ($65; NYSE: UTX) reported per-share earnings of $1.32, up 14% and $0.02 above the consensus. Revenue increased 13%. Management raised its guidance for full-year 2008. The company expects per-share earnings of $4.80 to $4.95, implying 12% to 16% growth. United Technologies is a Buy and a Long-Term Buy.

Defense contractor General Dynamics ($83; NYSE: GD) reported per-share earnings of $1.51, up 19% and $0.07 above the consensus. Revenue rose 11% to $7.30 billion, aided by strong sales of combat systems. Funded backlog reached $45.24 billion at the end of June, up 13% from the March quarter. General Dynamics is a Buy and a Long-Term Buy.

List Returns
LT Buy
S&P 500
2008 †
Since 2000 †
Since 2004 †
† Through July 22. Notes: Returns based on fully invested portfolios excluding dividends and transaction costs.

Rebounding banks
After getting pummeled for most of the year, banking stocks have rebounded big in recent trading. Wells Fargo ($30; NYSE: WFC) jumped more than 32% the day it announced better-than-expected June-quarter earnings and a 10% dividend hike. The stock is now up 48% from its 52-week low of $20.46 on July 15. Other major banks are also up sharply from July 15 lows: Citigroup ($21; NYSE: C), up 50%; J.P. Morgan ($42; NYSE: JPM), up 43%; Bank of America ($33; NYSE: BAC), up 81%; and Wachovia ($18; NYSE: WB), up 126%.

The impetus for the sector’s rally is a growing belief on Wall Street that the worst is behind the group. Wells Fargo’s dividend increase, at a time when several banks have cut dividends — including Wachovia’s second cut this year — demonstrated the company’s confidence in its future. And while second-quarter profits for banks were dismal in terms of absolute numbers — for example, Citigroup posted a loss of $2.2 billion in the June quarter, while Wells Fargo, Bank of America, and J.P. Morgan saw profits decline — the results handily beat Wall Street’s projections.

While the relief rally is certainly welcome, investors must view the move in context. Bank stocks have only returned to where they were trading in May or June. Even after the recent rally, shares of Citigroup and Bank of America have suffered double-digit declines for the year. The Forecasts has done a good job of avoiding the pain in the financials over the last 12 months — and will be cautious in returning to the group. For investors who want exposure to banks, Wells Fargo, a Long-Term Buy, is our top choice. Citigroup, Bank of America, J.P. Morgan, and Wachovia are rated Neutral.

June-quarter earnings
Freeport-McMoRan ($101; NYSE: FCX) reported per-share earnings of $2.25, a decrease of 14% from year-earlier results on roughly flat sales. The company increased its share-buyback authorization to 30 million shares, or about 8% of shares outstanding, and boosted its quarterly per-share dividend 14% to $0.50, payable in November. Management maintained its 2008 gold and molybdenum sales outlook but lowered its copper sales target because of production delays. Freeport is a Focus List Buy and a Long-Term Buy . . . Microsoft ($26; NASDAQ: MSFT) earned $0.46 per share, up 18% but a penny below the consensus estimate. Revenue increased 18% to $15.84 billion, driven by a 21% sales increase in the server and tools segment. For fiscal 2008 ended June, per-share earnings increased 26% on an 18% sales gain. Microsoft is a Buy and Long-Term Buy . . . Airgas ($59; NYSE: ARG) earned $0.81 per share, up 29% and in line with the consensus. Sales jumped 22% to $1.12 billion, with same-store sales up 7%. The gas distributor raise the bottom end of its profit guidance for fiscal 2009 ending March, projecting per-share profits of $3.30 to $3.40, versus the $3.39 consensus. Airgas is rated Buy.

Health-care roundup
Merck ($31; NYSE: MRK) shares tumbled on news that researchers found cholesterol drug Vytorin ineffective against a heart-valve condition. This marks the second time in 2008 that Vytorin, a drug that generated $5 billion in sales last year and is crucial to Merck’s future, did not perform as well as expected in a study. Merck’s per-share profits rose 5% excluding special items in the June quarter on a 1% decline in revenue. Merck is rated Neutral . . . Swiss drugmaker Roche offered $44 billion, or $89 per share, to purchase the 44% of Genentech ($94; NYSE: DNA) it does not already own. The offer represents a 9% premium to Genentech’s price before the announcement, and the biotech firm’s shares have since risen to more than 5% above the bid price, suggesting Wall Street expects Roche to raise its bid. Genentech is rated Neutral . . . After a close vote, a Food and Drug Administration panel recommended approval of Johnson & Johnson’s ($68; NYSE: JNJ) antibiotic Doribax as a treatment for a strain of hospital-borne pneumonia. The FDA normally goes along with panel recommendations, but concerns about the quality of J&J’s drug studies could derail the process. J&J is a Buy and a Long-Term Buy.

News digest
European regulators have expanded their investigation of Intel ($22; NASDAQ: INTC), issuing formal allegations of antitrust violations by the semiconductor giant. Intel is rated Neutral.

Merrill Lynch ($34; NYSE: MER) announced a worse-than-expected June-quarter loss of $4.7 billion, hurt by $9.4 billion in investment write-downs. The company also announced the planned sale of its stake in the Bloomberg media company for $4.4 billion. Merrill is rated Neutral.

Yahoo ($21; NASDAQ: YHOO) avoided a proxy fight with activist investor Carl Icahn by offering Icahn and his colleagues three seats on the company’s expanded 11-person board. Yahoo is rated Neutral.

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