Seeking Alpha
Profile| Send Message|
( followers)  

BlackRock Financial Management, Inc. is an investment advisory and hedge fund firm founded by Robert S. Kapito. The firm is a subsidiary of BlackRock, Inc. (NYSE:BLK). The firm caters to high-net-worth individuals, banking or thrift institutions, pension and profit sharing plans, charitable organizations and corporations and manages over $150 billion in assets.

The following is a list of its top underperforming stocks which BlackRock sold in the last quarter. Against S&P 500’s 5.96% gain since September 30, 2011, these stocks have shown losses unto 16.69% to gains up to 5.26%.

Stock

Symbol

Change in BlackRock’s Holdings from Q2 to Q3 (no. of shares)

Price change since Sept. 30,2011

Verizon Communications inc.

VZ

-1736953

5.26%

Microsoft Corporation

MSFT

-1926582

1.65%

The Coca-Cola Company

KO

-535686

-0.91%

Bank of America Corporation

BAC

-3146165

-15.58%

Intel Corp.

INTC

-2593956

4.12%

Buckeye Partners LP

BPL

-198340

-0.26%

Virgin Media Inc.

VMED

-436637

-16.69%

Source: 13F filing

Two stocks where I like BlackRock’s move to reduce position are Verizon and Microsoft.

Verizon is a provider of communications services. The company has two segments: Domestic Wireless and Wireline. Its Domestic Wireless communications products and services include wireless voice and data services and equipment sales, which are provided to consumer, business and government customers across the United States. Wireline’s communications products and services include voice, Internet access, broadband video and data, Internet protocol network services, network access, long distance and other services.

The main growth driver of Verizon’s business is its Wireless segment. On the other hand, Wireline segment’s performance is not that great, and its revenues are expected to decline going forward. Investors looking to catch upside from Verizon’s wireless business can consider investing in Vodafone Group (NASDAQ:VOD) which has 45% stake in Verizon Wireless. According to Barron’s, Vodafone Group is a better way to invest in the performance of Verizon Wireless than Verizon Communications is, with a cheaper price, larger dividend (6.7%) and exposure to emerging markets.

Microsoft is engaged in developing, licensing and supporting a range of software products and services. I have been a Microsoft bull till the recent past despite of its poor stock performance. My main bullish arguement was its low valuations. However, I would like to change my recommendation now due to increasingly apparent industry trends which will prove damaging to Microsoft's leadership position in PC software industry. PC software space has been traditionally dominated by Windows, providing a good defensive business for Microsoft. Growing computer literacy and internet adoption have driven Microsoft’s business for past two decades. However, going forward, increasing tablet adoption is going to change the complete industry dynamics.

As tablets continue to take market share from tradition PCs and Laptops, Microsoft is bound to suffer. Microsoft doesn’t have any presence in tablet space as of now. It is going to launch Windows 8 OS next year, which can be used with tablets. However, I believe this late entry will prevent Microsoft from gaining leadership position in the tablet space which will have adverse consequence. It might end up being a 3rd player just like what happened in the mobile space. Apple’s iOS and Google’s Android are the main platforms in the smartphone space and they will likely be a tough competition for Microsoft in the tablet space as well.

One stock which I believe is trading at attractive levels after recent underperformance is Bank of America. Bank of America is trading at just 30% of its book value and 45% of its tangible book value. The stock has underperformed S&P500 (SPY) and broader financial services sector in last 3 months declining by ~24%. The stock is now available at a cheaper price than what Warren Buffett paid for it back in August.

I am becoming incrementally more positive on Bank of America, and would recommend buying it. I believe the market is completely neglecting some of the important steps taken by the bank to improve liquidity. Over the past several weeks, BofA has executed on several asset sales that are consistent with management’s efforts to strengthen the balance sheet and improve the company’s overall capital position. For example:

  • BofA recently announced an agreement to sell most of its remaining stake in China Construction Bank. At September 30, BofA held 12.1 billion shares (~5%) of CCB with a carrying value of $7.2 billion, and a fair value of $7.7 billion. Out of this Bank of America will sell approximately 10.4 billion common shares through private transactions with a group of investors. Earlier also, on August 29, BofA sold 13.1 billion shares of CCB reducing its risk-weighted assets by $7.3 billion under Basel I. Together with some further realization of the deferred tax asset, the sale of the 10.4 billion CCB shares should generate about $2.9 billion of Tier 1 common capital boosting that ratio by 24bps.
  • BofA recently sold its stake in the Pizza Hut franchisee, for $755 million.
  • BofA’s previously announced sale of the Canadian card business is expected to close in 4Q11. It will free-up approximately $8 billion of RWA and as such will add another 7bps to the Tier 1 common capital ratio.

In addition to these transactions, Bank of America is also taking advantage of current market conditions, which are putting downward pressure on the market values of BofA’s debt and preferred stock issues, some of which are now trading below par. Management is issuing up to 400 million shares of common stock (3.9% of outstandings) and $3 billion in new senior notes to effectively replace roughly $6 billion of higher-cost preferred stock and/or trust preferred capital debt securities.

Once the eurozone stabilizes, the market will take a notice of these confidence-building measures, which will be a positive catalyst for the stock.

I also like Coca Cola despite of its relative underperformance. Coca cola is one of the best defensive bets in the current uncertain times, with its stable business. Growth trends in emerging markets, focus on cost savings and strong cash generation, all add up to an attractive long term growth story for investors in Coca-Cola. Its innovative marketing programs have continued to push and drive the growth of the brand. Trading at ~15x forward PE with 2.8% dividend yield, I believe Coca Cola makes a good buy.

Source: Top Underperforming Stocks BlackRock Is Selling