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4TH QUARTER REVIEW 2010
Rising Divdend Plus
We held many stocks in sectors that saw investor demand this past quarter and offered unique stories of prosperity, leading to satisfying performance. Virtually every one of our stocks delivered results in excess of consensus expectations, and sells were guided more by profit taking and macro issues than by corporate disappointments.
Portfolio Highlights
It was a quarter dominated by materials, construction/engineering, and technology. Fluor increased by about 33% for the quarter. With its powerful flow of contracts and new awards, this global engineering and construction leader has practically become a repeating-business-model enterprise. Cliffs Natural Resources, the iron ore producer, also moved up sharply.
Tech stocks provided a lift, particularly in the semiconductor area—one of the few tech industries with many good dividend payers. Maxim Integrated exceeded estimates and raised guidance despite many analysts’ gloomy view of chip inventories; it’s benefiting from growth in the tablet and smartphone areas. Altera, a manufacturer of programmable logic chips, is also gaining from exposure to wireless and communications infrastructure markets. It rose so strongly that we took partial profits when it became technically overbought. We saw gains in bigger names too, including Texas Instruments, IBM, and Intel—the latter providing a 15% dividend increase. Taiwan Semiconductor—the world’s leading chip fabricator—finally rose more than 20% to new multiyear highs. Equipment maker Applied Materials suddenly found buyers as well, with a 15% earnings beat and guidance for continued momentum. Their foray into thin-film solar has bumped into a soft solar market, but they are doing fine. Also in technology, Oracle had its doubters, but it surprised market expectations, delivering excess on every metric. A 10% earnings beat and upward guidance (a trend this quarter!) provided good momentum for stock gains, and it seemed every analyst jumped in with a ratings upgrade. Sweet, since our first purchase was at about half the current price.
Bank of New York Mellon had an in-line report, but analyst upgrades and Warren Buffett’s Berkshire Hathaway disclosing a new stake in the company boosted the price. After several disappointing quarters plus a major controversy with distribution partner Cardinal Health, Walgreen Company joined the “beat” movement and rose to 52-week highs. Xerox continued its turnaround with a modest beat on strong revenue gains, and Comcast rose as its move into content creation through NBC Universal came closer to regulatory approval.
Relatively few stocks were a drag on results. Abbott Labs and TEVA Pharmaceutical in the droopy healthcare group provided negative returns, as did Medicis Pharmaceutical. But Medicis was merely seeing profit taking from a very strong year, in our view. As for TEVA, we foresee a reversal; the FDA has just ruled in TEVA’s favor regarding the generic vulnerability of its proprietary Copaxone MS drug. Abbott has everything we like in a solid long-term holding except other equally enthusiastic investors. But it’s cheap, so they’ll come. Digital Realty fell on bad news from another company in the web hosting space. But the company reiterated strong guidance and we’ll give it the benefit of the doubt.
We took profits in América Móvil after a 20% gain this year, and stepped aside in CME on news of softer contract volumes than expected. We sold Aflac on concern that the hybrid securities in its portfolio might fall victim to sovereign restructurings and a generally punitive attitude toward bondholders. We’ll discuss a few late-quarter buys next quarter due to space constraints.
Looking Forward
We continue to believe in a long, slow recovery that can provide opportunities for well-positioned, well-managed companies. That said, “long” and “slow” remain key considerations. Recently investors behave as if those words should be “immediate and vigorous.” We find many stocks—some of ours included—that are overbought technically and perhaps ahead of themselves fundamentally. So in the short term there may be some chop, and we may reposition into candidate companies and stocks whose potential has not yet been embraced by investors.
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