Wednesday, February 20, 2008
Buy list on Feb 20, 2008
Apple (AAPL)
Given the current gloomy outlook for consumer spending, it was not at all surprising when Apple's management team lowered revenue and earnings forecasts in its most recent conference call. And, while it was also not at all surprising to see the stock drop in response to the news, we have to admit that we are a little amazed at how quickly investors have lost sight of the fact that the company's Mac line is continuing to "tear up the track" with regards to recapturing PC market share.
Yes, the iPod and iPhone are exciting products -- and both clearly represent meaningful sources of revenue for the company -- but in our opinion, they are also functioning as a very effective form of "bait" that is luring consumers into Apple Stores around the country -- and ultimately back to the Mac for their next PC purchase.
Not only is the elegance and ease-of-use of Apple's new Leopard operating system causing a number of former Windows users to say "hasta la vista, Vista," the company is also setting the pace for the industry in terms of hardware design and functionality, especially when it comes to laptops.
And, while we will be the first to admit that "weak stocks often get even weaker before they finally find their footing," we believe that Apple's stock is currently trading at levels that will look very cheap 18-24 months from now.
AAPL is considered a strong buy under $145 and a buy under $180.
Chart
Celgene (CELG):
is another stock that took a rather nasty tumble a few months ago in response to a serious bout of "investor panic," but with the stock now up close to 35% off the lows that were set just six weeks ago, it appears that cooler heads are once again returning to the table.
Not only does the company have one of the deepest product pipelines in the industry, it is in the process of acquiring Pharmion (PHRM) , which will give it access to a much larger sales force around the world. The lack of a significant sales force has been one of the few themes short sellers have been able to pin their hopes on over the years when it comes to bad mouthing Clegene, and once the Pharmion deal closes, this "no sales force" argument will lose much of its merit as well.
Celgene is sitting on roughly $2.5 billion in cash (some of which will admittedly be spent on the Pharmion deal), and as we have said before, "if we could own just one biotech stock for the next 10 years, Celgene would be it."
CELG is therefore considered a strong buy under $55 and a buy under $64.
chart
NVIDIA (NVDA)
Along with Apple's stock, Nvidia's (NVDA) has been hit pretty hard in response to investors' recent "the sky is falling" approach to forecasting consumer spending. However, while we do not disagree that we may see a slowdown in the economy over the next couple of quarters, we do think that the 30%-plus reduction in market capitalization that investors have handed the company is unjustified.
We say this for the simple reason that Nvidia dominates the market in which it participates ("programmable graphics processors") and is in superb shape financially (roughly $1.8 billion in cash, no debt). And, generally speaking, "the strong tend to get stronger" as economic slowdowns run their course due to the fact that it is even more difficult for less entrenched players to weather the slowdown ("Times are tough all over," as the saying goes).
NVDA is considered a strong buy under $25 and a buy under $28.
Chart
Deere & Co (DE), Intuitive Surgical (ISRG), Monsanto Company (MON) have outstanding estimate and chart picture.
Sivy on stocks:
In particular, companies that derive a large percentage of their earnings from outside the U.S. have the best chance of riding out a bad domestic economy. For example, two of the stocks I recommended in last month's column - Hewlett-Packard (HPQ, Fortune 500) and 3M (MMM, Fortune 500) - get at least 60% of their sales abroad.
Spotting true bargains during this downturn is no layup, though. Price/earnings ratios based on anticipated results may be misleading, for instance, because growth may not come through as expected this year. So make sure that a stock also looks cheap compared with its peers based on P/Es using 2007 earnings.
Another smart way to compare stocks is by ratios of price to cash flow (the cash per share a company actually generates each year). The reason: Cash figures tend to be less volatile than earnings.
Three stocks to watch
In doing a little bargain hunting among stocks in the Sivy 70, I found three that have solid prospects, trade at P/Es below 15 based on 2007 earnings and are priced at less than 10 times cash flow. Those multiples count as cheap by anyone's calculations.
DuPont (DD, Fortune 500) announced 27% earnings per share growth (excluding one-time items) in the fourth quarter and recently raised its earnings targets for 2008. How does a company in a cyclical industry such as chemicals buck a U.S. recession? Almost two-thirds of sales come from overseas, where they are growing up to 20% a year in countries such as Brazil, China and India.
The hottest part of DuPont's business has been agricultural products, boosted by rising food prices and demand for ethanol. That division, which accounts for almost a quarter of sales, is growing twice as fast as the rest of the company. As an added bonus, DuPont shares yield a very healthy 3.8%, making them a great choice for retirees.
Fortune Brands (FO, Fortune 500) is a conglomerate with top-name consumer brands, including Jim Beam bourbon and Titleist golf balls. The company also has a home and hardware division, which consists of product lines like Moen faucets. Those businesses have been suffering because of the bad housing market. As a result, the stock has fallen close to a 52-week low of $66, down from a high of $90. That looks like too much punishment for limited housing exposure. Besides, Fortune is restructuring to trim costs, downsizing its home and hardware division and selling its wine business. As a result, the company took a large write-down in the fourth quarter.
But long-term growth has averaged 9% annually and is projected to continue at that rate over the next five years. Add in the stock's solid 2.6% yield, and you have double-digit return potential.
IBM (IBM, Fortune 500) reported terrific fourth-quarter results. Earnings per share were up more than 20% on a 10% rise in sales. A third of the increase in per-share profits was the result of 2007 stock buybacks totaling almost $19 billion. The rest of the profit gain was mostly from IBM's extensive business outside the U.S., which now accounts for almost two-thirds of total sales.
The company is enjoying especially strong growth in Asia and some developing markets. Bookings for service contracts in 2008 are also several billion dollars above expectations, and IBM has raised earnings projections for 2008. As Big Blue goes global, seems like it would deserve a market-beating multiple.
Given the current gloomy outlook for consumer spending, it was not at all surprising when Apple's management team lowered revenue and earnings forecasts in its most recent conference call. And, while it was also not at all surprising to see the stock drop in response to the news, we have to admit that we are a little amazed at how quickly investors have lost sight of the fact that the company's Mac line is continuing to "tear up the track" with regards to recapturing PC market share.
Yes, the iPod and iPhone are exciting products -- and both clearly represent meaningful sources of revenue for the company -- but in our opinion, they are also functioning as a very effective form of "bait" that is luring consumers into Apple Stores around the country -- and ultimately back to the Mac for their next PC purchase.
Not only is the elegance and ease-of-use of Apple's new Leopard operating system causing a number of former Windows users to say "hasta la vista, Vista," the company is also setting the pace for the industry in terms of hardware design and functionality, especially when it comes to laptops.
And, while we will be the first to admit that "weak stocks often get even weaker before they finally find their footing," we believe that Apple's stock is currently trading at levels that will look very cheap 18-24 months from now.
AAPL is considered a strong buy under $145 and a buy under $180.
Chart
Celgene (CELG):
is another stock that took a rather nasty tumble a few months ago in response to a serious bout of "investor panic," but with the stock now up close to 35% off the lows that were set just six weeks ago, it appears that cooler heads are once again returning to the table.
Not only does the company have one of the deepest product pipelines in the industry, it is in the process of acquiring Pharmion (PHRM) , which will give it access to a much larger sales force around the world. The lack of a significant sales force has been one of the few themes short sellers have been able to pin their hopes on over the years when it comes to bad mouthing Clegene, and once the Pharmion deal closes, this "no sales force" argument will lose much of its merit as well.
Celgene is sitting on roughly $2.5 billion in cash (some of which will admittedly be spent on the Pharmion deal), and as we have said before, "if we could own just one biotech stock for the next 10 years, Celgene would be it."
CELG is therefore considered a strong buy under $55 and a buy under $64.
chart
NVIDIA (NVDA)
Along with Apple's stock, Nvidia's (NVDA) has been hit pretty hard in response to investors' recent "the sky is falling" approach to forecasting consumer spending. However, while we do not disagree that we may see a slowdown in the economy over the next couple of quarters, we do think that the 30%-plus reduction in market capitalization that investors have handed the company is unjustified.
We say this for the simple reason that Nvidia dominates the market in which it participates ("programmable graphics processors") and is in superb shape financially (roughly $1.8 billion in cash, no debt). And, generally speaking, "the strong tend to get stronger" as economic slowdowns run their course due to the fact that it is even more difficult for less entrenched players to weather the slowdown ("Times are tough all over," as the saying goes).
NVDA is considered a strong buy under $25 and a buy under $28.
Chart
Deere & Co (DE), Intuitive Surgical (ISRG), Monsanto Company (MON) have outstanding estimate and chart picture.
Sivy on stocks:
In particular, companies that derive a large percentage of their earnings from outside the U.S. have the best chance of riding out a bad domestic economy. For example, two of the stocks I recommended in last month's column - Hewlett-Packard (HPQ, Fortune 500) and 3M (MMM, Fortune 500) - get at least 60% of their sales abroad.
Spotting true bargains during this downturn is no layup, though. Price/earnings ratios based on anticipated results may be misleading, for instance, because growth may not come through as expected this year. So make sure that a stock also looks cheap compared with its peers based on P/Es using 2007 earnings.
Another smart way to compare stocks is by ratios of price to cash flow (the cash per share a company actually generates each year). The reason: Cash figures tend to be less volatile than earnings.
Three stocks to watch
In doing a little bargain hunting among stocks in the Sivy 70, I found three that have solid prospects, trade at P/Es below 15 based on 2007 earnings and are priced at less than 10 times cash flow. Those multiples count as cheap by anyone's calculations.
DuPont (DD, Fortune 500) announced 27% earnings per share growth (excluding one-time items) in the fourth quarter and recently raised its earnings targets for 2008. How does a company in a cyclical industry such as chemicals buck a U.S. recession? Almost two-thirds of sales come from overseas, where they are growing up to 20% a year in countries such as Brazil, China and India.
The hottest part of DuPont's business has been agricultural products, boosted by rising food prices and demand for ethanol. That division, which accounts for almost a quarter of sales, is growing twice as fast as the rest of the company. As an added bonus, DuPont shares yield a very healthy 3.8%, making them a great choice for retirees.
Fortune Brands (FO, Fortune 500) is a conglomerate with top-name consumer brands, including Jim Beam bourbon and Titleist golf balls. The company also has a home and hardware division, which consists of product lines like Moen faucets. Those businesses have been suffering because of the bad housing market. As a result, the stock has fallen close to a 52-week low of $66, down from a high of $90. That looks like too much punishment for limited housing exposure. Besides, Fortune is restructuring to trim costs, downsizing its home and hardware division and selling its wine business. As a result, the company took a large write-down in the fourth quarter.
But long-term growth has averaged 9% annually and is projected to continue at that rate over the next five years. Add in the stock's solid 2.6% yield, and you have double-digit return potential.
IBM (IBM, Fortune 500) reported terrific fourth-quarter results. Earnings per share were up more than 20% on a 10% rise in sales. A third of the increase in per-share profits was the result of 2007 stock buybacks totaling almost $19 billion. The rest of the profit gain was mostly from IBM's extensive business outside the U.S., which now accounts for almost two-thirds of total sales.
The company is enjoying especially strong growth in Asia and some developing markets. Bookings for service contracts in 2008 are also several billion dollars above expectations, and IBM has raised earnings projections for 2008. As Big Blue goes global, seems like it would deserve a market-beating multiple.
# posted by Logan Ramasamy @ 9:07 PM 
