- Hyatt Hotels (H) and Hospitality Properties (HPT) to outperform from neutral at RW Baird.
- AB InBev (BUD) to buy from neutral at Goldman.
- Amerisafe (AMSF) to buy from hold at Wunderlich.
- Northrop Grumman (NOC) to sector perform from underperform at RBC Capital.
- China Lodging Group (HTHT) to buy from hold at Brean Murray and to buy from neutral at Roth Capital.
Things look to be pretty quiet on the economic calendar this week. Here are the highlights:
- Tuesday: Weekly chain-store sales
- Wednesday: Federal budget balance for January
- Thursday: Wholesale trade data in December
- Friday: Trade balance in December and the weekly inflation survey
However, three iconic companies -- Walt Disney (DIS), Coca-Cola (KO) and Hasbro (HAS) -- highlight this week's quarterly results. Here's a look at what analysts surveyed by Thomson Reuters are anticipating from these and others.
The list of stocks under consideration has been reduced from eleven to ten, to seven and now in today's story four. Starting with five major defense contractors and six major oil companies (see Chasing Value: You Must Own Defense and Oil for Safety), I began a search to find one stock in each sector that might be suitable for inclusion in my list of 2011 stock picks posted last week Chasing Value: 2011 Stock Picks -- The Journey Begin.
Today we continue our analysis by examining return on equity (ROE), return on invested capital (ROIC), and price-to-earnings-to-growth (PEG). Each stock is ranked by sector and metric from best to worst. Sometimes there are clear winners and others there is little to separate one stock from the next. However, in total, a picture can be drawn that does portray a superior opportunity.
All of this has its limits, but, if you are a fan of Professor Nassim NicholasTaleb and his best seller The Black Swan then you already have been warned that the events that have the greatest impact on our lives and our investments are most often unpredictable. We cannot predict the future nor can we anticipate the tragedies that will tank our portfolio's.
While I do believe predicting the future is, how should I say, futile, there are general clues as to which way the wind blows.
One of our three value portfolios in the Buyback Letter is the Buyback Income Index, a 10-stock portfolio for those interested in income and growth. It features companies actively repurchasing their own stock that also pay relatively high dividends.
While our main emphasis is on buyback stocks, those stocks that both buy back AND pay a substantial and regular dividend are comforting to some investors who want to know that no matter what, at least they will be getting something back.
- Piper Jaffray upgraded Red Hat (RHT) to overweight from neutral.
- Honeywell (HON) was upgraded to outperform from neutral at Cowen.
- Regal-Beloit (RBC) and Actuant (ATU) were upgraded to buy from hold at Jefferies.
- RW Baird upgraded MedAssets (MDAS) to outperform from neutral.
- Savvis (SVVS) was upgraded to outperform from market perform at William Blair.
Our recommendations at The Buyback Letter currently focus on a collection of five stocks that we believe, as a group, will outperform the market this month. So far, we have done well. Our Buyback Premium Portfolio is beating the S&P 500 by more than 68% since its inception (August 2, 2000). The portfolio is up 47.53% since inception versus a decline of 20.64% in the S&P 500 over the same time frame. For the month of September 2010, The Buyback Premium Portfolio gained 12.38% vs. a gain of 8.76% in the S&P 500.
So what's our New Premium Portfolio Recommendation? On October 1, we issued a sell recommendation on two stocks Coach (COH) and Health Net (HNT) at market. Now, we recommended using the proceeds and available cash to buy equal dollar amounts of the following two stocks at market:Family Dollar (FDO) and American Financial Group (AFG).
- Barclays upgraded Western Digital (WDC) to overweight from equal weight.
- LDK Solar (LDK) was upgraded to buy from hold at Needham.
- Legg Mason (LM) was upgraded to outperform from neutral at Macquarie.
- Agilent (A) was upgraded to buy from hold at Stifel Nicolaus.
- Wells Fargo upgraded Dean Foods (DF) to outperform from market perform and Developers Diversified (DDR) to market perform from underperform.
- Deutsche Bank also upgraded Developers Diversified, to buy from hold.
- Northrop Grumman (NOC) was upgraded to sell from conviction sell at Goldman.
- MYR Group (MYRG) was upgraded to buy from hold at BB&T.
The earnings crunch continues this week, and analysts surveyed by Thomson Reuters are anticipating lots of strong quarterly reports.
For example, year-over-year earnings growth from big oil Chevron (CVX), ConocoPhillips (COP), ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) are expected to be in double digits. The same is true of many other energy and mining concerns reporting this week: Allegheny Technologies (ATI), Alliant Energy (LNT), Arch Coal (ACI), Cliffs Natural Resources (CLF), CMS Energy (CMS), CONSOL Energy (CNX), DPL (DPL), Hess Corp. (HES), Minerals Technologies (MTX), Pioneer Natural Resources (PXD), PPL Corp. (PPL), Southwestern Energy (SWN), Total (TOT), Whiting Petroleum (WLL), Williams Companies (WMB) and Wisconsin Energy (WEC).
Today I continue the exercise, hoping to find a stock worthy of placing a bet.
- Lockheed Martin: 3.77%
- Raytheon Company: 3.16%
- Northrop, Grumman: 2.89%
- General Dynamics: 2.59%
Equally important is that unlike many other industries, this is one tech sector that keeps most of its jobs at home and well-distributed through the country. This, too, preserves defense spending.
The major players in the industry after 20 years of consolidation are General Dynamics Corp (GD), Lockheed Martin (LMT), Boeing Co (BA), Northrop, Grumman (NOC), and Raytheon Company (RTN). In addition there are hundreds more making specialized parts in support of the majors and more still supplying basic elements like tires, wiring, computer processors, steel, aluminum, specialty glass, and ammunition. Then there are suppliers of manpower and smaller manufacturers producing unmanned aircraft drones and robots.
- Credit Suisse upgraded Netflix (NFLX) to neutral from underperform and raised its price target to $140 from $90. The firm's survey work indicates Netflix's streaming offering is compelling and will continue to grow as it acquires additional streaming content.
- Barclays upgraded Ford (F) to overweight from equal weight, citing the company's earnings power, reduced cost base, expectations for a return to prior peak margins and valuation. The firm raised its target to $16 from $15.
- Merriman upgraded OpenTable (OPEN) to buy from neutral based on increased visibility into international expansion from the toptable.com acquisition and upside from its Spotlight product.
- Siemens (SI) was upgraded to conviction buy from buy at Goldman.
- Medicis (MRX) was upgraded to buy from hold at Jefferies.
- IDEX (IEX) was upgraded to outperform from neutral at Baird.
This is not the time to be loading up on defense stocks. The department of defense's fiscal year 2012 budget request will be submitted in February and the discussions leading up to it will pressure the defense stocks. Also, given a shrinking backlog for many of the companies within the sector, I believe that consensus estimates remain meaningfully too high and will be revised downward throughout the 2nd half of 2010, particularly if current pension assumptions (i.e., interest rates and asset returns) hold.
Northrop Grumman Corp. (NOC) on July 28th, Northrop reported adjusted 2nd quarter EPS ahead of consensus, and revised guidance higher --- highlighting improved margin performance. However, cash flow was weak and Northrop joined the list of defense companies to report declining backlog and weak bookings. Here are my concerns regarding Northrop and why it is a stock to sell: 1) the company is way too leveraged to the defense sector view where I expect pressure on Department of Defense spending and contractor margins. Northrop also joined the list of defense companies reporting weak book-to-bill on the back of another sequential decline in backlog. 2) While Northrop showed some margin improvement in the 2nd quarter --- outside of ships --- its margins and returns on capital remain the lowest in its peer group. 3) If interest rates and asset returns simply stay where they are today, 2011 and 2012 estimates could be reduced down by 11% (of current EPS) or even more.
- Goldman believes EOG Resources (EOG) can regain its premium multiple given its ability to find new horizontal liquids resource plays. The firm upgraded shares to conviction buy from buy and has a $129 price target on the stock.
- Deutsche Bank upgraded Macerich (MAC) to buy from hold following the company's Q2 results and raised its target for shares to $47 from $45.
- Needham upgraded QuinStreet (QNST) to strong buy from buy, citing the strong Q4 report and valuation, and has a $20 target on the stock.
- Macy's (M) was upgraded to buy from neutral at BofA/Merrill.
- Whole Foods (WFMI) was upgraded to buy from neutral at UBS.
- Texas Instruments (TXN) was upgraded to outperform from market perform at Raymond James.
Here were today's unofficial closing bell levels:
Dow 10,366.72 +3.70 (0.04%)
S&P 500 1,095.17 -0.17 (-0.02%)
Nasdaq 2,249.84 +7.81 (0.35%)
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