Over the last few years, rising asset correlations trained investors to follow macro market factors. But stock specific factors like earnings announcements still matter. Last week we had grocer SUPERVALU in our article, 7 Cheap Companies Report Earnings Next Week. We wrote, "the company is worth a closer investigation. Based on the current distress, the company could be leveraged for upside on any better than expected news." Following their better than expected earnings, the company jumped 17%.ABBOTT LABORATORIES (ABT)Forward P/E: 10.44
PEG Ratio: 1.20
The diversified health care company operates under four segments: Diagnostics, Pharmaceuticals, Nutritionals and Vascular products. Like many other firms with sizeable pharmaceutical exposure, Abbott's stock price has been hurt because their most important drug Humira (which represented 20% of corporate revenues) will face generic competition as soon as 2013. But unlike many other pure play branded pharmaceutical companies, Abbott Lab only derives 43% of revenues from proprietary drugs. Abbott isn't completely a victim to generic drugs. Their purchase of Solvay gives them a footprint in branded generics production in India. Between this and other foreign sales, the international growth could replace much of the company's sales decreases attributed to loss of exclusivity in the coming years.
While we think the valuations make the stock appear cheaper than it actually is, Abbott provides investors with an interesting opportunity. The market has punished the stock as if it were a pure play branded drug maker but its diversity and growth opportunities ensure that the company deserves a premium to the pure play branded drug names. One potential catalyst would include a spin-off or sale of the nutritional products unit which produces Ensure. Investors confident of an imminent spin-off should buy this stock, but others may want to wait for further stock weakness.
ALTRIA GROUP (MO)
Forward P/E: 12.38
ROA (ttm): 11.20%
The company is an international manufacturer of tobacco products under the Marlboro, Virginia Slims, Skoal and Copenhagen brands. The company's cigarette sales have declined between 2008 and 2010 from $169.4 billion to $140.8 billion. As a result, cigarettes' share of total revenues have declined from 95.4% to 82.1%. Despite the decline in cigarette revenues, the company's total revenues have grown from $18.79 billion in 2006 to $24.36 billion in 2010.
The company's valuations and profitability are interesting, but there are better opportunities in the stock market.
AMERICAN EXPRESS (AXP)
Forward P/E: 11.27
ROA (ttm): 2.98%
The credit card and travel-related services company is one of the world's premiere brands. During the credit crisis, the stock paid a heavy price for its aggressive policies as the stock price fell from more than $60 to less than $15.
The company's sharp increase in adjusted net income from $3.5 billion in 2009 to $5.6 billion in 2010 is a promising sign. In addition, other metrics have been very positive. Worldwide, average spending per proprietary card increased 18% in 2010 from 2009 levels.Regulatory pressures could affect margins going forward, but current valuations are an interesting opportunity considering the company's brand value. The company is conservatively capitalized with ratios well above the risk based capital thresholds for "well-capitalized." In addition, there is potential growth both domestically and abroad. As the banking industry continues to adjust to the new landscape, there should be significant opportunities for deposit growth among firms with capacity under the regulatory deposit limits that the mega money center banks are already at or above.
APPLE INC (AAPL)
Forward P/E: 12.38
PEG Ratio: 0.70
ROA (ttm): 19.09%
The popular retail electronics designer and manufacturer has had a string of successes, and in the process, transformed itself from a counterculture niche brand to an international giant. For all of the stock price's performance strength, the company trades at stunningly low valuations. The forward P/E of 12.38 is already low but once you eliminate the approximately $50 billion of excess cash, the forward price/earnings is a surprisingly low 10.90! While retail consumers are fickle and there is legitimate reason to be concerned about Steve Jobs' health, the valuations alone make this stock an investment opportunity.
But there are additional things to consider ahead of earnings. The recent adjustments in the Nasdaq 100's weighting should have a fundamental effect on the recent stock performance. As a result of the important index's rebalancing, Apple's share of the index will fall from around 20.5% to around 12.3%.
Steve Jobs is a visionary and it will be interesting to see how this company develops going forward. There has been recent chatter about Apple developing a rival service to Netflix (NFLX). We previously suggested that Apple should enter social media in our article, Why Apple, Google, Microsoft or Yahoo Should Buy MySpace. The point is that the stock is cheap enough to buy and that the company continues to have intriguing opportunities and ammunition for growth.
WELLS FARGO (WFC)
Forward P/E: 8.41
ROA (ttm): 1.01%
Wells Fargo is one of the premiere banks in this country. With around 9,000 banking locations, Wells Fargo has a massive corporate footprint. One of the company's strengths is its strong noninterest income as a percentage of total revenues. In 2010, noninterest income was $40.45 billion of the total $85.21 billion in revenues. The benefit of this income is that it is not directly affected by credit losses and interest rate volatility.
With Tier 1 capital of 11.16%, WFC is above the well capitalized threshold. In addition, the bank has additional upside as it recovers from the financial crisis. In 2003, before the country's bank financials were inflated by housing market strength, Wells Fargo generated ROA of 1.64% in 2003 and 1.71% in 2004. Returning to these profitability levels is reasonable and if so, this bank has additional upside.
While Berkshire Hathaway's (BRK.A) average cost basis on their 358 million shares is around $22.33, it is worth mentioning that Warren Buffett continued to purchase shares around current prices. We think that Wells Fargo's valuations provides a great opportunity for investors interested in buying a premiere banking franchise with foreign growth opportunities. Investors bullish of Wells Fargo should also consider investing via TARP warrants, which we discuss the benefits of in, Bank Dividends Ready to Roar: How to Take Full Advantage. These warrants are especially useful if investors are bullish of future dividend payments since these warrants have anti-dilution features that protect warrant holders against price declines caused by dividend payments.