Stocks in the News — week of July 1, 2013 (updated July 5)


Goodfellow LLC’s “Stocks in the News”

seen on Townhall Finance, heard on Ransom Notes Radio



China’s Pricing Demands Stunt Baby Formula Growth

After a July 1 accusation of alleged baby formula price-fixing in China, several large foreign manufacturers cut retail prices this week, forcing Mead Johnson Nutrition Company (MJN, $68.90) to follow suit with its Enfamil product, or lose market share.  The tactic seems to be a government ploy designed to support domestic manufacturers, bringing risk to near-term earnings and medium-term pricing power at Mead Johnson.

The pricing change will knock earnings growth down about 5% in 2013 & ’14, giving the company about a one percent earnings growth scenario this year.

The stock fell to support around $68 and will likely be stuck in this two-year trading range for quite a while longer.  Shareholders should consider trading out around $79 and moving into a growth stock.  (07/05/13)

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HP Wins Biggest Gov’t IT Contract, Again

Hewlett-Packard Co. (HPQ, $25.61) won a $3.5 billion contract to continue running the U.S. Navy’s communications network for the next five years.  Revenue from the project will fall 37% from the previous contract due to competition, smaller project size, and federal budget cuts.

On May 23, we said that “A revenue turnaround is the big-picture goal at HP, but that’s more of a marathon than a sprint.”  Earnings are projected to fall 12% this year, followed by two no-growth years.  The PE is 7.1 and the dividend yield is 2.3%.

We think the worst is over for HP stock, and we’re changing our recommendation from sell to hold.  Expect the stock to trade between $23 and $30 for a while.  There’s room for traders to make money there.  (07/05/13)

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Novartis May Give Shareholders a Shot in the Arm 

After recent management changes at multinational healthcare company Novartis AG (NVS, $70.55), Citi Research expects the company to shore up investor confidence by resuming a $10 billion buyback plan and/or announcing a strategic review to maximize value in its Consumer division.  The stock price also suffers from a heavily undervalued late-stage pharmaceutical pipeline.

Earnings are projected to fall 3% this year, then rise 6 and 10 percent the next two years.  The dividend yield is 2.23%.

The stock broke out of a long-term trading range in January, rose 20%, then had a big pullback.  Expect Novartis to trade between $70 and $75 for a while now.  (07/05/13)

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Medicare to Lower Dialysis Reimbursement Rates in 2014

Medicare has announced that reimbursement rates for dialysis may fall significantly in 2014, alarming investors in DaVita HealthCare Partners Inc. (DVA, $116.70 midday), the largest U.S. dialysis provider.  “Monday’s announced Medicare cut for dialysis services far surpasses our worst fears,” reports Citi Research.  Buy-side analysts were expecting an approximate 2% cut, but the net cut proposal from Medicare came in at 9.4%.

Watch for earnings estimates to fall for DaVita towards a no-growth scenario in 2014.

Berkshire Hathaway owns 14% of DaVita stock, causing recent speculation of a buyout offer, which may provide some ongoing support for the stock price.  The chart turned bearish with today’s price drop, and will likely re-establish support at $115.  (07/02/13)

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Market Rotation Favors Tech Stocks 

“Shares of technology companies are rallying as investors see capital spending for their products strengthening along with the economy,” reports Bloomberg.

Apple Inc. (AAPL, $419.65 midday) shares are rallying with news that the company filed with the Japan Patent Office in June to trademark the term “iWatch”.  The company is believed to be developing a digital wristwatch, which could provide new growth opportunities.

Apple’s earnings estimates are holding steady; projected to fall 10% this year, then rise 10% next year.  With a PE of 10.3 and a dividend yield of 2.98%, there’s limited downside at this point.  The trading range is firming up between $385 and $465.  (07/02/13)

* * * * * Becomes #26 Most Shorted Nasdaq 100 Component — Forbes

Online travel company Inc. (PCLN, $842.55 midday) has been seeing increased recent short action.  Given its bullish chart, investors should expect any near-term breakout to be enhanced by short-covering.

Priceline recently issued $1 billion in senior notes at low interest rates, and intends to repurchase $1 billion in stock, which should contribute to the company’s financial performance.  Earnings are projected to grow 21-23 percent per year over the next three years.

In February and May, we told investors to buy shares in Priceline.  The stock is up 21% since our first recommendation, and appears immediately ready to break past  upside resistance at $845.  (07/02/13)

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Visa Inc. Stock Breaking Out on the Upside Today

While the financial services industry has focused on generating higher profit margins, global payments company Visa Inc. (V, $186.79) “has been adapting a long-term approach by focusing on increasing total volumes and improving its clientele,” reports Seeking AlphaCiti Research says , “We continue to be impressed with new CEO Charlie Scharf and believe he is pursuing the right strategic path for the company.”  Standard & Poor’s Research says, “We like V’s business model, high level of cash flows and healthy balance sheet.”

Visa’s earnings are expected to grow 21, 16, and 18% in the next three years.  The PE is 24.9, in a five-year range of 13-48.

The stock reached all-time highs in May, then traded in a tight range of $176-$185 through last Friday.  The stock broke out on the upside today, and an immediate rise in price looks sustainable.  (07/01/13)

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Morgan Stanley Raises Rating, Target Price on Pandora Media

Morgan Stanley upgraded Pandora Media Inc. (P, $18.91) today to Overweight, with a $24 price target, calling Pandora “the best pureplay exposure to the secular shift of radio dollars to online channels.”  The company is also benefitting from growth in subscribers, and listener hours.

Morgan Stanley expects meaningful upside to Wall Street’s earnings estimates on Pandora.  After a string of annual net losses, Pandora is expected to earn a small profit this year, rising rapidly in the next several years.

The chart is bullish, with the stock breaking out of a recent trading range last week.  Pandora is an aggressive growth stock.  Investors should expect volatility and use stop-loss orders to protect profits.  (07/01/13)

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Citi Research Favors Avago Technologies

Citi Research raised earnings estimates today on Avago Technologies Ltd. (AVGO, $37.66), citing growth in its superior acoustic wave filter technology, and a broadbased business recovery.

The street expects earnings to grow 16 and 19% in 2014 & ’15.  The dividend yield is 2.23% and the PE is 15.6.

On June 18, we told investors to buy Avago.  The stock has been trading sideways in a consistent pattern for two-and-a-half years, and appears immediately ready to break out on the upside.  (07/01/13)

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