JP Morgan's Top Buys: 3 Potential Longs, 2 To Avoid

by: Rash Menaria

JP Morgan Chase and Co. (NYSE:JPM) manages ~ $200 bn in equity assets primarily through its asset management subsidiary JP Morgan Asset Management. The following is a list of its top purchases from the last quarter as reported in their latest 13F filing with SEC.



Shares Held as on 09/30/2011

Shares Held as on 12/31/2011

Change in shares

Apple Inc.





Freeport-McMoran Copper & Gold Inc.





Google Inc.





Cisco Systems Inc.





Baker Hughes Incorporated





I believe Freeport-McMoran, Google and Cisco are good buys among above stocks. However, I would like to avoid Apple and Baker Hughes among above stocks.

Freeport-McMoRan Copper & Gold Inc. engages in the exploration, mining, and production of mineral resources. The company primarily explores for copper, gold, molybdenum, silver, and cobalt. It holds interests in various properties, located in North and South America; the Grasberg minerals district in Indonesia; and the Tenke Fungurume minerals district in the Democratic Republic of Congo.

I am bullish on Freeport as it is well positioned to benefit from continuing strength in the prices for copper, gold and molybdenum. Despite a tough macro environment, copper prices have increased 17% from mid-December to date. As Chinese economy recovers and restocking cycle starts, there is further upside potential for copper prices.

Freeport recently announced a 25% increase in its annual common dividends supported by strong balance sheet and cash flows. Also, with the recent refinancing of its debt structure, prospects for special dividends have increased. Further, the company is ramping up its idle capacity and pursuing expansion projects which is expected to increase its copper production by 25% by 2016. With a strong value and growth proposition I believe FCX offers attractive reward to risk in both near and longer term.

Google Inc. is the world's #1 search engine and online advertising company. Google is trading at a forward PE of 12x. Its EPS forecast for the current year is 42.43 and next year is 50.07. According to the consensus estimates, Google's top line is expected to grow 22.60% in the current year and 18.80% next year. Google has a much undervalued asset in the form of Youtube where only 3% of current videos are monetized through video advertising. Given the secular shift of viewers from offline media to online, I believe online video advertising has a big potential. Google's recent announcement regarding launch of 100 online video channels on YouTube that would feature new original programming is a very important strategic step in the right direction in getting quality content to attract advertisers. Youtube is likely to become a major growth driver for Google in next few years. With over 18% earnings growth, cash pile of over $40bn and a secular tailwind in the form of online advertising growth, I find Google's current valuations very low.

Cisco designs, manufactures and sells Internet protocol-based networking and other products related to the communications and information technology industry and provide services associated with these products and their use. Recently the company delivered an impressive fiscal Q2 2012 results. Although its guidance for flat FQ3 revenue was below what some investors expected, I believe it has more to do with conservatism on the part of management rather than any actual slowdown in the business.

The company is seeing strength in its business and it can easily do better than its guidance for FQ3. In the long term, I expect Cisco to continue posting strong result helped by product cycle momentum in 10GE datacentre, LTE and video. Trading at 10x forward earning, with a 9% FCF yield, stock repurchases, and a 1.6% dividend yield Cisco appears to be an attractive investment opportunity.

Baker Hughes Incorporated supplies wellbore-related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide. It also provides products and services to the downstream refining and process and pipeline industries.

BHI reported lower than expected Q4 earnings last month. BHI's NA operations were effected by poor logistics, hampering the company's ability to run its fracturing fleets efficiently, and thus, driving the margins lower. Further, availability, cost and transportation issues are expected to continue through 2012. Although international business performed largely as expected, going forward, it can also face pricing pressures.

With almost flat rig count, pricing pressures in natural gas basins and operational headwinds in 1H 2012, I see little upside for BHI near term and would recommend selling it.

Apple Inc. is a good company and its business fundamentals are going in the right direction as it continues to gain market-share in the fast growing smartphone and tablet space. However, I am a bit skeptical on the stock after its recent run up. I have outlined my major concerns with Apple's stock in a previous article. My key concern with the stock is declining iPhone sales in the coming quarters and too many expectations on the dividend front. I have a neutral rating on the stock.

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

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