2 Potential Shorts From AIG's Top Sells, 3 I'd Buy

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Includes: INTC, MCD, MSFT, MU, PG
by: Rash Menaria

American International Group, Inc. (NYSE:AIG) is one of the biggest international insurance organizations, serving customers in more than 130 countries. I discussed AIG's Top buys in a previous article. In this article, I would be discussing some of the AIG's top sells from the last quarter, as reported in the most recent 13F filing.


Stock

Symbol

Shares Held as on 09/30/2011

Shares Held as on 12/31/2011

Change in shares

McDonald's Corp.

MCD

926,071

570,903

-355,168

Procter & Gamble Co.

PG

1,422,145

108,501

-1,313,644

Micron Technology Inc.

MU

811,212

507,371

-303,841

Intel Corporation

INTC

4,595,440

221,566

-4,373,874

Microsoft Corporation

MSFT

5,689,920

217,034

-5,472,886

Click to enlarge

I believe McDonald's and Proctor & Gamble are good short candidates from the above list. However, I don't agree with AIG on Micron, Intel and Microsoft and believe they are a buy instead of sell.

McDonald's is the largest fast food restaurant chain by revenue. It operates in 120 countries with about 81% of its units operating as independent franchisees. It derives about half of its revenue from the U.S., one-third from Europe and remaining from APMEA regions.

Although McDonald's posted strong Q4 results driven by same-stores sales growth and franchised margin expansion, things may become a bit more difficult in 2012 as the macroeconomic forces are likely to be less supportive. Cost outlook for 1H 2012 looks challenging with food inflation trending above 4.5-5.5% in Europe. Strong negative FX pressure is also expected because of weakening euro and other currencies. Both these factors are expected to add to margin compression in the near term. Other factors affecting the bottom line include G&A expense, which is expected to be up by 6% due to the Olympics and technology investments.

In addition to these headwinds, McDonald's PE multiple at 16x is almost near its post-recovery high and I see little chance of any appreciation from here.

Procter and Gamble is a worldwide manufacturer and marketer of consumer and personal care products. Its well known brands include Pampers, Gillette, Pantene, Duracell, Clairol, Charmin and Bounty. It largely is a mature market player, with only 30% of revenue coming from emerging markets.

Recently, P&G reported disappointing FYQ2 results and lowered its 2012 guidance. With its business heavily levered toward developed markets, I expect P&G will continue to struggle with top-line growth as consumer spending weakens. P&G is losing its market share in mature markets, and it needs more innovation in its products to drive the growth. Even in emerging markets, I believe that margins will be under pressure, due to investment spending, along with Forex headwinds.

With the macro headwinds in the form of input costs and currency drags, and continued softening of developed-market growth rates, I don't like the risk-reward profile of P&G, and expect a near-term downside.

Micron Technology engages in the manufacture and marketing of semiconductor devices worldwide. It is a leading designer and producer of DRAM memory and NAND flash memory and offers foundry services for CMOS image sensors.

Micron recently highlighted that DRAM supply in 2012 should remain controlled as DRAM manufacturers cut their production levels and decreased the capex guidance. After the recent bottoming out of DRAM prices this should help improve prices. The improving HDD situation bolstering PC demand should also help DRAM prices. Demand for server DRAM also seems positive with improving trends in Cloud and Big Data/Fast Data. Further as the DRAM industry consolidates after Elpida's bankruptcy, Micron would be in a strong position in the DRAM market with above 25% market share.

Micron has increased its focus on NAND and SSD and is trying to increases its share in both consumers and enterprise market with new products and solutions. In addition MU's partnership with EMC Corporation (EMC) for the VFCache offers further growth potential for MU in enterprise SSD space. With its diversified business model, a string of new opportunities and DRAM recovery, there is enough upside potential in the near term for MU.

Intel is the world's largest supplier of semiconductor chips. The company designs and manufactures microprocessors, boards, and semiconductor components that are used in computers, servers, and networking and communication products. The company is the world's largest supplier of microprocessors, with a worldwide market share of more than 75%.

Intel reported good Q4 results and gave better-than-expected guidance for 2012. The Enterprise and emerging market strength pushed its PC sales while strong data traffic drove Data Centre revenue. Going forward, improving trends in Cloud and High Performance Computing are expected to drive server processor growth. The company's recent QLogic acquisition has increased its breadth of product line and strengthened its position in the super computing market.

Intel's Data Centre Capex guidance further supports the server processors' growth and upside potential to its margins in 2012. With new product cycles (Ivy Bridge, Romley and Medfield) and investments in its manufacturing and R&D capabilities, Intel is expected to gain market share against its competitor AMD.

Intel is committed to returning cash to its shareholders with a healthy 3.1% dividend yield and $4 billion in stock repurchases last year. It has authorization for a further $10 billion repurchase. Even with modest PC trends, the server market growth provides with considerable upside potential for its near-term earnings and multiple expansion.

Microsoft has seen a positive breakout on the upside from its last 2-year trading range. It is currently trading at a forward P/E of 10x. I believe Microsoft is a good medium-term investment. Its cash cushion limits the downside, as well as enables it to make opportunistic acquisitions. In addition, Microsoft is also taking a lot of new initiatives, which can drive meaningful growth over the next few years. Some of the major catalysts for the stocks are the Windows 8 launch, Office 365 gaining traction and a successful adoption of Nokia (NYSE:NOK)-WP7 phones. I think Microsoft offers an attractive risk/reward for investors who can hold the stock for one year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.