Investment Portfolio Decisions
We post summaries of portfolio transactions here for the purposes of transparency and education of our investors.
Opinions expressed are those of LOM and our advisors. Views and security holdings are subject to change at any time based on market and other conditions. This section of our website is for informational purposes only and should not be construed as investment advice with respect to the information or securities presented.
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July, 2010
Purchases / Additions
Teva Pharmaceutical Industries (TEVA)
The Investment Committee has decided to initiate a position in Teva Pharmaceuticals, the worldwide leader in generic pharmaceuticals. Headquartered in Israel, Teva derives approximately 80% of its sales from the United States and Europe. The company has 35,000 employees and production facilities in Israel, North America, Europe, and Latin America.
The Investment Committee has decided to initiate a position in Teva Pharmaceuticals, the worldwide leader in generic pharmaceuticals. Headquartered in Israel, Teva derives approximately 80% of its sales from the United States and Europe. The company has 35,000 employees and production facilities in Israel, North America, Europe, and Latin America.
The company is in an excellent position to capitalize on the huge number of patent expirations over the next few years. The industry currently faces $39 billion in patent expirations in 2011 (Lipitor, Plavix, and Levaquin, among others), $34 billion in 2012 (Singulair, Lexapro, and Viagra), and $17 billion in 2013 (Cymbalta, Aciphex, and Niaspan). Teva also has a branded drug portfolio, most notably Copaxone, a highly successful Multiple Schlerosis drug that has a very attractive efficacy and safety profile. Although Copaxone currently represents 17% of Teva’s sales and 33% of its profit, this contribution should be drastically reduced over the next several years as new products are introduced.
Health care cost containment has been a major global issue for several years now, and will likely be an area of continued focus for years to come. This will likely drive increased adoption of generic drugs, and Teva is in an excellent position to benefit from this trend. Teva’s earnings should grow in excess of 20% over the next three years, with growth slowing subsequently from those lofty levels. We believe the stock, at approximately 12.0 times 2010 earnings, offers a compelling value given the company’s excellent growth prospects.
Accenture (ACN)
The Investment Committee has decided to add to the Quality Growth Portfolio’s position in Accenture. On the back of a strong earnings report and trading at just 13.5x their normalized 2010 full-year operating earnings, Accenture represents a very compelling opportunity. Accenture’s superior market position in consulting, systems integration, and outsourcing should enable it to achieve sustainable long-term earnings growth. Accenture recently reiterated its positive revenue growth outlook of 5%-9% for their fiscal fourth quarter and 7%-10% for next fiscal year. Accenture’s fiscal third-quarter earnings beat, bullish management commentary, and strong outlook should help to refocus attention on the company’s improving fundamental story, providing the catalyst for share price outperformance.
The Investment Committee has decided to add to the Quality Growth Portfolio’s position in Accenture. On the back of a strong earnings report and trading at just 13.5x their normalized 2010 full-year operating earnings, Accenture represents a very compelling opportunity. Accenture’s superior market position in consulting, systems integration, and outsourcing should enable it to achieve sustainable long-term earnings growth. Accenture recently reiterated its positive revenue growth outlook of 5%-9% for their fiscal fourth quarter and 7%-10% for next fiscal year. Accenture’s fiscal third-quarter earnings beat, bullish management commentary, and strong outlook should help to refocus attention on the company’s improving fundamental story, providing the catalyst for share price outperformance.
Trims / Deletions
Lockheed Martin (LMT)
The Investment Committee has decided to eliminate its position in Lockheed Martin from the Quality Growth Portfolio, primarily to make room for better growth opportunities. We believe Lockheed has good growth prospects over the next five years as the F-35 enters commercial production, but the profitability associated with the F-35 will likely be low in the early stages of the program. In addition, although manageable, there is added risk of future defense budget cutbacks as Washington begins to focus on deficit reduction. The stock still offers investors high current income through its generous dividend, but its relatively lackluster near-term estimated earnings growth precludes its continued inclusion in the Quality Growth Portfolio.
The Investment Committee has decided to eliminate its position in Lockheed Martin from the Quality Growth Portfolio, primarily to make room for better growth opportunities. We believe Lockheed has good growth prospects over the next five years as the F-35 enters commercial production, but the profitability associated with the F-35 will likely be low in the early stages of the program. In addition, although manageable, there is added risk of future defense budget cutbacks as Washington begins to focus on deficit reduction. The stock still offers investors high current income through its generous dividend, but its relatively lackluster near-term estimated earnings growth precludes its continued inclusion in the Quality Growth Portfolio.
Becton Dickinson (BDX)
The Investment Committee has decided to trim the Quality Growth Portfolio’s position in Becton Dickinson. While BDX remains a core holding in the portfolio, this transaction allows for the addition of Teva and increases the portfolio’s exposure to the fast-growing generic drug market. Not only does the pharmaceutical industry face $90 billion in patent expirations between 2011 and 2013, but political pressures on health care cost containment will likely benefit Teva for the foreseeable future.
The Investment Committee has decided to trim the Quality Growth Portfolio’s position in Becton Dickinson. While BDX remains a core holding in the portfolio, this transaction allows for the addition of Teva and increases the portfolio’s exposure to the fast-growing generic drug market. Not only does the pharmaceutical industry face $90 billion in patent expirations between 2011 and 2013, but political pressures on health care cost containment will likely benefit Teva for the foreseeable future.
Johnson & Johnson (JNJ)
The Investment Committee has decided to trim the Quality Growth Portfolio’s position in Johnson & Johnson. While JNJ remains a core holding in the portfolio, this transaction allows for the addition of Teva and increases the portfolio’s exposure to the fast-growing generic drug market. Not only does the pharmaceutical industry face $90 billion in patent expirations between 2011 and 2013, but political pressures on health care cost containment will likely benefit Teva for the foreseeable future.
The Investment Committee has decided to trim the Quality Growth Portfolio’s position in Johnson & Johnson. While JNJ remains a core holding in the portfolio, this transaction allows for the addition of Teva and increases the portfolio’s exposure to the fast-growing generic drug market. Not only does the pharmaceutical industry face $90 billion in patent expirations between 2011 and 2013, but political pressures on health care cost containment will likely benefit Teva for the foreseeable future.
Allocation Update
Reduce Small Cap; In-line with Strategic Target.
Historically, small-cap stocks have outperformed large caps during the initial stages of an economic recovery. Consistent with this pattern, the S&P 600 has outperformed the S&P 500 by more than 20 percentage points since the market bottom in March 2009. As the U.S. expansion moderates during the second half of the year we expect a rotation in market leadership away from small-cap stocks. With a normalized price-to-earnings ratio of approximately 20, we also believe the small-cap sector of the market is fully valued. We will continue to maintain a neutral strategic weighting in the sector.
Historically, small-cap stocks have outperformed large caps during the initial stages of an economic recovery. Consistent with this pattern, the S&P 600 has outperformed the S&P 500 by more than 20 percentage points since the market bottom in March 2009. As the U.S. expansion moderates during the second half of the year we expect a rotation in market leadership away from small-cap stocks. With a normalized price-to-earnings ratio of approximately 20, we also believe the small-cap sector of the market is fully valued. We will continue to maintain a neutral strategic weighting in the sector.
Increase Emerging Markets; Remain Underweight Strategic Target
Emerging markets continue to drive global GDP higher as the economies of South America and the Pacific Rim grow at a rapid pace. China, Brazil, and India have averaged 10% GDP growth over the past twelve months, slightly below their decade-long average of 12%. Many investors are worried that these spectacular growth rates will slow, especially given the Chinese government’s recent moves to slow growth. We agree that these economies will slow, but to a still impressive 8% annualized rate over the next several years. We believe that Chinese policies are prudent insofar as they can prevent their economy from overheating. As investor expectations for future growth have declined, the risk/reward ratio for investing in these economies has improved, warranting an increased weighting within the Quality Global Strategy.
Emerging markets continue to drive global GDP higher as the economies of South America and the Pacific Rim grow at a rapid pace. China, Brazil, and India have averaged 10% GDP growth over the past twelve months, slightly below their decade-long average of 12%. Many investors are worried that these spectacular growth rates will slow, especially given the Chinese government’s recent moves to slow growth. We agree that these economies will slow, but to a still impressive 8% annualized rate over the next several years. We believe that Chinese policies are prudent insofar as they can prevent their economy from overheating. As investor expectations for future growth have declined, the risk/reward ratio for investing in these economies has improved, warranting an increased weighting within the Quality Global Strategy.
May, 2010
Purchases / Additions
Bank of New York Mellon (BK)
The Investment Committee has decided to add to the portfolio’s position in Bank of New York Mellon. BK continues to win asset-servicing mandates and attract inflows to its asset management funds, but earnings growth has been subdued due to low interest rates, tight trading spreads, and lower volumes and volatility. Below average earnings growth during the past year has capped share price gains, leading the stock to significantly underperform during the past year. We believe earnings growth is poised to reaccelerate as the company benefits from recent restructuring and operational efficiencies and short-term interest rates rise from their exceptionally low levels. BK has estimated that a one-point rise in short rates will boost profits by thirty cents a share. BK shares are attractive by historical measures - the stock has traded at a premium to the S&P 500 in the past, but now trades at a slight discount (13x the 2010 consensus EPS estimate versus 15x for the S&P 500). The stock’s attractive valuation and potential for double-digit earnings growth creates an excellent opportunity and warrants a higher weighting within the portfolio.
The Investment Committee has decided to add to the portfolio’s position in Bank of New York Mellon. BK continues to win asset-servicing mandates and attract inflows to its asset management funds, but earnings growth has been subdued due to low interest rates, tight trading spreads, and lower volumes and volatility. Below average earnings growth during the past year has capped share price gains, leading the stock to significantly underperform during the past year. We believe earnings growth is poised to reaccelerate as the company benefits from recent restructuring and operational efficiencies and short-term interest rates rise from their exceptionally low levels. BK has estimated that a one-point rise in short rates will boost profits by thirty cents a share. BK shares are attractive by historical measures - the stock has traded at a premium to the S&P 500 in the past, but now trades at a slight discount (13x the 2010 consensus EPS estimate versus 15x for the S&P 500). The stock’s attractive valuation and potential for double-digit earnings growth creates an excellent opportunity and warrants a higher weighting within the portfolio.
JPMorgan Chase (JPM)
The Investment Committee has initiated a position in JPMorgan Chase in the equity portfolios. JPMorgan Chase’s businesses include U.S. consumer and commercial banking, which continue to be operated under the Chase brand, while asset management, investment banking, and affiliated services are delivered to clients worldwide under the J. P. Morgan brand. Approximately 55% of the company’s revenues are derived from retail, commercial, and credit card services. Twenty-five percent of revenues are derived from investment banking, with the remainder coming from asset management, treasury, and other services. Led by highly regarded and straight-talking CEO Jamie Dimon, the company has successfully navigated the financial crisis and has emerged as one the best capitalized and preeminent banks in the nation. Management’s focus on maintaining a "Fortress Balance Sheet," with strong capital ratios and strong credit ratings, has meant they are willing to sacrifice short-term growth for long-term opportunity. We believe this approach is indicative of a high-quality company and management team.
The Investment Committee has initiated a position in JPMorgan Chase in the equity portfolios. JPMorgan Chase’s businesses include U.S. consumer and commercial banking, which continue to be operated under the Chase brand, while asset management, investment banking, and affiliated services are delivered to clients worldwide under the J. P. Morgan brand. Approximately 55% of the company’s revenues are derived from retail, commercial, and credit card services. Twenty-five percent of revenues are derived from investment banking, with the remainder coming from asset management, treasury, and other services. Led by highly regarded and straight-talking CEO Jamie Dimon, the company has successfully navigated the financial crisis and has emerged as one the best capitalized and preeminent banks in the nation. Management’s focus on maintaining a "Fortress Balance Sheet," with strong capital ratios and strong credit ratings, has meant they are willing to sacrifice short-term growth for long-term opportunity. We believe this approach is indicative of a high-quality company and management team.
From a position of strength, we believe JPMorgan Chase is poised to grow its market position, earnings, and dividends at an exceptional pace as the economy expands during the next several years. After earning $2.24 in 2009, we believe earnings will quickly accelerate in the coming years - with an earnings potential approaching $6.00 by 2012. In order to maintain their capital strength, the company was forced to slash its dividend in early 2009, but based on management’s statements and our analysis of the company’s earnings power we expect a sizable dividend increase by year-end. These extremely positive factors are currently being overshadowed by near-term political risks. While the possibility exists for draconian measures guised as financial regulation to come out of Washington, we do not believe the ultimate legislation will have a material long-term impact on Morgan’s businesses and earnings power. Accordingly, we believe the risk/reward profile favors long-term investors focused on the future earnings power of the company.
Trims / Deletions
AFLAC (AFL)
The Investment Committee has decided to eliminate the position in Aflac in our equity portfolios. The stock has significantly outperformed the market over the past year, led by improving business fundamentals. At the same time, however, the stock's risk profile has increased given the company's exposure to European credit, which constitutes a significant portion of Aflac's asset base. At current price levels, we believe investors are not likely being compensated adequately for this balance sheet risk. In addition, while Japanese and U.S. operations remain strong, the company faces increasing competition as deregulation in Japan has allowed large life insurance companies to compete directly with Aflac.
The Investment Committee has decided to eliminate the position in Aflac in our equity portfolios. The stock has significantly outperformed the market over the past year, led by improving business fundamentals. At the same time, however, the stock's risk profile has increased given the company's exposure to European credit, which constitutes a significant portion of Aflac's asset base. At current price levels, we believe investors are not likely being compensated adequately for this balance sheet risk. In addition, while Japanese and U.S. operations remain strong, the company faces increasing competition as deregulation in Japan has allowed large life insurance companies to compete directly with Aflac.
April, 2010
Purchases / Additions
Chevron Corporation (CVX)
The Investment Committee has decided to add to its position in Chevron Corporation (CVX). Chevron has one of the most attractive portfolios of development projects, and the best profile for future production growth among the major integrated oil companies. Their portfolio of investment opportunities is strong with 37 new projects in promising areas such as Australia, Angola, and the Gulf of Mexico. CVX has a healthy financial position that offers a great deal of flexibility. They are expected to earn around $18 billion of free cash flow from 2010 through 2012, likely leading to higher dividends, share repurchases, and other investments in growth opportunities. Trading at approximately 8.4x normalized EPS with a dividend yield of 3.3%, Chevron remains the least expensive of the US majors and one of the best values within the integrated sector.
The Investment Committee has decided to add to its position in Chevron Corporation (CVX). Chevron has one of the most attractive portfolios of development projects, and the best profile for future production growth among the major integrated oil companies. Their portfolio of investment opportunities is strong with 37 new projects in promising areas such as Australia, Angola, and the Gulf of Mexico. CVX has a healthy financial position that offers a great deal of flexibility. They are expected to earn around $18 billion of free cash flow from 2010 through 2012, likely leading to higher dividends, share repurchases, and other investments in growth opportunities. Trading at approximately 8.4x normalized EPS with a dividend yield of 3.3%, Chevron remains the least expensive of the US majors and one of the best values within the integrated sector.
International Business Machines (IBM)
The Investment Committee has decided to add to our existing position in International Business Machines. During the past decade, the company has divested low-margin, commoditized businesses such as personal computers, and strengthened their position in software and services through strategic investments in more than 100 companies. With roughly 65% of revenues generated outside the U.S., IBM is well diversified globally and will continue to benefit from the synchronized global economic recovery currently underway. IBM's transformation to a services-oriented company should allow them to continue to grow earnings at a double-digit pace as they continue to shift their revenue mix toward high-margin services and software. Consulting services bookings grew 18% year over year, which we believe signals improving IT spending trends and reinforces our outlook for the industry. First-quarter results solidly beat expectations, and while management raised guidance, we believe earnings estimates are still conservative. In addition to the positive quarter, management also announced an $8 billion share repurchase program and an 18% dividend increase.
The Investment Committee has decided to add to our existing position in International Business Machines. During the past decade, the company has divested low-margin, commoditized businesses such as personal computers, and strengthened their position in software and services through strategic investments in more than 100 companies. With roughly 65% of revenues generated outside the U.S., IBM is well diversified globally and will continue to benefit from the synchronized global economic recovery currently underway. IBM's transformation to a services-oriented company should allow them to continue to grow earnings at a double-digit pace as they continue to shift their revenue mix toward high-margin services and software. Consulting services bookings grew 18% year over year, which we believe signals improving IT spending trends and reinforces our outlook for the industry. First-quarter results solidly beat expectations, and while management raised guidance, we believe earnings estimates are still conservative. In addition to the positive quarter, management also announced an $8 billion share repurchase program and an 18% dividend increase.
Trims / Deletions
Goldman Sachs (GS)
The Investment Committee has decided to sell Goldman Sachs out of the Quality Growth portfolio. Although we continue to consider Goldman Sachs a high quality company with excellent growth prospects and an attractive valuation, the recent civil action against the firm - as well as the possibility of regulatory overreach within the financial industry - has resulted in an increased risk profile for the stock.
The Investment Committee has decided to sell Goldman Sachs out of the Quality Growth portfolio. Although we continue to consider Goldman Sachs a high quality company with excellent growth prospects and an attractive valuation, the recent civil action against the firm - as well as the possibility of regulatory overreach within the financial industry - has resulted in an increased risk profile for the stock.
Although the final outcome of the civil case is difficult to predict, we believe the company has a good legal defense and the ultimate damages, if any, will not likely be material relative to Goldman's financial position and cash flow generation. That said, Wall Street firms have been the focus of populist angst, and it is entirely possible that the SEC's actions could be used for political leverage in the debate on the future of financial industry regulation. Given the potential of Goldman Sachs being used as a scapegoat, as well as the possibility of future investigations and legal actions, we believe it is prudent to move to the sidelines until there is greater clarity on both the specific SEC complaint and financial regulatory overhaul.
March, 2010
Purchases / Additions
Goldman Sachs (GS)
The Investment Committee has decided to initiate a position in the Goldman Sachs Group, the preeminent investment banking firm, in the Portfolio's. Headquartered in New York, Goldman has approximately $850 billion in assets and employs 32,500 people in offices across 30 countries. Approximately 44% of the company's net revenues are derived outside the Americas. Goldman Sachs operates in three major segments: Trading and Principal Investments (66% of revenue, on average, over the last three years), Asset Management and Securities Services (19%), and Investment Banking (15%).
The Investment Committee has decided to initiate a position in the Goldman Sachs Group, the preeminent investment banking firm, in the Portfolio's. Headquartered in New York, Goldman has approximately $850 billion in assets and employs 32,500 people in offices across 30 countries. Approximately 44% of the company's net revenues are derived outside the Americas. Goldman Sachs operates in three major segments: Trading and Principal Investments (66% of revenue, on average, over the last three years), Asset Management and Securities Services (19%), and Investment Banking (15%).
Although brokerage firms are known for the volatility of their revenue and profits, Goldman Sachs has exhibited relatively stable earnings and book value growth since its initial public offering in 1999. Despite tumultuous markets, the company has generated annual profits each year since its IPO, and posted only one quarterly loss (in the fourth quarter of 2008) during this time period. Goldman posted average annual earnings and book value per share growth of 15.6% and 19.8%, respectively, over the last ten years. Return on equity has averaged approximately 19% each year.
Goldman has considerable opportunity in capturing market share in the aftermath of the financial crisis. There are now fewer competitors within the industry, and clients - mindful of their counter-party risk - are seeking to do business with only the strongest firms. Goldman is extremely well capitalized, with industry-leading regulatory capital ratios. Leverage (assets/common equities) is currently at a historical low, at 12 times, but management expects this to increase as markets return to a state of normalcy. Investor uncertainty regarding the capital markets, as well as political risk, has resulted in Goldman Sachs stock trading at a discount to its historical average, creating significant opportunity. The stock trades at approximately 1.2 times estimated 2010 yearend book value per share, compared to the historical average of between 1.7 and 2.2 times book.
Trims / Deletions
United Technologies (UTX)
The Investment Committee has decided to trim the United Technologies position within the Portfolio's. UTX and its industrial brethren have outperformed the broader market over the last year, leading to a relative overweight position for both the stock and the sector. United Technologies continues to be a core position in the Quality Growth Portfolio based on its impressive track record and dominant position in the end markets that it serves, but the company's exposure to the global commercial real estate market tempers its near-term earnings growth. In line with our "cyclical-to-predictable" thesis for 2010, reducing the weighting in UTX will free up proceeds for more compelling growth opportunities.
The Investment Committee has decided to trim the United Technologies position within the Portfolio's. UTX and its industrial brethren have outperformed the broader market over the last year, leading to a relative overweight position for both the stock and the sector. United Technologies continues to be a core position in the Quality Growth Portfolio based on its impressive track record and dominant position in the end markets that it serves, but the company's exposure to the global commercial real estate market tempers its near-term earnings growth. In line with our "cyclical-to-predictable" thesis for 2010, reducing the weighting in UTX will free up proceeds for more compelling growth opportunities.
February, 2010
Purchases / Additions
PepsiCo (PEP)
The Investment Committee has decided to add to our US and global portfolio's position in PepsiCo. PepsiCo's strong stable of diversified brands, including Frito-Lay, Gatorade, Tropicana, Quaker, and strength in international markets all provide growth long-term growth opportunities well beyond the mature carbonated-soft-drink (CSD) market and the company is well positioned to deliver consistent double-digit earnings growth as the economic recovery matures. The imminent closing of the bottler acquisition will provide a further catalyst to the stock, as we believe company management will articulate a clear framework for earnings growth through merger synergies, share buy-backs, and reinvestment in strategic growth initiatives. We believe the stock currently offers significant upside and limited downside thanks to its subdued valuation and our expectation for future earnings growth. We expect PepsiCo, which has historically generated 12% earnings per share growth, to continue to do so for the foreseeable future and the stock trades at only 15x 2010 and 13x 2011 expected earnings versus a historical average of 18-20 times forward earnings.
The Investment Committee has decided to add to our US and global portfolio's position in PepsiCo. PepsiCo's strong stable of diversified brands, including Frito-Lay, Gatorade, Tropicana, Quaker, and strength in international markets all provide growth long-term growth opportunities well beyond the mature carbonated-soft-drink (CSD) market and the company is well positioned to deliver consistent double-digit earnings growth as the economic recovery matures. The imminent closing of the bottler acquisition will provide a further catalyst to the stock, as we believe company management will articulate a clear framework for earnings growth through merger synergies, share buy-backs, and reinvestment in strategic growth initiatives. We believe the stock currently offers significant upside and limited downside thanks to its subdued valuation and our expectation for future earnings growth. We expect PepsiCo, which has historically generated 12% earnings per share growth, to continue to do so for the foreseeable future and the stock trades at only 15x 2010 and 13x 2011 expected earnings versus a historical average of 18-20 times forward earnings.
Abbott Laboratories (ABT)
The Investment Committee has decided to add to the US and global portfolio's position in Abbott Labs. Abbott is a diversified healthcare company with market-leading positions in four categories: pharmaceuticals, diagnostics, cardiovascular, and nutritional products. After successfully navigating the patent expiration of blockbuster-drug Depakote in 2008, the pharmaceutical division is currently experiencing high growth thanks to Humira (for the treatment of rheumatoid arthritis, psoriasis, and Crohn's Disease) and its hypertension franchise (Tricor, Trilipix, Niaspan). Another major growth driver for Abbott continues to be its cardiovascular division, with its new drug-eluting stent, Xience V, which is gaining market share in all major geographies. The nutritional products (Similac, Ensure) and diagnostics divisions, while more mature, provide the company with consistent and predictable cash flow generation. Abbott Labs has an excellent track record with mergers and acquisitions, and recently closed the purchase of Solvay Pharmaceuticals. Solvay will be immediately accretive to earnings and gives Abbott additional exposure to emerging markets. Abbott has posted historical EPS growth of about 11%, and consensus projections call for earnings growth in the 10%-12% range over the next five years. The stock trades at a very reasonable 13 times 2010 earnings, generates substantial free cash flow, and offers a current dividend of about 3%.
The Investment Committee has decided to add to the US and global portfolio's position in Abbott Labs. Abbott is a diversified healthcare company with market-leading positions in four categories: pharmaceuticals, diagnostics, cardiovascular, and nutritional products. After successfully navigating the patent expiration of blockbuster-drug Depakote in 2008, the pharmaceutical division is currently experiencing high growth thanks to Humira (for the treatment of rheumatoid arthritis, psoriasis, and Crohn's Disease) and its hypertension franchise (Tricor, Trilipix, Niaspan). Another major growth driver for Abbott continues to be its cardiovascular division, with its new drug-eluting stent, Xience V, which is gaining market share in all major geographies. The nutritional products (Similac, Ensure) and diagnostics divisions, while more mature, provide the company with consistent and predictable cash flow generation. Abbott Labs has an excellent track record with mergers and acquisitions, and recently closed the purchase of Solvay Pharmaceuticals. Solvay will be immediately accretive to earnings and gives Abbott additional exposure to emerging markets. Abbott has posted historical EPS growth of about 11%, and consensus projections call for earnings growth in the 10%-12% range over the next five years. The stock trades at a very reasonable 13 times 2010 earnings, generates substantial free cash flow, and offers a current dividend of about 3%.
Trims / Deletions
AT&T (T)
The Investment Committee has decided to eliminate AT&T from all portfolios. The company has been enjoying substantial subscriber growth as the exclusive carrier of the iPhone, but the growth in the wireless business has not been able to offset secular declines in the traditional wire-line telephone business. At the same time, the company faces a potential price war with Verizon Wireless, and has significantly higher capital spending requirements to upgrade its wireless network for the tremendous increase in data usage stemming from the success of the iPhone. The stock still offers investors high current income through its generous dividend, but its relatively lackluster estimated earnings growth precludes its continued inclusion in our portfolios.
The Investment Committee has decided to eliminate AT&T from all portfolios. The company has been enjoying substantial subscriber growth as the exclusive carrier of the iPhone, but the growth in the wireless business has not been able to offset secular declines in the traditional wire-line telephone business. At the same time, the company faces a potential price war with Verizon Wireless, and has significantly higher capital spending requirements to upgrade its wireless network for the tremendous increase in data usage stemming from the success of the iPhone. The stock still offers investors high current income through its generous dividend, but its relatively lackluster estimated earnings growth precludes its continued inclusion in our portfolios.
January 2010
Purchases / Additions
McDonald's Corp. (MCD)
The Investment Committee has decided to initiate a position in McDonald's in our US and Global strategies. McDonald's is a leading global retailer with more than 32,000 system wide (includes franchised and company-owned) restaurants in 118 countries. The company generated 2008 revenues of $23.5 billion with system wide sales of close to $70 billion. McDonald's is a geographically diverse company - the U.S. accounts for only 34% of revenues, Europe 42%, with the remainder generated in Asia, Africa, South America, and the Middle East. After outperforming in 2008, MCD shares have significantly lagged their industry group and the overall market in 2009. This is primarily due to the market's correct perception of the company's stock as being a safe haven investment. Despite the company's global footprint, MCD's remains under-penetrated in many markets. Growth in these international markets is central to our advisor's thesis in purchasing the company. We believe the company can deliver 10% earnings per share growth and continue to generate substantial cash flow to fund future dividend growth. The stock, currently trading 14x next year's estimated earnings, is priced at a discount to the S&P, and well below its historic average. After their recent dividend hike the stock yields 3.5%. McDonald's is one of the highest quality and best run consumer companies in the world. Their global exposure, highly predictable growth outlook, and defensive characteristics improve the overall characteristics of the portfolio.
The Investment Committee has decided to initiate a position in McDonald's in our US and Global strategies. McDonald's is a leading global retailer with more than 32,000 system wide (includes franchised and company-owned) restaurants in 118 countries. The company generated 2008 revenues of $23.5 billion with system wide sales of close to $70 billion. McDonald's is a geographically diverse company - the U.S. accounts for only 34% of revenues, Europe 42%, with the remainder generated in Asia, Africa, South America, and the Middle East. After outperforming in 2008, MCD shares have significantly lagged their industry group and the overall market in 2009. This is primarily due to the market's correct perception of the company's stock as being a safe haven investment. Despite the company's global footprint, MCD's remains under-penetrated in many markets. Growth in these international markets is central to our advisor's thesis in purchasing the company. We believe the company can deliver 10% earnings per share growth and continue to generate substantial cash flow to fund future dividend growth. The stock, currently trading 14x next year's estimated earnings, is priced at a discount to the S&P, and well below its historic average. After their recent dividend hike the stock yields 3.5%. McDonald's is one of the highest quality and best run consumer companies in the world. Their global exposure, highly predictable growth outlook, and defensive characteristics improve the overall characteristics of the portfolio.
International Business Machines (IBM)
The Investment Committee has decided to initiate a position in International Business Machines. IBM provides a wide range of services, software, and hardware solutions across multiple industries. With annual revenues of over $100 billion, approximately 400,000 employees, and operations in more than 170 countries, the company is the world's largest services vendor, largest enterprise hardware provider (ex PCs), and second largest software vendor. IBM has long been a company synonymous with quality. During the past decade, the company has divested low-margin, commoditized businesses such as personal computers, and strengthened their position in software and services through strategic investments in more than 100 companies. The company is now focused on the next generation of client needs, including business intelligence and analytics, virtualization, and green solutions. With roughly 65% of revenues generated from outside the U.S., IBM is well diversified globally and will continue to benefit from the global synchronized recovery currently underway. They are focused and well positioned to benefit from ongoing infrastructure growth in emerging markets; these growth markets currently account for 18% of total revenue, but are growing 5x faster than developed markets. IBM's transformation to a services oriented company should allow them to continue to grow earnings at a double-digit pace. The company's highly predictable earnings growth (100% Value Line earnings predictability score), attractive valuation (less than 12x 2010 earnings), diversified high-margin businesses, and global reach makes it a worthy addition to the portfolio.
The Investment Committee has decided to initiate a position in International Business Machines. IBM provides a wide range of services, software, and hardware solutions across multiple industries. With annual revenues of over $100 billion, approximately 400,000 employees, and operations in more than 170 countries, the company is the world's largest services vendor, largest enterprise hardware provider (ex PCs), and second largest software vendor. IBM has long been a company synonymous with quality. During the past decade, the company has divested low-margin, commoditized businesses such as personal computers, and strengthened their position in software and services through strategic investments in more than 100 companies. The company is now focused on the next generation of client needs, including business intelligence and analytics, virtualization, and green solutions. With roughly 65% of revenues generated from outside the U.S., IBM is well diversified globally and will continue to benefit from the global synchronized recovery currently underway. They are focused and well positioned to benefit from ongoing infrastructure growth in emerging markets; these growth markets currently account for 18% of total revenue, but are growing 5x faster than developed markets. IBM's transformation to a services oriented company should allow them to continue to grow earnings at a double-digit pace. The company's highly predictable earnings growth (100% Value Line earnings predictability score), attractive valuation (less than 12x 2010 earnings), diversified high-margin businesses, and global reach makes it a worthy addition to the portfolio.
Trims / Deletions
Nokia (NOK)
The Investment Committee has decided to sell our position of Nokia. Nokia has underperformed its peers, both fundamentally and in terms of price performance, since the portfolio's purchase in mid-2009. The company's number one market share position continues to be eroded by both high-end smartphone alternatives and low-end entrants to the market. We have also been disappointed by the pace and success of new product introductions and missteps at Nokia Siemens Networks (NSN). The Investment Committee believes the portfolio can be improved and better positioned for the next phase of the economic cycle by investing the proceeds from Nokia's sale in more predictable, lower volatility alternatives such as IBM.
The Investment Committee has decided to sell our position of Nokia. Nokia has underperformed its peers, both fundamentally and in terms of price performance, since the portfolio's purchase in mid-2009. The company's number one market share position continues to be eroded by both high-end smartphone alternatives and low-end entrants to the market. We have also been disappointed by the pace and success of new product introductions and missteps at Nokia Siemens Networks (NSN). The Investment Committee believes the portfolio can be improved and better positioned for the next phase of the economic cycle by investing the proceeds from Nokia's sale in more predictable, lower volatility alternatives such as IBM.
Target (TGT)
The Investment Committee has decided to eliminate its position in Target. The company has performed well during the market rebound, increasing 90% from its lows in March, outpacing both the broader market and its sector. This dramatic performance is indicative of a stock reliant on discretionary consumer spending, which usually tends to lead the market during the initial stages of a market recovery. As the market recovery matures we believe leadership will rotate away from stocks such as Target that have participated significantly during the recovery and into more defensive positions.
The Investment Committee has decided to eliminate its position in Target. The company has performed well during the market rebound, increasing 90% from its lows in March, outpacing both the broader market and its sector. This dramatic performance is indicative of a stock reliant on discretionary consumer spending, which usually tends to lead the market during the initial stages of a market recovery. As the market recovery matures we believe leadership will rotate away from stocks such as Target that have participated significantly during the recovery and into more defensive positions.
Lowe's Cos. (LOW)
The Investment Committee has decided to eliminate the portfolio's position in Lowe's Company. As the market recovery matures we believe discretionary companies such as LOW's will lag the market as investors favor more predictable stocks. We also believe that as consumers deleverage spending will continue to grow at a sub-par pace. In addition, much tighter credit standards and the difficult housing market will continue to weigh on the shares. The portfolio's risk/reward characteristics and positioning for the next stage of the economic recovery and market rally will be improved by deploying LOW's proceeds into more attractive opportunities.
The Investment Committee has decided to eliminate the portfolio's position in Lowe's Company. As the market recovery matures we believe discretionary companies such as LOW's will lag the market as investors favor more predictable stocks. We also believe that as consumers deleverage spending will continue to grow at a sub-par pace. In addition, much tighter credit standards and the difficult housing market will continue to weigh on the shares. The portfolio's risk/reward characteristics and positioning for the next stage of the economic recovery and market rally will be improved by deploying LOW's proceeds into more attractive opportunities.
