Vanguard's Top Sells: 2 Short Ideas, 3 Buys

by: The Analyst Hub

Founded by John C. Bogle in 1975, Vanguard Group, Inc. is a client-owned investment advisory firm. The firm manages the Vanguard series of mutual funds in addition to other funds and caters to individual and institutional investors.

I discussed Vanguard Group's Top Buys from the last quarter in a previous article. In addition, it is also interesting to look at the top stocks where Vanguard is reducing its holdings. In this article, I will be discussing some of the top sells from Vanguard, as released in its last quarter 13F filing with SEC.

Amgen: My take is Sell

Vanguard sold 4,604,556 shares of Amgen, Inc. (NASDAQ:AMGN) last quarter. Amgen Inc., a biotechnology company, discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology in the United States, Europe and Canada. Its flagship drugs include Aranesp, Epogen, Neupogen and its second generation compounds.

Amgen has had a good run in the last three months. Management's recent capital deployment strategy has worked well and resulted in Amgen's recent outperformance since November. But with this catalyst now behind, I believe positive pipeline news will be required for Amgen's multiple expansion from here as its P/E closely correlates with long-term growth. However, the company doesn't have any major pipeline catalyst for 2012. Also concerning is the declining Epogen and Arnesp sales due to increasing competition and maturing markets. The stock has already run up ~25% since November lows and I don't see any further upside.

Hewlett Packard: My take is Sell

Vanguard sold 3,166,788 shares of Hewlett Packard Co. (NYSE:HPQ) last quarter. Hewlett Packard has taken quite a bit of hammering in the stock market in the recent past. After a dismal 2011 where we saw the leadership change with Meg Whitman becoming its new CEO, HP is trying to stage a turnaround. However, it looks like a long, tough path ahead for HP for its recovery as its CEO succinctly put it when HP announced its first-quarter results for this year.

There was nothing to cheer for when HP reported its first-quarter results, as revenue declined by 7% year on year. Its PC volumes declined by 18% year-year, trailing the broader PC market by a significant margin. It can only mean that it is losing market share to Lenovo (OTCPK:LNVGY). Lenovo incidentally reported strong sales growth across all major markets. Further, its Enterprise Servers, Storage and Networking business, and Imaging and printing Group seem to be struggling with revenue declining by 10% year-year and 7% year-year, respectively. In addition to broader macro factors, company-specific issues are also a big concern for the company. For example, HP's industrial standard servers revenue declined by 9% sequentially, while Dell Inc (NASDAQ:DELL) and International Business Machines Corporation (NYSE:IBM) saw an increase of 6% and 16%, respectively, from the previous quarter. Clearly, HP is losing market share in server business as well.

Unless there are some visible signs that the company's turnaround efforts are working and its market share losses are reversing, I see the stock continuing its downward journey.

Intel: My take is Buy

Vanguard sold 809,039 shares of Intel Corp. (NASDAQ:INTC) last quarter. Intel is a good GARP stock. Intel's growth is significantly outperforming the broader PC markets. Going forward, cloud computing, secular growth in servers, and a strong product pipeline, are likely to drive good growth for the company. In addition, it also has a good share-growth opportunity in the mobile space. Trading at 10.25x forward earnings, the stock does not look expensive, and there is a good chance of multiple expansion. A 3.5% dividend yield is an added benefit for investors looking to buy the stock. I have discussed Intel's bulls thesis in a previous article.

Dell Inc: My take is Buy

Vanguard sold 784,622 shares of Dell Inc. last quarter. Dell Inc. is one of the world`s largest manufacturers of computers, with worldwide PC market share of ~13% and FY11 revenue of $61 billion. The company offers a full range of IT products and services, including desktops, notebooks, PDAs, servers, storage systems, printers, and other peripherals, which it primarily sells to customers using a direct model. The company also provides services and resells third-party peripherals and software.

Recently, Dell reported a mixed January quarter. However, its guidance for 7% declines in April quarterly revenues was disappointing, causing the stock to give away some of its YTD gains. I believe investors should utilize this opportunity to go long on the stock. Dell is still in the initial stages of transformation and such speed bumps are likely. However, I am still bullish about the medium- to long-term prospects of the company.

Smarter business practices helped Dell improve its gross margins profile in 2011. Going forward, it is expected to continue as component pricing trends improve, along with a shift in the revenue mix towards non-PC and value-add solutions. With its enterprise storage better integrated, Dell could be a serious competitor in storage space, which offers long-term growth.

Dell also announced the creation of a new software group, which I believe is another step towards transforming the company to more of a solution provider. Dell, with its strong balance sheet and cash flow generation could make strategic acquisitions and repurchase shares. All these factors indicate a strong medium-term outlook with accelerating revenue growth.

The Walt Disney Co: My take is Buy

Vanguard sold 836,501 shares of The Walt Disney Co. (NYSE:DIS) last quarter. The Walt Disney Co. is a diversified media company with five operating segments, including Media (45% of revenue), Theme Parks (28% of revenue), Studio (18% of revenue), Consumer (7% of revenue) and Interactive (2% of revenue). The company has a world-class asset base, including 80% ownership of ESPN, the largest and most profitable cable network, the Disney Channel cable network, the ABC broadcast network, Walt Disney World and Disneyland theme parks, and the Walt Disney Studio.

In my view, Disney's combination of superior growth over the next several years, along with a stronger secular position, creates attractive opportunity. In media space, it will be difficult for any distributor to successfully compete without ESPN and Disney's networks. With ~12% annual increase in sports rights payments by ESPN over the last decade, the launching of new networks, and the extension to connected devices, ESPN has and will continue to see robust increases in the near future.

In the domestic parks business, consensus is building in appropriate levels of caution on margin expansion in 2012 because of pre-opening costs associated with marketing and training. However, 2013 onward, margins may surprise the Street on the upside as new attractions begin to roll off, increasing the parks' incremental margins.

Further, the company's expansion in the higher margin cruise business with the launch of Disney Dream and Disney Fantasy is expected to bode well for the investors. In addition to strong domestic trends, international markets continue to be a strong driver of revenue and margin growth for the company. Trading at 11.5x forward earnings, the stock doesn't look pricey and I recommend a buy.

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