Portfolio Review


BlackRock downgraded

BlackRock ($148; BLK) is being dropped from the Buy and Long-Term Buy lists. True, the stock yields 3.7% and trades at 12 times trailing earnings, a 50% discount to its three-year average P/E ratio. True, revenue jumped 37% in the past year while free cash flow soared 140%. But as an asset-management company, BlackRock derives much of its revenue from fees based on assets and performance, making the shares highly sensitive to the stock market. Moreover, the Quadrix® Overall score has slipped to 82, hurt by below-average ranks for Earnings Estimates and Performance. And given the market's latest decline, BlackRock's earnings estimates could fall further. The stock is now rated A (above average).

Apple unveils new iPhone

Investors greeted Apple's ($373; AAPL) latest smartphone, presented by new CEO Tim Cook, with little enthusiasm. The new iPhone 4S features a faster processor, longer-lasting battery, and a “virtual assistant” that recognizes voice commands. But there was some disappointment that Apple didn't come up with a more radical upgrade. As with prior models, the new iPhone will be available on AT&T ($28; T) and Verizon Communications ($36; VZ), and Apple has also added Sprint Nextel ($3; S) to the mix. Hoping to get the device in more hands and boost sales for its App Store, Apple will offer the older iPhone 3GS free with a two-year contract. Apple is a Focus List Buy and a Long-Term Buy. AT&T is rated B (average). Sprint Nextel and Verizon Communications are rated C (below average).

Mortgages weigh on big banks

Financials have fared worse than any other S&P 500 sector in 2011, with the sector index down 25% for the year and 12% since the end of August. Bank of America ($6; BAC) shares trade below $6 for the first time since March 2009. Bank stocks have been pressured by concerns about their exposure to faltering European governments and financial institutions. Also, tighter U.S. regulations are crimping revenue growth.

Some banks are also haunted by the specter of soured investments. An Irish entity called Sealink Funding sued over $2.4 billion in residential mortgage-backed securities sold by J.P. Morgan Chase ($30; JPM) and $1.6 billion from Bank of America. Separately, a German investor sued J.P. Morgan over $500 million in mortgage-backed investments. J.P. Morgan is a Long-Term Buy. Bank of America is rated C (below average).

H-P strengthens defenses

Hewlett-Packard ($23; HPQ) hired Goldman Sachs ($95; GS) to help protect itself against activist investors seeking to oust the board of directors and change the direction of the floundering company. Late last month, H-P dumped Leo Apotheker as CEO in favor of Meg Whitman. Bloomberg reported the deal stemmed from fears that bitter rival Oracle ($29; ORCL) would mount a hostile takeover.

H-P's stock-market value has shrunk to $47.88 billion, with shares down 45% for the year. H-P is reportedly trying to sell its Palm unit, which includes the webOS mobile operating system, the ill-fated TouchPad tablet and a bunch of patents, to Amazon.com ($213; AMZN). Other buyers are reportedly interested in Palm as well. H-P is a Long-Term Buy. Oracle is a Focus List Buy and a Long-Term Buy. Amazon.com and Goldman Sachs are rated C (below average).

Deal makers

Dover ($47; DOV) completed the sale of Crenlo and Paladin Brands, two businesses that make cab-equipment enclosures. Dover reported proceeds of $290 million and said it will recognize a loss of $0.35 per share from the sale in the September quarter. Dover is a Long-Term Buy.

The U.S. Department of Justice has asked for more information regarding Google's ($502; GOOG) proposed $12.5 billion acquisition of Motorola Mobility Holdings ($38; MMI). Google expects to complete the deal by the end of 2011 or early next year. Google is a Buy and a Long-Term Buy.

IBM ($175; IBM) said it will purchase privately held Q1 Labs for an undisclosed price. The deal will expand IBM's presence in security software and continue the company's strategy of filling out its software portfolio with niche acquisitions. IBM is a Buy and a Long-Term Buy.

Intel ($21; INTC) agreed to acquire Telmap, an Israeli maker of mobile-navigation software, for an estimated $300 million to $350 million. Separately, Intel's McAfee security unit plans to buy NitroSecurity, a privately held software company. Terms were not disclosed. Intel is a Focus List Buy and a Long-Term Buy.

Corporate roundup

AutoZone ($320; AZO) approved an additional $750 million in share buybacks, the equivalent of nearly 6% of the company's outstanding shares. AutoZone is a Buy and a Long-Term Buy.

Shares of CF Industries ($124; CF) and other agricultural companies fell following a report that corn stockpiles are higher than expected. The stock remains a star in Quadrix, earning maximum scores of 100 for Overall, Reranked Overall, and 12-Factor Sector. Trading at six times the consensus for 2012 earnings, the stock is 48% below the median for its peer group. CF Industries is a Focus List Buy and a Long-Term Buy.

Retail outlook

The International Council of Shopping Centers expects retail sales to rise 3% to $250.2 billion in the last two months of 2011. That would be weaker than last year's 4% holiday growth and still down slightly from the 2007 peak of $251.7 billion. Given the muted growth outlook, retailers are proceeding with caution. Foot traffic could be lighter this year, as inflation-adjusted income for U.S. families has dropped to the lowest levels since 1996.

While no retailers are completely immune from economic trends, our favorites have some advantages. Bed Bath & Beyond ($55; BBBY) has delivered solid operating momentum in recent quarters, and the consensus projects profit growth of 17% for the second half of fiscal 2012 ending February. Demand for soft goods such as linens should remain solid.

Wal-Mart Stores ($53; WMT) sells many staples that consumers need regardless of economic conditions, and shoppers often trade down to discount stores during difficult times. Auto-parts retailers such as Advance Auto Parts ($59; AAP) and AutoZone ($320; AZO) are capable of doing strong business during slow economies as Americans hold onto their cars longer and subsequently need parts to repair them. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy. AutoZone is a Buy and a Long-Term Buy. Advance Auto and Wal-Mart are Long-Term Buys.

Rank Changes

BlackRock ($148; BLK) is being dropped from the Buy List and Long-Term Buy List. The Buy List now holds 24.9% in the Vanguard Short-Term Investment-Grade ($10.63; VFSTX) fund, while the Long-Term Buy List holds 24.8%.

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