All this occurred before the company’s November 15 earnings release that failed to impress investors and led to a 5 percent drop in the share price. Earnings showed a slight beat and revenue a slight miss, but it was the forecast that told the tale. This was bad timing for Wal-Mart as the Dow has dropped close to 1,000 points since the presidential election in anticipation of a cliff dive into yet another recessionary period. Given that fear amidst a wall of global worry, is WMT right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Right now, every stock on every exchange is facing the same catalyst – a deal or no deal on the so-called fiscal cliff. If a long-term grand bargain gets done, look for the mother of all stock market rallies. If the proverbial can ends up down the road, brace yourself for a plunge. Tax policy is a catalyst within the broader catalyst. Investors are bailing out in anticipation of rising capital gains tax rates. At the start of a new tax year, certainty could bring some of those investors home to the markets, adding fuel to the fire.

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E = Equity to Debt Ratio is Close to Zero

On its face, Wal-Mart’s debt position is less than impressive. A debt to equity ratio of 0.78 with total debt of $57.5 billion against $8.6 billion in cash is nothing to shout from the rooftops. Compared to one of the company’s slightly upscale competitors, Target (NYSE:TGT), Wal-Mart does not look so bad. Target’s debt to equity ratio is 1.16 with $18.6 billion in debt and only $1.5 billion total cash. But low-end retailer Dollar Tree (NYSE:DLTR) beats them both by a country mile. Dollar Tree has a debt to equity ratio of 0.17 with total debt of $264 million and a healthy total cash position of $222 million.

A = A-Level Management Runs the Company

Wal-Mart management has done what many iconic companies in history have failed to achieve. WMT has continued to grow in spite of the death of legendary founder and retailing genius Sam Walton. Management successfully dealt with the Mexican bribery scandal but now faces what could be the biggest challenge in the company’s storied history. Wal-Mart workers are expressing discontent with wages, hours, and working conditions through a non-union group called OUR Wal-Mart (Organization United for Respect at Wal-Mart). Company management has filed a complaint with the National Labor Relations Board (NLRB) claiming the group is a front with union backing. Watch this one closely as the implications are huge.

T = Technicals on the Stock Chart are Strong

Wal-Mart’s technicals were looking good going into the post-election panic selling. As of November 16, 2012, the stock price was 7.7 percent below its 20 Day Simple Moving Average; 8.38 percent below its 50 Day SMA; and still 1.35 percent above the 200 Day SMA. However, the Relative Strength Indicator has dropped below 20, indicating a strong signal the stock is currently oversold.

S = Support is Provided by Institutional Investors & Company Insiders

Wal-Mart has one of the lowest percentages of institutional ownership of any Dow component at a mere 30.3 percent. In contrast, fellow big-box retailer Home Depot (NYSE:HD) is 74.4 percent institutionally owned. The top five holders are Vanguard Group, Wellington Management, BlackRock Institutional Trust, Berkshire Hathaway, Fidelity Investments, and the Bank of New York Mellon.

E = Earnings Are Increasing Quarter over Quarter

WMT’s earnings grew 8.36 percent quarter-over-quarter and 9.19 percent over 5 years. That is superior to rival Target’s 3.35 percent quarter-over-quarter growth and 5.95 percent increase over 5 years. Both pale in comparison to an impressive quarter-over-quarter increase of 32.89 percent coupled with a 26.72 percent rise over the past 5 years at Dollar Tree. 

E = Excellent Relative Performance to Peers

Dollar Tree also has the best Return on Equity of 33.83 percent with operating margins of 12.04 percent. Wal-Mart’s ROE of 23.58 percent bests Target’s 18.95 percent; but trails in operating margins with 5.94 percent versus 6.22 percent at Target.

T = Trends Support the Industry in which the Company Operates

In response to increased discounting from all sides in the retail space, Wal-Mart was forced to return to its more aggressive pricing strategies. Given the continued shrinkage in the purchasing power of the company’s customer base, this is a trend likely to continue. In addition, the superior performance of smaller rivals like Dollar Tree and Dollar General (NYSE:DG) indicate low-end customers may be abandoning Wal-Mart. In some ways the company suffers from its own success as in the U.S. market Wal-Mart is running out of places to plant its flag. Growth will have to come from emerging markets and the company is committed to do so.

In the early days of the financial crisis some higher end consumers looked to Wal-Mart for lower prices but that may be over. Current trends indicate a gradually recovering economy is causing higher income consumers to spend more but lower income shoppers are still reluctant to spend.

Conclusion

At best, Wal-Mart is a WAIT and SEE, with the minimum wait until after a resolution of the fiscal cliff. The tax hikes at the bottom of the cliff affect earners at all levels and that will not be good for Wal-Mart in particular as lower income earners will be facing payroll tax increases. At worst, Wal-Mart is a STAY AWAY due to its labor issues. Right now, the company has the upper hand, but if income inequality moves from the periphery to a central issue about which more Americans are concerned, the picture could change. As the country’s largest employer, Wal-Mart has undue influence on prevailing wage rates. 

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Couple that news with the mad dash to the exit doors following the presidential election and you have the ingredients for a downturn. XOM dropped 4.6 percent through the close of trading on Friday November 16.

Is it time to BUY Exxon on this dip? Exxon generates more revenue than any other company on the planet, and its market capitalization now runs second only to Apple (NASDAQ:AAPL). Is it time to WAIT and SEE what happens to global demand and the price of crude oil?  Or is it time to simply STAY AWAY and look for companies with better growth opportunities?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The big drivers of the current drop are fiscal cliff fears and tax rates. Return to recessionary conditions will not be good for anyone and investors concerned about higher capital gains and other taxes in 2013 are cashing in right now. Once that selling has subsided, buyers may return to pick up the pieces. There is a potential for a major upward surge in the unlikely event the Congress actually gets its act together and passes a long-term deal like the grand bargain that fell into the trash bin of history last year. Don’t hold your breath, but anything is possible. A nice move upward in trading on November 19 may be a harbinger of good things to come.

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H = High Quality Pipeline

In the oil business, pipeline means proven reserves and exploration assets. For Fiscal Year 2011, Exxon reported proved reserves of crude oil, natural gas liquids, synthetic oil, and natural gas of 25 billion barrels. Despite what you read about Peak Oil, numbers like these coupled with Exxon’s ongoing exploration and acquisition activities are a good sign Exxon will be around for decades as smaller rivals fall by the wayside.

E = Equity to Debt Ratio is Close to Zero

Exxon has a strong balance sheet with low debt to equity ratio of 0.07 and more total cash on hand of $13.1 billion than total debt of $12.4 billion. Smaller rival Conoco Philips (NYSE:COP) has debt to equity at 0.42 with total debt of $24.9 billion against only 1.3 billion total cash on hand. Larger competitor Chevron (NYSE:CVX) also has a strong balance sheet with total debt of 12.3 billion against total cash of $21.6 billion and a debt to equity ratio at .09.

A = A-Level Management Runs the Company

Faced with the prospect of dwindling reserves of conventional sources of oil and gas, Exxon management went unconventional and bought XTO energy, a major player in shale exploration and production in 2010 and XOM is not done buying yet, turning their eyes northward to Canada. That is the kind of move a forward-looking thinking A Level Management Team makes. In the short run some question the move, but no one anticipated the unbridled success of shale that drove producers to oversupply and prices to drop. This move bodes well for Exxon’s future.

T = Technicals on the Stock Chart are Strong

Exxon’s share price has risen about 12 percent year-over-year but some of the technicals are getting a bit shaky. As of November 16, 2012, the stock price is 33.4 percent below its 20 Day Simple Moving Average; 4.4 percent below the 50 Day SMA; and 1.35 percent above the 200 Day SMA. The Relative Strength Indicator has been creeping south since late October and is now nearing the 20 level used by conservative investors as a signal of an oversold condition.

S = Support is Provided by Institutional Investors & Company Insiders

Exxon Mobil is 49.8 percent institutionally owned. The top five holders are Vanguard Group, BlackRock Institutional Trust, Bank of New York Mellon, Fidelity Investments, and Wellington Management.

E = Earnings Are Increasing Quarter over Quarter

Over the past 5 years, XOM has increased earnings 4.95 percent, which bests rival BP plc (NYSE:BP) with an increase of 3.94 percent  Both trailed the performance of Chevron at 11.5 percent. Over the most recent 5 quarters Exxon has been relatively consistent, showing EPS of $2.13; $1.97; $2.0; $3.41; and $2.09. 

E = Excellent Relative Performance to Peers

Exxon’s Return on Equity of 27.48 percent handily tops rivals Chevron at 18.96 percent; BP at 15.56 percent; and Conoco Philips at 12.5 percent. Year over year, the XOM’s share price has outperformed its rivals as well, rising 12.09 percent versus at a 3.31 percent increase at Chevron; a 4.05 percent loss at BP; and a 4.9 percent gain at Conoco Philips.

T = Trends Support the Industry in which the Company Operates

The oil and shale revolution has literally turned the US energy future upside down.  In a recent World Energy Outlook (WEO) report, the International Energy Agency (IEA) predicts the US will eclipse Saudi Arabia as the world’s leading oil producing nation.  Some disagree, but it appears the US is on its way towards achieving a goal that heretofore existed only in the realm of political rhetoric – energy independence.

Conclusion

Exxon has been paying a healthy dividend for a long time and the future of energy in this country is the brightest it has been in a long time.  For the vast majority of investors, EXXON should be a BUY. However, Hurricane Sandy has injected a worm of doubt into the minds of many who believe global warming is a hoax and nothing can be done about cyclical climate change anyway.  Australia recently became one of more than 30 countries around the world to initiate a carbon tax. They will have a “cap and trade” scheme in place in a few years similar to what was proposed here in the US, but failed to gain necessary support. That may change now. Although Exxon could adapt to that eventuality, it would probably cause a downward movement in the share price.  

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Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Spectrum availability, or the lack of it, is the big challenge for giants Verizon and AT&T. Verizon’s recently approved acquisition of Advanced Wireless Spectrum from a group of cable companies gives them a near-term advantage over T, whose acquisition of T-Mobile was denied. However, AT&T is expected to outdistance VZ’s spectrum capability once they complete the current regulatory hurdles they face.  The mobile market is increasingly looking for faster communication and Verizon has a time sensitive advantage here as well. The company’s 4G LTE is expected to roll out in mid-2013, more than a year sooner than AT&T’s planned rollout in 2014.

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H = High Quality Product Pipeline

For the mobile carriers product pipeline is about devices and subscription plans. Verizon now has the coveted iPhone in its lineup and the company has at least 5 new phones in its pipeline. Verizon and its competitors are rolling out innovate data plans as the move to smartphones with better capability means more data use from customers.

E = Equity to Debt Ratio is Close to Zero

Verizon has a debt to equity ratio of 1.4, which is more than twice the debt to equity ratio of 0.63 at rival AT&T (NYSE:T). Their total debt of $52.8 billion with $10.3 billion total cash bests AT&T’s total debt of $63.6 billion with only $2.2 billion cash on hand.

T = Technicals on the Stock Chart are Strong

As of November 13, the stock price is 5.69 percent below its 20-day simple moving average, or SMA; 6.98 percent below the 50-day SMA; and 0.09 percent above the 200-day SMA. The Relative Strength Indicator is around 26, below the oversold threshold of 30 used by some investors but short of the 20 mark favored by more cautious investors. An RSI of 70 or 80 or above is an indication the stock is overbought and due for a fall while values between 20 and 30 or below signal a possible uptrend.

S = Support is Provided by Institutional Investors & Company Insiders

Verizon’s institutional ownership is on the light side for a Dow component at 54.2% but fares well when compared to AT&T where 57% of shares are institutionally held. Verizon’s top five holders are Vanguard Group, Capital World Investors, Capital Research Global Investors, BlackRock Institutional Trust, and Bank of New York Mellon. Insider transactions of 34.5% are relatively high, with seven major sales from Verizon corporate officers over the past year.  .

E = Earnings Are Increasing Quarter over Quarter

Verizon’s most recent quarter over quarter earnings showed a 14.43% increase, far superior to the 3.14% increase posted by AT&T.  However, neither company has shot the lights out over the past five years, with a decline of 18.83% at T and a drop of 14.7% at VZ.

E = Excellent Relative Performance to Peers

Although Sprint Nextel (NYSE:S) and T-Mobile compete with Verizon, the truth is VZ has only one real competitor in size, scope, and product offerings and that is AT&T. Both offer fiber optic television service and high speed Interest service.  On the popular Return on Equity metric, VZ’s 8.03% is almost twice that of the 4.14% return from T. On operating margins Verizon also emerges as a clear winner, with margins of 13.32% compared to AT&T’s 7.82%.

T = Trends Support the Industry in which the Company Operates

There is no question Verizon operates in a space with growth potential limited only by technological breakthroughs.  Technological advances have brought capabilities to the mobile market that existed only in dreams a decade ago. Not long ago phone reliability was the principal concern of mobile phone consumers. Today things like call quality are at the bottom of the list of the vast majority of consumers. The “smart” in smartphone is what they are after.

In a bold move Verizon is planning to enter the online streaming market, partnering with Redbox. When the plan was first announced there were doubts about finding content providers who might be reluctant to risk relationships with cable operators.  On October 25, 2012 Warner Bros signed on and the launch of the service, called Redbox Instant, may come as soon as Christmas.

Conclusion

Certainly Verizon will continue to lose land-line subscribers as will AT&T.  But the future is mobile, and not just phones but mobile devices of all kinds. There is room for growth in the number of mobile device users and existing users are looking for higher speeds. Verizon’s LTE coverage is twice that of AT&T. To put that into perspective, consumers who move from 3G coverage to 4G Long Tern Evolution will experience speeds 10 times faster than their old 3G dinosaurs. How can Verizon be anything but a BUY?

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So what’s the story with UTX in the midst of a global slowdown and growing concern about defense spending? Considering the degree of uncertainty, is UTX right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

While the “fiscal cliff” may be avoided, it is hard to imagine a scenario in today’s political climate that does not call for cuts in defense spending. The issue is how much and where. Once the size and scope of the cuts are known, the certainty could act as a catalyst for United Technologies stock, either up or down.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

E = Equity to Debt Ratio is Close to Zero

United Technologies’ debt position is cause for concern, but when compared to the company’s competitors, the picture looks a bit less grim.Right now UTX has a debt to equity ratio of 1.15 with $28.7 billion in debt and only $6.2 billion total cash on hand. In sharp contrast, competitor Lockheed Martin (NYSE:LMT) has a debt to equity ratio of 2.67 and General Electric (NYSE:GE) stands at 3.52. The best performance among the major defense contractors is Northrup Grumman (NYSE:NOC) at 0.36.

A = A-Level Management Runs the Company

While UTX management’s cost cutting efforts merit praise, the recent shareholder lawsuit does not exactly instill confidence in the hearts of potential investors. While the suit itself might be without merit as the company contends, there is no denying the core issue in the suit. United Technologies was fined for supplying China with software needed to make attack helicopters. The suit seeks to remove the board of directors; an unlikely outcome. However, A Level Management should be able to deal with foreign customers without violating US law.

T = Technicals on the Stock Chart are Strong

The technicals for UTX have been relatively weak all year with multiple crosses above and below the 20 Day, 50 Day, and 200 Day Simple Moving Averages. As of November 13^th 2012 the stock price is 0.87 below its 20 Day SMA; 1.98% below the 50 Day SMA; and 6.19% below the 200 Day SMA.

S = Support is Provided by Institutional Investors & Company Insiders

UTX is 83% institutionally owned, far surpassing fellow Dow Component GE’s 55%. The top five holders are Vanguard, Fidelity Investments, Massachusetts Financial Services, BlackRock Institutional Trust, and Capital Research Global Investors.

E = Earnings Are Increasing Quarter over Quarter

Earnings per share for the most recent quarter over quarter comparison decreased 3.9%.  However, over the last 5 years, EPS has increased 8.15. While Northrup experienced a smaller decline in quarter over quarter EPS at -2.2%, General Electric came in with an impressive 44% increase and Lockheed Martin had a respectable 11.09% increase.

E = Excellent Relative Performance to Peers

Return on Equity is a favored measure of many investors and on this metric UTX is solid at 22.37%; but not the leader of the pack.  That position belongs to rival Lockheed Martin with an astounding ROE of 106.7%. UTX comes in second on Operating Margins as well, with the company’s 14.11% trailing Northrup Grumman’s margin of 37.27%.

T = Trends Support the Industry in which the Company Operates

United is heavily exposed to the defense and construction sectors. Trends in aircraft manufacture bode well for the company’s Pratt and Whitney operation, which accounts for about 23% of 2012 revenue. Part of that comes from defense contracts to go along with the 23% from Sikorsky Helicopters and the Aerospace business. The construction business with Otis elevators, Fire and Security Systems, and Carrier HVAC make up more than 50% of total revenue and the construction industry seems to be slowly recovering. However, the pace of the recovery and the long term uncertainty over how much this country is willing to continue to spend on defense are cautionary signs for UTX.

Conclusion

In the aftermath of the U.S. election, the DJIA has shed about 500 points. Although the news from Europe is undoubtedly a major factor, most market analysts and prognosticators agree the deep foreboding over the impending fiscal cliff is a major factor in the downturn. This is not to deny the role of selling to lock in gains in the belief rates will go up. Assuming we escape the cliff, defense spending is sure to be on the table in any deal negotiated. In the near term cuts in defense spending are likely.  What is more potentially troubling is the country’s willingness to continue pouring money into defense in the long term. At best, UTX is a WAIT and SEE. While the current dividend yield of 2.38% is more than respectable, is it enough to justify buying into a company where almost 50% of revenue is shrouded in a cloud of uncertainty?

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Dow Component Travelers (NYSE:TRV) has the largest market capitalization of any property and casualty insurance company in the United States. The share price is up over 22% year over year and 22.56% year to date and yet on October 3^rd 2012 Goldman Sachs bumped TRV from its Conviction Buy list, leaving it with a BUY rating and a $75 dollar price target.

So what should investors be thinking about Travelers? Is the stock a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze TRV with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The traditional view of catalysts for stock price movement is an event that yields an immediate and sometimes dramatic shift in share price upward or downward. Earnings surprises both positive and negative are frequent catalysts as are press releases about specific events of macroeconomic issues that could affect the company and hence its stock.

However, if you look at the chemistry origins of the term catalyst, it is a substance that “provokes or accelerates” change. Investors would do well to broaden their concept of catalysts to include the possibility of change over time rather than an immediately obvious change. Under that scenario, there is a potential longer term catalyst for TRV that bears mentioning.

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Travelers derives almost 60% of its revenue from the business and financial segment and small to medium enterprises, or SMEs, represent a major portion of that revenue. In the current economic climate, SMEs are less concerned with Travelers superior customer service because it comes at a premium price. TRV has lost market share as small business owners look for less costly alternative. Any improvement in business conditions there could act as a moderate catalyst for Travelers.

E = Equity to Debt Ratio is Close to Zero

Travelers has a low debt to equity ratio of 0.25, substantially better than the debt to equity at competitors American International Group (NYSE:AIG) at 0.71 and Hartford Financial Services Group (NYSE:HIG) at 0.34.

T = Technicals on the Stock Chart are Strong

As of October 31st 2012 the stock’s simple moving averages are looking pretty good. The stock price is .13% above its 20 Day SMA; 3.98% above the 50 Day SMA; and 13.71% above the 200 Day SMA. However, the relative strength indicator, or RSI, is in moderate territory with a value of 55.

S = Support is Provided by Institutional Investors & Company Insiders

Travelers is  85% institutionally owned, making it one of the highest percentage institutionally held stocks in the Dow 30. The top five holders are Southeastern Asset Management, Vanguard Group, BlackRockInstitutional Trust, Neuberger Berman Group, and Massachusetts Financial Services

E = Earnings Are Increasing Quarter over Quarter

Travelers really shines on this metric with a whopping 244% increase in earnings per share quarter over quarter. In comparison, major rival AIG saw a 29.6% drop in earnings per share quarter over quarter while Hartford saw an equally outsized change with a 219.8% decrease in EPS quarter over quarter.

E = Excellent Relative Performance to Peers

With the exception of Return on Equity, Travelers outperforms both AIG and HIG. AIG’s ROE of 21.58% bests TRV’s of 8.97% and Hartford’s of 0.37%. Operating margins of 10.95% at Travelers surpass operating margins of 7.37% at AIG and a negative 1.16% ROE at Hartford. While all three companies saw negative EPS growth over the past 5 years, Travelers was by far the “best of the worst” with a negative 10.66% compared to a negative 39.6% for AIG and a negative 33.65% at Hartford.

T = Trends Support the Industry in which the Company Operates

A recent report from the world’s largest reinsurer, Munich Re, points to a very disturbing trend for property and casualty insurers – weather related natural disasters.  According to their report, “the number of natural disasters per year has been rising dramatically on all continents since 1980, but the trend is steepest for North America where countries have been battered by hurricanes, tornadoes, floods, searing heat and drought.”

If you believe climate change and global warming is all a hoax perpetrated by Al Gore and assorted wild-eyed environmentalist wackos, you might want to take a deep breath and think like an investor not an ideologue.

Investing is all about risk and certainty.  Munich Re is a for-profit company that believes climate change is real and poses a major problem for the insurance industry world-wide.  You can find those who disagree with Munich Re and a USA Today press release on Munich’s findings cited French reinsurer AXA as disagreeing with Munich Re’s conclusions.

Yet a visit to AXA’s Corporate Website reveals the following about the company’s position on climate change:

• ·         Climate change is a fact.
• ·         This change is being caused by the combination of natural variability and human-induced phenomena.
• ·         The acceleration of this trend could bring about potentially dangerous extreme phenomena. Any actions looking to reduce causes linked to human activity are to be promoted.
• ·         For AXA, the potentially dangerous climatic extremes primarily concern 1) a repetition of the storms seen in Europe, with increasing damage due to quicker wind speeds and higher storm tides, and 2) a significant increase in flooding, essentially in the UK, with even London significantly at risk.

Conclusion

An objective and dispassionate view of the situation screams uncertainty.  As an investor, are you certain climate change deniers are right?  It the Reinsurance industry warnings are right, it seems clear that TRV and its property and casualty peers merit a WAIT AND SEE posture.

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UnitedHealth (NYSE:UNH) is the nation’s largest health insurance provider with an 11.7% share of the market. The company is less dependent on individual and small business health policies for revenue than many of its peers as UNH has a substantial information technology business as wells as a Medicare advantage and pharmacy benefits operation.

Considering the degree of uncertainty surrounding health care in this country, is UNH right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

In theory, the re-election of Barack Obama as president could act as a moderate catalyst for the share price as that would preserve the 30 million new customers for health insurance payers as a result of the individual mandate. However, in practice, other provisions of the Affordable Health Care Act and general concerns about Obama’s economic policies could counter-balance the upward pressure.  The AHA requires insurers to issue premium refunds if their medical care ratios fall below 80%; with UNH standing at 80.2% as of Q3 2012.  The medical cost ratio is determined by dividing costs by premiums.

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Again in theory if Governor Romney wins, that could drive down the share price of health care insurers facing the loss of the individual mandate for carrying health insurance. In addition, Governor Romney has said he will keep the ban on pre-existing conditions, which only works for the providers if they get those 30 million new customers.  In practice, no one knows what Governor Romney will do and how much of the Affordable Health Care Act will go away and what might remain.

E = Equity to Debt Ratio is Close to Zero

UnitedHealth has a moderate debt to equity ratio of 0.43 and a total debt of $13 billion against total cash on hand of $11.9 billion that compares favorably with its major competitors. Humana (NYSE:HUM) leads the pack with a debt to equity ratio of 0.22 and $11.8 billion total cash on hand against total debt of $1.8 billion. Aetna (NYSE:AET) has a debt to equity ratio of 0.47 with $4.7 billion in total debt against $$3.3 billion total cash on hand.

T = Technicals on the Stock Chart are Strong

As of October 23^rd 2012 the stock price is 0.26% below its 20 Day Simple Moving Average, or SMA; 2.91% above the 50 Day SMA; and 2.43% above the 200 Day SMA. The share price crossed above all three averages in mid-September and with the exception of the modest dip in the 20 day SMA has remained above the averages.  The Relative Strength Indicator, or RSI, breached the 80 overbought level in early September, dipped to 40 and then climbed back to 79 before its current downward move to 49.

S = Support is Provided by Institutional Investors & Company Insiders

UnitedHealth has one of the largest percentages of institutional holders of any Dow component at 87.95%.  This is somewhat impressive as UNH was added to the Dow on September 24^th of 2012. The top five holders are Fidelity Investments, Wellington Management, Vanguard Group, Capital World Investors, and JP Morgan Chase. 

E = Earnings Are Increasing Quarter over Quarter

United’s release of Q3 earnings on October 16^th were solid with a 28% quarter over quarter increase in earnings per share and an 8% increase in revenue.  The company’s major competitors have yet to report but if Q2 performance is any kind of guide, all trailed UNH by a wide margin. Only WellPoint (NYSE:WLP) had a positive quarter over quarter EPS increase of 2.69%.  Earnings per share at Aetna (NYSE:AET) dropped 4.62% and a troubling 20.35% at Humana (NYSE:HUM).

E = Excellent Relative Performance to Peers

Return on Equity is a favored measure of many investors and on this metric UNH handily bests its rivals with an ROE of 19.07% compared to 10.53% at WellPoint; 15.5% at Humana; and 17.71% at Aetna. Operating margins of 8.56% at UnitedHealth trail Aetna’s 8.85% but outperform WellPoint’s 6.31% and Humana’s 5.41%.

The share price performance is another story all together.  UNH beats them all with a 12.76% year to date increase in share price and a year over year increase of 19.66%.  In contrast, Aetna is up 5.18% year to date and both Humana and WellPoint have seen their share price drop.

T = Trends Support the Industry in which the Company Operates

With increasing life expectancies and the size of the baby boomer population entering the golden years, the trends for health care services are explosive.  How much that translates to the health care payers remains to be seen.  The important distinction to keep in mind is that UNH is not a health care provider; rather it is a health care payer.  Demand for services will definitely go up but regulatory pressures over cost are likely to increase as well.  Whether it be the Affordable Care Act or some other means of health care reform, premium increases cannot be sustained to infinity.  Something has to give and the profitability of health care payers going forward is at best uncertain, and at worst facing a decline.

Conclusion

After the election UNH may be a buy, but as of this writing the stock is a definite WAIT and SEE.  If President Obama wins and you believe the Affordable Care Act will be good for health care payers over the long term, a BUY may be in order.  If Governor Romney wins, STAY AWAY until the Affordable Care Act is repealed and the replacement is evaluated.

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Is P&G still a long term BUY, or has this American icon slipped to WAIT and SEE or STAY AWAY status? (See my conclusion at the end of this post.)

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Despite P&G’s place on multiple advisory lists of attractive dividend yielding stocks, the company has a growth problem that has now earned it a spot on many cautionary watch lists.  Lowered guidance in June of 2012 sent the stock price skidding downward, making future earnings releases and pre-announcements even more likely to act as catalysts for the share price in either direction.

H = High Quality Product Pipeline

P&G has a history of product innovation with families of products.  The company’s flagship Tide detergent is available in more variations than similar competitive products.  P&G created a new market with the introduction of Pampers diapers and their more recent introduction of the Swiffer line of cleaning products.  Swiffer tools and replaceable cleaning elements rewarded P&G with a 5% increase in profits and investors with a 143% increase in share price in the product family’s maiden year of 1999.

E = Equity to Debt Ratio is Close to Zero

P&G’s debt to equity ratio of .47 is less than half that of rivals Colgate-Palmolive (NYSE:CL) at 2.33 and Kimberly Clark (NYSE:KMB) at 1.25.  The company has $29.8 billion in debt with $4.44 billion total cash on hand and a Current Ratio at a substandard 0.88.  In contrast, CL has a current ratio of 1.36 and KMB stands at 1.28.

A = A-Level Management Runs the Company

In early Q1 of 2012 P&G announced an ambitious plan to cut operating costs by $10 billion by the end of 2016 to improve eroding margins.  Cutting employees, marketing expenses and operational costs is often viewed as a positive development as it is evidence management sees a problem and is taking corrective steps.  However, one can also view these efforts as evidence of poor management in the past.

There is no question management at P&G is under the microscope, especially CEO Bob McDonald.  CNBC stock guru Jim Cramer placed McDonald on his CEO “Wall of Shame” earlier in the summer but later removed him, stating that McDonald inherited the problematic situation at P&G.

Of far greater concern than the opinion of Cramer is that of hedge fund manager Bill Ackman, whose Pershing Square Capital Management recently moved up its stake in P&G stock. According to Reuters, Ackman  spoke to a recent Value Investing Congress and layed much of the blame for P&G’s problems of late squarely at the feet of senior management. 

T = Technicals on the Stock Chart are Strong

As of October 16, the stock price was 0.55% below its 20 Day Simple Moving Average, or SMA; 1.03% above the 50 Day SMA; and 5.93% above the 200 Day SMA. The stock price has been volatile but trending upward since the reduced earnings forecast in early July.

S = Support is Provided by Institutional Investors & Company Insiders

With P&G 57.18% institutionally owned, the company has one of the lowest percentages of institutional holders of any Dow component.  The top five holders are Vanguard, BlackRock Institutional Trust, Fidelity Investments, and Northern Trust Bank.  Insider transactions at P&G are robust at 5.75% with several large direct sales over the last six months from company officers.  CEO Bob McDonald drew some attention with his April 2012 purchase of 1,205 shares at $63.55.  This garnered positive comments in some circles but McDonald’s August direct sales of about 130,000 shares went largely unnoticed.

E = Earnings Are Increasing Quarter over Quarter

This is the trouble spot for many investors.  Quarter over quarter earnings were down 9.11% but perhaps of greater concern is the dismal 5 Year Earnings per Share growth of a meager 1.86%.  In contrast, smaller rival Colgate-Palmolive (NYSE:CL) had 3.3% quarter over quarter growth and 14.98% 5 year EPS growth; and Kimberly Clark (NYSE:KMB) showed  21.91% quarter over quarter earnings improvement and an 8.2% growth over 5 years.

E = Excellent Relative Performance to Peers

Colgate and Kimberly are outperforming P&G on some other measures as well.  Return on Equity at Colgate is a staggering 93% and 32.73% at Kimberly-Clark; in sharp contrast to an ROE of 13.83% at P&G.  Colgate has the highest operating margins of the three at 22.78% with P&G at 15.88% and Kimberly-Clark at 12.94%.

T = Trends Support the Industry in which the Company Operates

The rise in middle class consumers in emerging markets should be a favorable trend for P&G with their existing 37% revenue from these markets.  But the company has moved too far too fast in the eyes of some analysts and trails rivals Unilever (NYSE:UL) and The Clorox Company (NYSE:CLX).  P&G will slow expansion plans to concentrate on core country product categories but there is another trend in developed countries that does not bode well for P&G.

While the prognostication of the demise of the middle class may be overstated, there is no denying the stagnation of middle class incomes in the US, Canada, and elsewhere in industrialized countries.  As the middle class consumer gets squeezed harder and harder, cheaper product alternatives to P&G’s premium brands become more attractive.  The Wall Street Journal reports that P&G and other consumer companies are moving towards an “hourglass” marketing strategy, focusing products and pricing on the top and the bottom of the economic spectrum and increasingly ignoring the middle.  An upward focus maintains higher margins but in a smaller market while the downward focus will put severe pressure on margins going forward.

Conclusion

P&G seems to be a company looking to find its footing in a changing market environment.  The cost cutting efforts will improve margins in the near term but over the long haul the company’s ability to restore growth in the face of shifting consumer spending preferences remains to be seen.  Loss of market share and lower margins may lead to decreasing dividend payouts which make the best case for investing in P&G.  Despite their fabled history, P&G right now looks like a WAIT and SEE at best.

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Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

AT&T has lost the competitive advantage of exclusive rights to the iPhone but the company does have some potential catalysts going forward, albeit not very explosive ones.  The first is a real long shot with the new Windows Phone 8 in the Nokia (NYSE:NOK) Lumia line.  Windows based smartphones get very positive reviews but have failed to catch the eye of a tech-crazed population more interested in the “smart” part and less interested in the “phone” part.  In short, phone quality and reliability, which many tech gurus feel is best on Windows Smartphones, is of little concern to techies and non techies alike, hungering for the latest and greatest apps.

Right now the Android and Apple lineup has the decided advantage of tablet computers within the same ecosystem.  If the release of the Windows 8 based tablet Surface catches on, interest in the Nokia phones could follow.

H = High Quality Pipeline

The new products familiar to consumers come from manufacturers like Samsung, but behind the scenes AT&T has a long history of innovation in platform technology that supports these devices.  The company prides itself for its relatively new Innovation Pipeline, or TIP, which they characterize as a giant “corporate suggestion box” where AT&T employees around the world offer their ideas for new products and product enhancements.

E = Equity to Debt Ratio is Close to Zero

While AT&T’s debt to equity ratio is on the high side of zero at 0.42, it is far superior to that of its only major competitor and fellow Dow component Verizon Wireless (NYSE:VZ) whose debt to equity ratio is 1.41.

T = Technicals on the Stock Chart are Strong

As of October 16, the stock price was 5.43% below its 20 Day Simple Moving Average, or SMA; 4.66% below the 50 Day SMA; and 6.84% above the 200 Day SMA.  The Relative Strength Indicator for T right now is around 24.9.  The traditional view of the RSI is an upper threshold of 70 indicates the stock is overbought and due for a drop in share price and the lower threshold of 30 signals oversold conditions with a share price rise as a possibility.  More conservative investors use 20 and 80 as the limits.  Depending on your point of view, T is already oversold or may be in the near future.

S = Support is Provided by Institutional Investors & Company Insiders

At 89%, AT&T has one of the highest percentages of institutional holders of any Dow component.  Verizon has 55% institutional ownership.  The top five holders of AT&T are Vanguard Group, Evercore Trust, Capital Research Global Investors, Bank of New York Mellon, and T.Rowe Price, and Fidelity Investments.

E = Earnings Are Increasing Quarter over Quarter

Although AT&T’s quarter over quarter earnings increased 10.08%, over 5 years earnings per share are down 18.8%.  Verizon shows a similar but slightly better pattern with 12.63% earnings growth quarter over quarter and a 14.71% loss over 5 years.

E = Excellent Relative Performance to Peers

In reality AT&T has only one peer and both are doing well, although on some measures T lags a bit behind VZ.  Return on Equity from Verizon is 7.05% compared to 4.08% at AT&T.  Operating margins for VZ of 12.73% also best the 7.98% margins at T.  On book value per share AT&T comes out ahead at $17.79 versus $13.04 and T’s forward P/E of 13.81 is more attractive than VZ’s 15.77

T = Trends Support the Industry in which the Company Operates

While AT&T will certainly continue to lose landline subscribers, they are at the forefront of the mobile/wireless explosion and they have room to grow with their Internet/TV Uverse business.  They lag behind rival Verizon in expanding 4G network capabilities and are looking to close the gap.  With mobile subscriptions approaching saturation levels in a few years, major growth will come from increasing data consumption as more and more subscribers will be using smartphones and tablets to access Internet services.  AT&T is already the largest high speed Internet Service Provider in the US.

Finally, if a duopoly between AT&T and Verizon becomes reality margins at both these giants will improve.  It is for that reason the proposed acquisition of T-Mobile was not approved and now there are other causes for concern.  Second tier player Sprint-Nextel (NYSE:S) is getting a large chunk of cash from a 70% ownership bid from Japanese mobile operator Softbank.  In addition, the proposed merger of T-Mobile and MetroPCS (NYSE:PCS) may delay the duopoly awhile.

Conclusion

Although the industry will continue to evolve and mergers and acquisitions will shake the landscape a bit, it is hard to envision a scenario that does not include AT&T as a major player.  To some Verizon may be a more attractive play, but it was AT&T that recently announced an additional $11 billion dollar share buyback program, which is good news for its investors.  Couple that confidence in their own performance with an already attractive dividend, and T looks like a definite BUY.

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Merck & Co. (NYSE:MRK) is one of the top pharma companies, and historically the Pharma sector has qualified as a place to go when economic conditions call for defensive plays. With a 5 Year dividend history of 4.04% average yield and a share price up almost 27% year to date and 54% year over year, is Merck a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

FDA approval of a drug with broad market potential can produce dramatic upward movement in the manufacturer’s stock price. Merck has a fracture reduction drug in Phase III trials but industry experts do not see it having “blockbuster” potential, although some see a modest bump in the share price of 6% to 8%.

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H = High Quality Pipeline

Drug pipelines are what big pharma is all about and Merck shares got a bit of a bump last week when the company announced some good results from its Phase II study of a drug treatment for Type 2 diabetes. With companies like Merck, it is usually a race between patent expiration of big winners like Singulair and the introduction of new revenue producing drugs. Right now, the company has 20 drugs in its Phase III pipeline. Industry analysts see five drugs as having the potential to fill the gaping hole left by the loss of Singulair revenues.  The drugs are insomnia treatment drug Suvorexant; Bridon, which is a neuromuscular reversal agent; an HPV cancer prevention drug V503; a cholesterol treatment drug Tredaptive; and Endocyte, for late stage oncology treatments.

E = Equity to Debt Ratio is Close to Zero

Merck has one of the lowest Debt to Equity Ratios of any of the big pharma players globally at a respectable 0.34.  The company’s total debt is $18.9 billion with $17.56 billion cash on hand, giving Merck one of the strongest balance sheets in the industry.  In contrast, international competitor Glaxo SmithKline (NYSE:GSK) has a bloated debt to equity ratio of 2.44 with $27.8 billion in debt and $12.3 billion cash on hand.  Pfizer (NYSE:PFE) has a debt to equity ratio of 0.48 with $38.5 billion in total debt and $24.3 billion total cash on hand.

T = Technicals on the Stock Chart are Strong

As of October 8, the stock price is 3.5% above its 20 Day Simple Moving Average; 5.45% above the 50 Day SMA; and 17.23% above the 200 Day SMA.  The share price crossed above all three averages in June of this year and with the exception of a brief drop below the 20 day SMA in August, the share price has remained above these three averages.  If you are a believer in the Relative Strength Indicator as a buy/sell signal, it is over 90.  As you may know, values above 70 or 80 signal overbought conditions and the possibility of a pullback in share price.

S = Support is Provided by Institutional Investors & Company Insiders

Merck is 75.18% institutionally owned.  The top five holders are Capital World Investors, Wellington Management, Vanguard Group, Franklin Resources, and BlackRock Institutional Trust.  Institutional interest is broad based, with 1438 institutions with a position in Merck.

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E = Earnings Are Increasing Quarter over Quarter

Merck’s Earnings per Share dropped 10.19% quarter over quarter.  In contrast, Glaxo SmithKline’s EPS increased 16.55% quarter over quarter and Pfizer’s EPS were up 33.52%.

E = Excellent Relative Performance to Peers

In general, Merck slightly outperforms rival Pfizer but lags behind Glaxo.  Merck has a Return on Equity of 12.15% with operating margins of 18.86% compared to Pfizer’s 10.49% ROE and 20.16% operating margin.  Glaxo SmithKline has a stunning ROE of 66.22% with operating margins of 28.86%.

T = Trends Support the Industry in which the Company Operates

Big pharma may well be a sector facing countervailing winds with as yet uncertain outcomes.  On the positive side, you have hefty tailwinds stemming from increased life expectancies and the global reach of the baby boomer retirement phenomenon. This means a dramatic increase in market potential for drug providers.

However, there are at least three strong headwinds the sector faces which in theory could radically alter the picture.

First, the trend of legal challenges to existing drug patents is growing.  Merck is not the only big pharma company facing staggering revenue losses from loss of patent protection.  Industry analysts estimate Merck could lose over $100 billion in revenue over the next few years but conventional wisdom says Merck and others will be able to bring new drugs online to offset revenue loss.

But the second trend sounds a warning bell.  Have you heard of “Pharmerging?”  It is the technical capability of manufactures in emerging markets to make generic versions of major blockbuster drugs.  These generic drugs appeal to an increasingly financially strapped public unable or unwilling to pay the staggering costs of some of big pharma’s big winners. Generic drug manufacturers are growing globally and pose a severe threat to the profitability of the biggest players in the sector.

Third, governments everywhere are struggling to keep up with the rising costs of health care on all fronts.  In a world plagued by debt investors need to note the fact healthcare costs are one of the biggest drains on any national budget.  Look for legislation and reforms everywhere, all aimed at driving down costs which will not be good for big pharma as it now exists.

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Conclusion

Merck and its big pharma cousins get lots of BUY recommendations based on size, stability, and dividend income.  But one could make a pretty strong case based on healthcare trends that big pharma “ain’t what it used to be.”

Government interventions across the globe and increasing generic competition may prove to be lasting game changers in the industry.  Certainly the world’s population will demand drugs in increasing numbers, but the price they are willing to pay and their wavering belief the best treatment comes from a prescription brand name drug could lead to dramatic changes in the sector.  If you believe big pharma can respond to the headwinds, you could adopt a WAIT and SEE posture.  However, it seems the contrarian point of view here is to STAY AWAY and look for better opportunities.

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Pfizer (NYSE:PFE), the largest drug company in the world, has seen its share price appreciate 45.6% year over year and 21.49% year to date.  The current dividend yield is 3.45% and the 5 year dividend average is a healthy 4.97%.  Thompson/First Call data indicates there are 17 analyst firms with a BUY or STRONG BUY rating on Pfizer shares.

So what do you think?  Given gloomy economic conditions and the relative safety of big pharma, is Pfizer a BUY, a WAIT and SEE, or a STAY AWAY for the average investor like you and me?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

On the morning of October 8, market participants saw the catalytic power of positive drug results as Pfizer’s rival Eli Lilly (NYSE:LLY) hit a four year high on positive news about its Alzheimer’s drug undergoing clinical trials. As you will see below, Pfizer has the same potential for catalysts for the stock price.

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H = High Quality Pipeline

Pfizer has about 12 drugs at FDA registration stage and 20 drugs in phase III trials. Industry experts say the ones to watch are auto-immune system drug Tofacitinib; central nervous system drug Lyrica; and the potential multi-billion dollar market mover Eliquis for stroke prevention.

E = Equity to Debt Ratio is Close to Zero

Pfizer has a respectable debt to equity ratio of 0.48; slightly higher than rivals Novartis (NYSE:NVS) at 0.35 and Sanofi-Aventis (NYSE:SNY) at 0.29.  However, Pfizer’s cash position is stronger, with $24.4 billion total cash on hand against $38.6 billion in total debt which compares favorably with Sanofi’s cash on hand at only $6.06 billion against $21.2 billion in debt, and Novartis at $6.1 billion total cash and $22.7 billion in total debt.

T = Technicals on the Stock Chart are Strong

As of October 8, the stock price is 3.99% above its 20 Day Simple Moving Average or SMA; 5.73% above the 50 Day SMA; and 14.32% above the 200 Day SMA.  The share price crossed above all three averages in early July of 2012 and has remained above ever since.  Howevcr, the Relative Strength Indicator, or RSI, is over 90. This signals the potential of an overbought condition and a subsequent dip in the share price.

S = Support is Provided by Institutional Investors & Company Insiders

Pfizer is 73.29% institutionally owned.  The top five holders are Vanguard Group, Wellington Management, Bank of New York Mellon, Fidelity Investments, and T.Rowe Price Associates.  Pfizer is a favorite for institutional buyers, with over 1600 different institutions holding PFE.

E = Earnings Are Increasing Quarter over Quarter

Pfizer’s earnings per share increased an impressive 33.52% quarter over quarter while rival Sanofi showed a 15.2% increase and Novartis showed a quarter over quarter decrease of 0.55%..

E = Excellent Relative Performance to Peers

Pfizer may be the biggest drug company in the world but on some indicators it lags behind major competitors.  While its operating margin of 20.16% bests Sanofi’s 11.9% and 17.56% at Novartis, Pfizer’s Return on Equity of 10.19% is the lowest of the three.  On 5 year EPS growth Pfizer lags as well, with a -6.12% against +5.57% for Novartis and +13.44% for Sanofi.

T = Trends Support the Industry in which the Company Operates

Conventional wisdom says future growth with a big pharma drug provider like Pfizer depends on the race between patent expiration of existing blockbuster drugs and the introduction of new patentable products to replace them.

Yet there are trends afoot that could well turn conventional wisdom on its ear.  The first is legal challenges to existing patents.  In early October 2012 the Indian government patent office revoked Pzfizer’s patent on its kidney cancer drug Sutent, which brought in $1.19 billion in revenue globally in 2011.  The patent was challenged by two Indian pharma providers with business models of providing drugs at lower costs.  Pfizer is appealing the case but the decision is part of a trend of successful patent challenges across the industry over the last decade.  The successful challenge of Pfizer’s Lipitor patent a year or so ago made headlines in the non-business press.

These legal challenges are part of a broader and more dangerous trend for big pharma of a move towards more affordable drugs.  In times past when consumers, governments, and private insurers were seemingly flush with cash, generics were seen as less effective and therefore less desirable than brand name prescription drugs.  That is all gone now as generics are gaining in popularity largely because of their affordability, but also because they are seen to be effective.  In short, we are all of us right now borderline broke and doing whatever we can to control costs.

Private insurers, consumers, and governments across the world are looking for ways to make drugs more affordable.  With healthcare costs overall accounting for huge portions of national budgets everywhere, you can expect to see reforms and legislation all aimed at driving down costs.  This of course does not bode well for the profitability of big pharm companies like Pfizer over the long term.

Conclusion

Due to its size, technological capability, and reputation, Pfizer is in a good position to respond to the trends.  In the short term the dividend is attractive and it should be awhile for the negative headwinds to end the love affair market participants have with companies like Pfizer.  Despite the bullish views of the analyst community, common sense seems to say the days of astronomical revenues from drug prices only governments and insurance companies can afford to pay are drawing to a close.  This certainly goes against the crowd but it looks like PFE is a STAY AWAY for the longer term or at best a WAIT and SEE how they respond.

Watch for M&A activity for Pfizer to increase its presence in the generic drug sector.  In short, watch for evidence that Pfizer, or any other big pharma stock in which you might be interested, is actively planning to manage a future of lower priced drugs.

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