Odds ‘n Ends – Aggressive Portfolio (Part 1)

Building Risk

  • Not much in the news for Applied Materials these days, but I am upbeat about some of the exciting technologies on tap including the new smartwatch, tablet-sized phones and explosive global growth in smartphones. These devices are the primary drivers for semiconductors and play right into AMAT’s wheelhouse as a leader in precision materials engineering, wafer fabrication equipment and semiconductor inspection and process controls. The company is managing costs and adjusting its solar display operations to better align capacity with slowing demand. Revenue is expected to move higher next year after a sluggish 2013 and profits should follow. The well covered dividend – yielding 2.6% – has grown over 13% annually over the past five years and further increases are probable, which makes for appealing total return potential out to late decade.
  • Coal shipments are still the biggest challenge for rail provider CSX Corp., but expansion of intermodal services should be a growth driver. June-period revenues for this business were up 4% and record service metrics, such as on-time performance, are helping to convert shippers from use of motor carriers to trains. Higher fuel prices also boost interest in rail, as trains are much more energy-efficient than trucks. CSX is continuing to invest heavily in intermodal terminals and double-stack clearances, which allow for the more efficient piggy-backing of containers. It most recently broke ground on a $107 million facility in Quebec that is expected to open in 2015 and will connect Canada to its U.S. network and it is clearing the path on a central Pennsylvania to Northeastern, Ohio intermodal track.  Baring any negatives on coal pricing and a slowdown in the economy, there is decent capital gains potential for CSX through 2016-2018.
  • DIRECTV Group, which had backed Time Warner Cable in its standoff with CBS, will be looking closely at the recent deal as they too struggle against rising programming costs. Slower growth in South America this past quarter was a bit troubling, so this is a stock to watch. The company’s bid for Hulu fell through, as Hulu decided to stay a private company and there are few on-line streaming options remaining for DIRECTV to buy. Strong cash flow is aiding aggressive share buybacks, so for now, the balance of long-term growth versus valuation is on the side of DTV. And absent further deterioration in Latin America and threats from the likes of Google and other streaming options, the shares can be held in aggressive accounts.
  • As part of its focused Gulf Coast shale gas integration investment strategy, Dow Chemical is expanding four of the company’s leading brands in Freeport, Texas and Plaquemine, Louisiana. This venture is expected to drive strong revenue growth and generate about $2.5 billion in cash flow once fully operational, enabling Dow to address growing customer and value chain demand in global markets such as food packaging, transportation and infrastructure, medical, electrical components and telecommunications. With a 3.3% yield, the shares have broad appeal as it transitions from a commodity-based chemical company to a more focused structure concentrating on agriculture, performance materials and plastics.
  • Harris Corp. continues to amaze with new daily highs despite a challenging operating environment and cuts in military spending. Diversification efforts have helped. The company recently delivered five simulators that will help the National Oceanic and Atmospheric Administration to prepare for the advent of a new generation of geostationary weather satellites as well as a $150 million Federal Aviation Administration contract I reported on last month. The dividends should grow faster than earnings out to late decade providing some downside risk protection
    for the shares as the company has decent cash flow and the payout ratio is a reasonable 30% of earnings. The shares yield 2.9% and the valuation is a reasonable 12 times fiscal 2014 estimated earnings per share. A possible takeover target, the shares can be held.
  • As reported on earlier this week, Hess Corp. increased its dividend by 150% to an annual $1.00 per share payout as the company continues to shed underperforming and riskier assets for more focused oil and gas plays both domestically and around the globe. The shares are not particularly cheap, but speculative accounts may want to maintain positions as the company evolves into a pure-play energy exploration and production company. The balance sheet is strong and there is worthwhile upside potential for the shares to late decade. Here again, the company may be ripe for a larger player to take Hess over.

 Next week I will bring you up to date on JPMorgan Chase, Manitowoc, Newmont Mining, Qualcomm and Teva Pharmaceutical.

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