Best Ideas 10.3
Best Ideas 10.3
Best Ideas 10.3
3 October 2011
Bloomberg JPUS4Q11 <INDEX> <GO> Bloomberg subscribers can use the ticker JPUS4Q11 to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPUS4Q11 could diverge from returns quoted in this report, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For information on JPUS4Q11, please contact your J.P. Morgan salesperson or the Delta One Desk.
See page 62 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as a single factor in making their investment decision.
Daniel M McElligott
(1-212) 622-5598 daniel.m.mcelligott@jpmorgan.com J.P. Morgan Securities LLC
Significant headwinds have pressured equities since late July, as the spreading of European sovereign concerns, coupled with the US political rancor, has undermined investor confidence. And unfortunately, as weeks have passed, liquidity in risky markets continues to deteriorate, putting more downside pressure on US equities. For equities to regain their footing, in our view, requires Europe leaders to visibly move in a direction to contain the crisis. That said, the current high volatility continues to point to equities making a sizable move in the next few monthseither a downside or upside break. We believe the move is to the upside (similar to 98) predicated on the notion that European leaders successfully leverage the EFSF.
-16.8%
6.6%
-5.9%
8.5%
-5.3%
5.4%
-7.1%
2.2%
-14.2%
9/11/08 28%
Lehman bankruptcy
1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10 10/10 1/11 4/11 7/11 10/11 1/12
Asia Crisis
Subprime Crisis
Euro Crisis
9/11 6.27
Two Different Outcomes: What Worked in Both 98 and 08? Growth and Higher Valuations...Semis, Tech Hardware and Retail
We noted a few weeks ago that we saw the market at a juncture similar to both 98 and 08 (see Europe Severe but Some Reasons Closer to Asia 98 dated 09/15), with both involving a financial crisis. In fact, in some aspects, this crisis more resembles Asia (but with larger consequences) given the need for the weaker Euro periphery to delever (need to devalue, which cannot be done without leaving the Eurozone). We looked at both periods to see what outperformed in the six months following each crisispost-98 (test and passed) and post-Lehmans failure (test and failure). This is important, as the S&P 500 direction could not be more differentup 40% post-98, down 40% post-Lehman. Five Industries (Figure 4): There were five industries (GICS level 2) that outperformed in both periods: Semiconductors, Consumer Services, Software, Tech Hardware, and Retail. Doesnt this look like Early Cycle? Five Styles (Figure 5): There were also five styles that outperformed: High P/B, Pure Growth (Citigroup Pure Growth), High P/E, High EV/EBITDA, and More Liked (FC Mean). The takeaway? It seems that whether this crisis resolves positively or negatively, Early Cycle, Growth/Consensus (FC Mean), and more expensive stocks could outperform.
Figure 4: Industry Groups that Outperformed in Both Periods % chg vs S&P 500: 6-mos after event Post-Lehman '08 Industry '98 crisis Combined
S&P 500 performance 40% -40%
% chg vs S&P 500: 6-mos after event Post-Lehman '08 '98 crisis Combined 40% -40%
Relative performance (vs S&P 500) Semiconductors 41% Consumer Svcs Software & Svcs Tech Hardware & Equip Retailing
Source: J.P. Morgan and FactSet.
11% 10% 7% 6% 4%
Expensive P/B Pure Growth Expensive P/E Expensive EV/EBITDA More Liked
Source: J.P. Morgan and FactSet.
4% 6% 2% 2% 1%
Pharma, Biotech & Life Sciences Food & Staples Retailing Telecom Services Food Beverage & Tobacco Consumer Svcs 18.0% 8.0% Utilities Energy HH & Personal Products
Semiconductors Retailing
-2.0%
Health Care Equip & Svcs Commercial Svcs & Supplies Materials Transportation Consumer Durables & Apparel Capital Goods Banks Insurance Autos & Components
Media
-12.0%
Diversified Financials
-22.0%
-32.0% -52.0%
-32.0%
-12.0%
8.0%
28.0%
48.0%
68.0%
7.0%
Pure Growth Expensive P/B Expensive EV/EBITDA Expensive P/E More Liked Market Cap Larger Cyclical Low Price S&P Low Quality Cheap EV/EBITDA Low Momentum Pure Value Cheap P/B Cheap P/E High Be
2.0% Market Cap Smaller -3.0% High Momentum S&P High Quality High Price Less Liked
-8.0%
-13.0% -50.0%
-30.0%
-10.0%
10.0%
30.0%
50.0%
70.0%
Figure 8: J.P. Morgan Fundamental Analysts Best Near-Term Stock Ideas LONG STOCK IDEAS
$ in mm; Priced as of 9/27/11
JPM Coverage Current Name 1 Cimarex Energy Co. 2 Freeport-McMoRan Copper & Gold Inc. 3 United Continental Holdings Inc. 4 Ly ondellBasell Industries N.V. Cl A 5 Ow ens Corning 6 Noble Corp. 7 Wells Fargo & Co. 8 Harman International Industries Inc. 9 Rock-Tenn Co. Cl A 10 Kinross Gold Corp. 11 Agilent Technologies Inc. 12 Ariad Pharmaceuticals Inc. 13 St. Jude Medical Inc. 14 CVS Caremark Corp. 15 Deere & Co. 16 Boeing Co. 17 Pfizer Inc. 18 Reinsurance Group of America Inc. 19 Union Pacific Corp. 20 Brinker International Inc. 21 Comerica Inc. 22 Sy nopsy s Inc. 23 Las Vegas Sands Corp. 24 Apple Inc. 25 AON Corp. 26 Broadcom Corp. 27 ITC Holdings Corp. 28 Ares Capital Corp. 29 Simon Property Group Inc. 30 NCR Corp. 31 CME Group Inc. Cl A 32 Quanta Serv ices Inc. 33 Home Depot Inc. 34 Celgene Corp. 35 Yahoo! Inc. 36 American Tow er Corp. 37 Verisk Analy tics Inc. (Cl A) 38 Watson Pharmaceuticals Inc. 39 Rey nolds American Inc. Average Industry Oil Gas & Consumable Fuels Metals & Mining Airlines Chemicals Building Products Energy Equipment & Serv ices Commercial Banks Household Durables Containers & Packaging Metals & Mining Life Sciences Tools & Serv ices Biotechnology Health Care Equipment & Supplies Food & Staples Retailing Machinery Aerospace & Defense Pharmaceuticals Insurance Road & Rail Hotels Restaurants & Leisure Commercial Banks Softw are Hotels Restaurants & Leisure Computers & Peripherals Insurance Semiconductors & Semiconductor Equipment Electric Utilities Capital Markets Real Estate Inv estment Trusts (REITs) Computers & Peripherals Div ersified Financial Serv ices Construction & Engineering Specialty Retail Biotechnology Internet Softw are & Serv ices Wireless Telecommunication Serv ices Professional Serv ices Pharmaceuticals Tobacco Ticker XEC FCX UAL LYB OC NE WFC HAR RKT KGC A ARIA STJ CVS DE BA PFE RGA UNP EAT CMA SNPS LVS AAPL AON BRCM ITC ARCC SPG NCR CME PWR HD CELG YHOO AMT VRSK WPI RAI Price $60.01 $34.82 $20.43 $29.59 $23.45 $31.89 $32.18 $52.09 $15.02 $33.56 $10.14 $38.97 $34.69 $69.48 $62.78 $48.05 $85.66 $22.34 $23.41 $24.91 $44.69 $41.21 $35.04 $75.70 $13.78 $113.60 $18.01 $262.29 $19.43 $33.88 $63.97 $14.54 $54.58 $34.49 $72.10 $37.24 Market Cap $5,135 $33,005 $6,758 $16,913 $2,894 $8,331 $2,250 $3,709 $17,070 $11,653 $1,344 $12,841 $46,653 $28,759 $46,526 $3,560 $41,810 $1,847 $4,705 $3,588 $32,632 $13,463 $16,854 $3,883 $2,827 $33,375 $2,833 $17,537 $4,030 $52,998 $29,350 $18,358 $21,600 $5,175 $9,671 $21,708 JPM Rtg JPM Analy st OW Joseph Allman, CFA OW Michael F. Gambardella OW Jamie Baker OW Jeffrey J. Zekauskas OW Michael Rehaut, CFA OW J. Dav id Anderson, PE, CFA OW Viv ek Juneja OW Himanshu Patel, CFA OW Phil Gresh, CFA OW John Bridges CFA, ACSM OW Ty cho W. Peterson OW Cory Kasimov OW Michael Weinstein OW Lisa C. Gill OW Ann Duignan OW Joseph B. Nadol III OW Chris Schott, CFA OW Jimmy S. Bhullar, CFA OW Thomas R. Wadew itz OW John Iv ankoe OW Stev en Alex opoulos, CFA OW Sterling Auty , CFA OW Joseph Greff OW Mark Moskow itz OW Matthew G Heimermann OW Harlan Sur OW Stefka Gerov a, CFA OW Richard Shane OW Michael W. Mueller, CFA OW Paul Coster, CFA OW Scott Lev ine OW Christopher Horv ers, CFA OW Geoffrey Meacham, Ph.D. N Doug Anmuth OW Philip Cusick, CFA OW Michael A. Meltz, CFA OW Chris Schott, CFA OW Rae Maile 41% Target Implied Price Upside $132.00 $74.00 $36.00 $50.00 $39.00 $53.00 $41.00 $50.00 $80.00 $23.00 $50.00 $15.00 $57.00 $50.00 $100.00 $89.00 $25.00 $67.00 $119.00 $31.00 $32.00 $33.00 $59.00 $525.00 $53.00 $45.00 $95.00 $17.00 $140.00 $22.00 $23.50 $40.00 $75.00 $17.00 $60.00 $36.00 $73.00 120% 113% 76% 69% 66% 66% 64% 55% 54% 53% 49% 48% 46% 44% 44% 42% 41% 39% 39% 39% 37% 32% 32% 31% 29% 28% 25% 23% 23% 22% 22% 21% 18% 17% 17% 10% 4% 1% $2.20 $1.80 $1.90 $27.68 $3.40 $2.96 $3.33 $1.40 $2.57 $1.82 $17.41 $0.70 $2.35 $3.60 $0.74 $1.03 $1.64 $4.46 $2.65 10.6x 13.8x 23.5x 14.4x 12.1x 11.8x 22.7x 9.8x 44.2x 9.9x 15.1x 27.8x 14.4x 17.8x 19.7x 53.1x 21.0x 16.2x 14.1x 12.8x 2.63x 3.26x 2.28x $5.32 $0.87 $2.91 -$0.80 $3.27 $2.78 $6.43 $4.24 $2.25 $7.08 $6.51 11.9x 12.5x 10.8x 14.8x 7.9x 6.8x 13.2x 9.8x 17.3x 11.5x EPS & Valuation 2011E EPS $6.35 $5.89 $3.64 $4.93 $2.23 $1.72 $2.81 P/E ('11E) 9.4x 5.9x 5.6x 6.0x 10.5x 18.6x 8.9x P/B 1.78x 2.28x 3.48x 1.24x 0.76x 1.11x 1.05x 1.58x 1.05x 1.14x 2.78x 168.59x 2.65x 1.22x 3.82x 9.82x 1.57x 0.67x 2.28x 4.22x 0.69x 1.69x 4.49x 5.34x 1.60x 3.19x 3.26x 0.90x 7.02x 2.95x 0.84x 1.24x 2.92x 4.91x 1.46x 6.07x
$24.96 $131,785
$17.75 $138,488
$399.26 $370,150
Figure 9: J.P. Morgan Fundamental Analysts Best Near-Term Stock Ideas SHORT STOCK IDEA
$ in mm; Priced as of 9/27/11
JPM Coverage Current Name 1 Canadian National Railw ay Co. Average Industry Road & Rail Ticker CNI Price $68.12 Market Cap $30,451 JPM Rtg JPM Analy st N Thomas R. Wadew itz Target Implied Price Upside $75.00 10% 10% EPS & Valuation 2011E EPS $4.77 P/E ('11E) 14.3x 14.3x P/B 2.58x 2.58x
Year-to-date pension trends imply funded status deterioration if these conditions hold through year-end Pension performance is primarily driven by two factors: 1) discount rates and 2) asset returns. The year-to-date performance of both of these factors imply that we should expect pension plan funded status deterioration if these trends hold or worsen between now and companies fiscal yearends. If this perfect storm of poor plan asset performance and substantial increases in pension obligations due to large yearover-year decreases in discount rates holds through December, the deterioration in 2011 pension funding levels could be the worst pension performance over the past decade, which has already seen two particularly bad years in 2002 and 2008. The Moodys Aa rate fell to 3.94 on September 22. If current trends in Aa or higher corporate credit rates hold through yearend, it could result in some Decemberyearend companies lowering discount rate assumptions by as much as 125 basis points for some companies. The implication of this discount rate trend would be higher pension projected benefit obligations (PBOs).
Figure 10: YOY Moodys Aa Corporate Bonds Index Month-end Performance, 2010 and YTD 2011
YOY Moody's Aa Bond Index Monthend Rates
5.75 5.50 5.25 5.00
Rate
Amy Schmidt
(1-415) 315-6705 amy.m.schmidt @jpmorgan.com J.P. Morgan Securities LLC
4.75 4.50 4.25 4.00 3.75 Lower YOY rate means higher PBO
Month
2010 2011
With the S&P 500 down 10% since December 31, 2010, many pension plans could see material declines in plan asset balances if trends hold through yearend.
Month-End Price
Month
2010 2011
Volatile markets elevate the need to consider pension exposure when making investment decisions Pension plans represent a very real source of risk for companies. In the worst case scenario, an unhealthy pension plan can push an otherwise healthy company with a value-creating portfolio of operating businesses into financial distress or bankruptcy. As we have said in prior research, one of the problems with pension exposure is that it has the potential to create situations where the tail wags the dog. That is, pensions have the potential to create very serious problems at a company when the size of the pension plan begins to be comparable or larger than the size of the "operating businesses." A big pension plan can make even a seemingly straightforward business model very complicated. In some situations, how someone thinks about the risks associated with a companys pension exposure should change how they think about a stock, because it may alter the risk-reward tradeoff of the investment in a material way. As we had often stated, we think about pension plans like insurance entities. From our perspective, having exposure to a pension plan is analogous to having exposure to a business segment that is an insurance entity managing a book of annuity contract obligations. Consistent with this philosophy, we take a two-step approach to pension analysis in the valuation process. Those steps are: Step 1. Identify companies with elevated levels of pension risk. Identify companies where the pension plans are large enough that an investor should think of the pension plan as a materially large business unit; and Step 2. Model the companies with the highest levels of pension risk. Once a company has been isolated as having a materially-large pension risk exposure, we
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recommend modeling the pension to forecast the balance-sheet, income-statement, and cash-flow effects associated with the pension plan. We have various resources that can help clients conduct this two-step analysis. Contact us if you would like copies of our most recent pension risk ratio analysis research or if you would like a copy of our proprietary model that you can use to forecast pension and other post-retirement plan behavior for up to 6 years. JPMorgan Chase & Co. and its affiliates do not provide tax advice or advice on tax accounting matters. Accordingly, this material is not intended or written to be used, and cannot be used or relied upon, by any recipient in connection with promotion, marketing or a recommendation for the purpose of avoiding U.S. tax-related penalties. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implications that may result from acting on a particular recommendation.
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Kapil Dhingra
(1-212) 272-7823 kapil.dhingra@jpmorgan.com
Adam Rudd
(1-212) 272-1215 adam.ch.rudd@jpmorgan.com
Amyn Bharwani
(1-212) 622-8030 amyn.x.bharwani@jpmorgan.com J.P. Morgan Securities LLC
Figure 12: Sector Composition of the J.P. Morgan US Best Near-Term Ideas Basket JPUS4Q11 <Index>, as of Sep 27, 2011 (close)
Basket Details
Bloomberg Ticker Benchmark Number of Components Weighting Scheme
Source: J.P. Morgan.
C. Discretion 10%
Financials 18%
Industrials 18%
Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg.
Technology 10%
Bloomberg subscribers can use the ticker JPUS4Q11 to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time, the performance of JPUS4Q11 could diverge from returns quoted in this report, because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or additional reports relating to it. For information on JPUS4Q11, please contact your J.P. Morgan salesperson or the Delta One Desk.
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Figure 13: Market Capitalization Breakdown of the J.P. Morgan US Best Near-Term Ideas Basket JPUS4Q11 <Index>, as of Sep 27, 2011 (close)
Figure 14: Composition of the J.P. Morgan US Best Near-Term Ideas Basket JPUS4Q11 <Index>, as of Sep 27, 2011 (close)
Ticker
AAPL PFE WFC HD BA CVS UNP SPG LVS FCX CELG DE RAI AMT BRCM CME YHOO KGC LYB AON STJ A WPI NE UAL VRSK XEC CMA PWR ITC RKT SNPS RGA ARCC OC NCR HAR EAT ARIA
Name
Apple Inc Pfizer Inc Wells Fargo & Co Home Depot Inc Boeing Co/The Cvs Caremark Cor Union Pac Corp Simon Property Las Vegas Sands Freeport-Mcmoran Celgene Corp Deere & Co Reynolds America American Tower-A Broadcom Corp-A Cme Group Inc Yahoo! Inc Kinross Gold Lyondellbasell-A Aon Corp St Jude Medical Agilent Tech Inc Watson Pharm Noble Corp United Continent Verisk Analyti-A Cimarex Energy C Comerica Inc Quanta Services Itc Holdings Cor Rock-Tenn Co-A Synopsys Inc Reinsurance Grou Ares Capital Cor Owens Corning Ncr Corp Harman Intl Brinker Intl Ariad Pharm
Sector
Technology Health Care Financials C. Discretion Industrials C. Staples Industrials Financials C. Discretion Materials Health Care Industrials C. Staples Telecom Technology Financials Technology Materials Materials Financials Health Care Health Care Health Care Energy Industrials Industrials Energy Financials Industrials Utilities Materials Technology Financials Financials Industrials Technology C. Discretion C. Discretion Health Care
Industry
Analyst
Wgt Mkt. Cap JPM Last 3M ADV (%) ($B) Rating Price ($) ($M)
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 370.15 138.49 131.78 53.00 46.53 46.65 41.81 33.32 32.63 33.01 29.35 28.76 21.71 21.60 18.75 17.59 18.36 17.07 16.81 13.46 12.84 11.65 9.67 8.05 6.76 5.68 5.13 4.70 4.12 3.88 3.71 3.59 3.56 2.83 2.89 2.83 2.25 1.85 1.34 OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW N OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW $ 399.26 $ $ 17.75 $ $ 24.96 $ $ 33.88 $ $ 62.78 $ $ 34.69 $ $ 85.66 $ $ 113.60 $ $ 44.69 $ $ 34.82 $ $ 63.97 $ $ 69.48 $ $ 37.24 $ $ 54.58 $ $ 35.04 $ $ 262.29 $ $ 14.54 $ $ 15.02 $ $ 29.59 $ $ 41.21 $ $ 38.97 $ $ 33.56 $ $ 72.10 $ $ 31.89 $ $ 20.43 $ $ 34.49 $ $ 60.01 $ $ 23.41 $ $ 19.43 $ $ 75.70 $ $ 52.09 $ $ 24.91 $ $ 48.05 $ $ 13.78 $ $ 23.45 $ $ 18.01 $ $ 32.18 $ $ 22.34 $ $ 10.14 $ 8,535 930 1,067 493 414 358 310 262 853 682 247 408 123 181 317 142 484 141 140 105 138 187 101 144 148 28 77 99 46 24 55 29 30 28 45 37 33 48 39
Computers & Peripherals Mark Moskowitz 2.56% Pharmaceuticals Chris Schott, CFA 2.56% Commercial Banks Vivek Juneja 2.56% Specialty Retail Christopher Horvers, CFA 2.56% Aerospace & Defense Joseph B. Nadol III 2.56% Food & Staples Retailing Lisa C. Gill 2.56% Road & Rail Thomas R. Wadewitz 2.56% Real Estate Investment Trusts Michael W. Mueller, CFA/A2.56% Hotels Restaurants & Leisure Joseph Greff 2.56% Metals & Mining Michael F. Gambardella 2.56% Biotechnology Geoffrey Meacham, Ph.D. 2.56% Machinery Ann Duignan 2.56% Tobacco Rae Maile 2.56% Wireless Telecommunication SerPhilip Cusick, CFA 2.56% Semiconductors & Semiconduct Harlan Sur 2.56% Diversified Financial Services Kenneth B. Worthington, C 2.56% Internet Software & Services Doug Anmuth 2.56% Metals & Mining John Bridges CFA, ACSM 2.56% Chemicals Jeffrey J. Zekauskas 2.56% Insurance Matthew G Heimermann 2.56% Health Care Equipment & SuppliMichael Weinstein 2.56% Life Sciences Tools & Services Tycho W. Peterson 2.56% Pharmaceuticals Chris Schott, CFA 2.56% Energy Equipment & Services J. David Anderson, PE, CFA2.56% Airlines Jamie Baker 2.56% Professional Services Michael A. Meltz, CFA 2.56% Oil, Gas & Consumable Fuels Joseph Allman, CFA 2.56% Commercial Banks Steven Alexopoulos, CFA 2.56% Construction & Engineering Scott Levine 2.56% Electric Utilities Stefka Gerova 2.56% Containers & Packaging Phil Gresh 2.56% Software Sterling Auty, CFA 2.56% Insurance Jimmy S. Bhullar, CFA 2.56% Capital Markets Richard Shane 2.56% Building Products Michael Rehaut, CFA 2.56% Computers & Peripherals Paul Coster, CFA 2.56% Household Durables Himanshu Patel, CFA 2.56% Hotels Restaurants & Leisure John Ivankoe 2.56% Biotechnology Cory Kasimov 2.56%
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Basket Performance
In this section, we examine the hypothetical performance of the J.P. Morgan US Best Near-Term Ideas Basket for Q4 2011 over the last three years. The J.P. Morgan US Best Near-Term Ideas Basket JPUS4Q11 <Index> would have significantly outperformed the S&P 500 Index over the past three years. The annualized return of the J.P. Morgan US Best Near-Term Ideas Basket would have been ~5.6% (while the annualized S&P 500 Index return during the same time period was 2%). The correlation of the basket returns to the S&P 500 Index returns has been 97%, and the recent six-month realized volatility of the basket has been 28.7% (the realized volatility of the S&P 500 Index over the same time frame has been 25%). The figures below show the performance and volatility of the J.P. Morgan US Best Near-Term Ideas Basket vs. that of the S&P 500 Index. The historical beta and correlation of the basket to the S&P 500 is also shown in the charts below.
Figure 15: Performance of the J.P. Morgan US Best Near-Term Ideas Basket (JPUS4Q11 Index) and S&P 500 Index (since past 3 years)
160
Basket Daily Return (%)
Figure 16: Daily Returns of the J.P. Morgan US Best Near-Term Ideas Basket (JPUS4Q11 Index) vs. S&P 500 Index Return
15% R = 95%
JPUS4Q11
S&P 500
-10%
-5%
0%
5%
10%
15%
Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance excludes commissions and fees. Past Performance is not indicative Note: All price performance excludes commissions and fees. Past Performance is not indicative of future returns. of future returns.
Figure 17: 6M Realized Volatility of the J.P. Morgan US Best Near-Term Figure 18: 6M Beta and 6M Correlation of the J.P. Morgan US Best Ideas Basket (JPUS4Q11 Index) vs. S&P 500 Index Near-Term Ideas Basket (JPUS4Q11 Index) vs. S&P 500 Index
70% 60% 50% 40% 30% 20% 10% 0% Mar,09 Sep,09 Mar,10 Sep,10 Mar,11 Sep,11 Basket 6M Realized Vol. S&P 500 6M Realized Vol. 99% 98% 97% 96% 95% 94% 93% 92% Mar,09 0.9 6M Correl. (Left) Aug,09 Jan,10 Jun,10 6M Beta (Right) Nov,10 Apr,11 0.8 Sep,11 1.1 1.0 1.3 1.2
Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Note: All price performance excludes commissions and fees. Past Performance is not indicative Note: All price performance excludes commissions and fees. Past Performance is not indicative of future returns. of future returns.
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Additional Basket Methodology In order to keep the basket relevant to the investment theme, J.P. Morgan reserves the right to review the following at any time: Basket methodology. This is to ensure the rules of the basket remain relevant following any structural changes to the theme. This may include ensuring that the sector exposure of the basket remains broadly consistent with the investment theme. Basket change implementation. J.P. Morgan will consider extending the implementation of changes to the basket composition from one trading session to any period up to five trading sessions in the event that a material increase in the liquidity or capacity of the basket is required to minimize market impact. Corporate actions may affect the J.P. Morgan US Best Near-Term Ideas Basket. The composition of a custom basket is typically adjusted in the following manner: Cash Merger. The divisor is adjusted, and we remove the merging company from the basket on the day of merger and redistribute gains into remaining companies according to recalculated market cap weights of surviving constituents in the basket. Stock Merger. If the acquirer is a member of the basket, then the weight allocated to the acquired will transfer to the surviving entity on the close of the last day it trades. If the acquirer is not a part of the basket, then proceeds (losses) from the acquired company will be redistributed to the surviving basket constituents based on the recalculated weighting on the close of its last trading day. Spinoffs. The spinoff company and parent will be included in the basket, and both the spinoff and parent company weights will be readjusted according to new market capitalizations after the spinoff date. Tender Offers and Share Buybacks. The company remains in the basket and its weight is adjusted according to the impact the tender/buyback has on the stocks market value. Delisting/Insolvency/Bankruptcy. The company is removed from the basket as of the close of the last trading day, and the proceeds (losses) will be redistributed into remaining companies according to re-calculated weights of remaining companies in the basket. If a stock trades on pink sheets it will not be included in the basket.
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Christopher Sands
(1-212) 622-9224 christopher.sands@jpmorgan.com J.P. Morgan Securities LLC
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Long Union Pacific (UNP $85.66 Overweight) Short Canadian National (CNI $68.12 Neutral)
Over the next three months, we recommend a pair trade of taking a long position in OW-rated UNP to capture the companys strong legacy contract repricing story and robust near-term PRB coal volumes, while offsetting the macro risk by taking a short position in N-rated CNI. UNP should realize a significant tailwind in 2012 from repricing ~$1.05 bn in revenue of old contracts (legacy intermodal and coal), where pricing is likely to rise sharply. We estimate that the combined revenue increase resulting from repricing the legacy contracts is ~$490 mm in 2012 or ~$0.63/share, which contributes 9.7%points to earnings growth. In contrast, we expect the pricing outlook to be somewhat more muted for CNI, which does not have any meaningful legacy contracts remaining in its book of business. CNI is also exposed to Canadian regulated grain, which has limited pricing opportunity. In our view, the revenue mix for UNP is more defensive with ~38% of 2010 revenues from the less economically sensitive coal and agricultural segments compared to only ~24% of CNIs revenues. Although we are recommending a short position in CNI against a long UNP in this pair trade, we continue to rate CNI Neutral, as we believe the stock already reflects a reasonably optimistic outlook. We believe CNI is likely to realize modest margin expansion in the medium term, but our sense is that volume and revenue growth are the more important drivers of the CNI story. On our 2012 EPS estimates, UNP trades at 11.9x and CNI trades at 13.6x. The longterm average historical P/E range for UNP and CNI is 11x-15x, but we note that during the positive rail pricing story of 2004 2008 the rail group realized stronger valuation in the 13x 17x range. In our view, the more defensive book of business and strong legacy contract repricing story should likely drive a stronger valuation for UNP relative to CNI. We note that the YTD stock performance for UNP is down 7.6%, while CNI is up 2.5% and the S&P 500 is down 8.5%.
Alexander K. Johnson
(1-212) 622-6513 alexander.k.johnson@jpmorgan.com J.P. Morgan Securities LLC
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Rodney C. Clayton
(1-212) 622-2873 rodney.c.clayton@jpmorgan.com
Ankit Varmani
(1-212) 622-5654 ankit.varmani@jpmorgan.com J.P. Morgan Securities LLC
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Machinery
Global Agriculture Fundamentals Strong; Overweight DE
Ann Duignan AC
(1-212) 622-0381 ann.duignan@jpmorgan.com
Michael Shlisky
(1-212) 622-6656 michael.d.shlisky@jpmorgan.com J.P. Morgan Securities LLC
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Airlines Consumer
UAL: Priced for Turbulence, but We See Friendlier Skies Ahead
Jamie Baker AC
(1-212) 622-6713 jamie.baker@jpmorgan.com
Joseph Abboud
(1-212) 622-7059 joseph.g.abboud@jpmorgan.com J.P. Morgan Securities LLC
21
Vivek Aalok
(1-212) 622-0798 vivek.x.aalok@jpmorgan.com
Michael Kimlat
(1-212) 622-0458 michael.x.kimlat@jpmorgan.com
Amy L Carroll
(1-212) 622-1206 amy.l.carroll@jpmorgan.com J.P. Morgan Securities LLC
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Gaming
LVS: Several Catalysts Should Drive Near-Term Share Performance
Joseph Greff AC
(1-212) 622-0548 joseph.greff@jpmorgan.com
Jonathan Mohraz
(1-212) 622-1111 jonathan.mohraz@jpmorgan.com J.P. Morgan Securities LLC
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Building Products
We Highlight Overweight-Rated OC as Our Best Near-Term Idea Amid Market Turmoil
Michael Rehaut AC
(1-212) 622-6696 michael.rehaut@jpmorgan.com
Jason A Marcus
(1-212) 622-4906 jason.a.marcus@jpmorgan.com
William W Wong
(1-212) 622-1442 william.w.wong@jpmorgan.com J.P. Morgan Securities LLC
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Restaurants
Right Time, Right Price to Buy Brinker International
John Ivankoe AC
(1-212) 622-6487 john.ivankoe@jpmorgan.com
Amod Gautam
(1-212) 622-6417 amod.gautam@jpmorgan.com
Shaurja Ray
(1-212) 622-2039 shaurja.ray@jpmorgan.com J.P. Morgan Securities LLC
Hardlines Retailing
Home Depot The Orange Box Under the Christmas Tree
Christopher Horvers AC
(1-212) 622-1316 christopher.horvers@jpmorgan.com
Mark Becks
(1-212) 622-5265 mark.a.becks@jpmorgan.com
Aaron Goldstein
(1-212) 622-1336 aaron.goldstein@jpmorgan.com
Rachel Stubins
(1-212) 622-4245 rachel.stubins@jpmorgan.com J.P. Morgan Securities LLC
26
Tobacco
RAI: A Solidity of Earnings Expectations that Is Difficult to Beat
Rae Maile AC
(44) 20 7155 6102 rae.maile@jpmorgan.com J.P. Morgan Securities Ltd.
27
28
Andrew Smith
(1-713) 216-7681 andrew.l.smith@jpmorgan.com J.P. Morgan Securities LLC
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Jessica Lee
(1-212) 622-9812 jessica.s.lee@jpmorgan.com
Jeanine Wai
(1-212) 622-6489 jeanine.wai@jpmorgan.com J.P. Morgan Securities LLC
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John P Grassano
(1-212) 622-5605 john.p.grassano@jpmorgan.com J.P. Morgan Securities LLC
In addition, the whole large bank sector is attractively valued, in our view, and well below historical multiples. We believe Wells Fargo is also attractively valued at 7.5 times 12E EPS, which is the lowest multiple among our regional banks despite its strong longterm track record that is one of the best in the large cap bank group. On price to tangible book value basis, WFC trades at 1.4x, above peers but typically so due to this superior track record and less useful as a metric as the industry recovers and gets closer to normalized earnings. Given what we view as its high quality, lower risk and attractive valuation, we expect WFC to outperform the group in the near term.
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Preeti Dixit
(1-212) 622-9864 preeti.s.dixit @jpmorgan.com J.P. Morgan Securities LLC
Valuation
CMA shares trade at only 0.74x adjusted TBV (adjusted for SBIB deal), which is a 30% discount to the peer avearge, and we believe the valuation of CMA shares compensates investors for a challenged growth outlook. Once loan growth turns, depending on magnitude and sustainability, we expect to see CMA shares revalued to either a peer multiple or even a modest premium to peers given its strong core deposit funding base.
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Rahul Nevatia
(1-212) 622-6454 rahul.nevatia@jpmorgan.com J.P. Morgan Securities LLC
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Life Insurance
RGA: Strong Capital Position, Conservative Portfolio, and Marginal Equity Exposure
Jimmy Bhullar, CFA AC
(1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com
Matthew Byrnes
(1-212) 622-0695 matthew.p.byrnes@jpmorgan.com
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Insurance Non-Life
Aon Corporation: Bringing a Bit of Visibility to an Uncertain Market
Matthew G. Heimermann AC
(1-212) 622-6545 matthew.g.heimermann@jpmorgan.com
Donald H. Chen
(1-212) 622-2875 donald.h.chen@jpmorgan.com
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REITs
Simon Appears Well Positioned for Defense and Offense
Michael W. Mueller AC
(1-212) 622-6689 michael.w.mueller@jpmorgan.com
Anthony Paolone
(1-212) 622-6682 anthony.paolone@jpmorgan.com
Cindy True
(1-212) 622-6748 cindy.l.true@jpmorgan.com
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Daniel Kim
(1-212) 622-6557 daniel.x.kim@jpmorgan.com
Jonathan Philpot
(1-415) 315-6725 jonathan.philpot@jpmorgan.com J.P. Morgan Securities LLC
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Anupam Rama
(1-212) 622-0105 anupam.rama@jpmorgan.com
Michael E Ulz
(1-212) 622-0900 michael.e.ulz@jpmorgan.com
G Krishna Gorti, MD
(1-212) 622-4986 krishna.gorti@jpmorgan.com J.P. Morgan Securities LLC
41
SMid Biotechnology
Ariads Key Drug Attempting to Set the PACE into Year-End
Cory W KasimovAC
(1-212) 622-5266 cory.w.kasimov@jpmorgan.com
Karen E Jay
(1-212) 622-4668 karen.e.jay@jpmorgan.com
Matthew J Lowe
(1-212) 622-0848 matthew.j.lowe@jpmorgan.com J.P. Morgan Securities LLC
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Gavin S. Weiss
(1-212) 622-5451 gavin.s.weiss@jpmorgan.com J.P. Morgan Securities LLC
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Christopher Pasquale
(1-212) 622-6590 christopher.t.pasquale@jpmorgan.com
Kimberly Gailun
(1-617) 310-0740 kimberly.w.gailun@jpmorgan.com
Ross Comeaux
(1-212) 622-1895 ross.w.comeaux@jpmorgan.com J.P. Morgan Securities LLC
44
Evan Lodes
(1-212) 622-5650 evan.lodes@jpmorgan.com
Ramesh Donthamsetty
(1-212) 622-6580 ramesh.c.donthamsetty@jpmorgan.com J.P. Morgan Securities LLC
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Pharmaceuticals Major
Pfizer: Entering New Product Cycle; Defensive Play in a Choppy Market
Christopher Schott, CFA AC
(1-212) 622-5676 christopher.t.schott@jpmorgan.com
Jessica Fye
(1-212) 622-4165 jessica.m.fye@jpmorgan.com
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Pharmaceuticals Specialty
Watson Poised for Significant Near-Term Upside
Chris Schott, CFA AC
(1-212) 622-5676 christopher.t.schott@jpmorgan.com
Jessica Fye
(1-212) 622-4165 jessica.m.fye@jpmorgan.com J.P. Morgan Securities LLC
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Silke Kueck
(1-212) 622-6503 silke.x.kueck@jpmorgan.com
Olga Guteneva
(1-212) 622-6488 olga.v.guteneva@jpmorgan.com
Ben Richardson
(1-212) 622-6455 ben.richardson@jpmorgan.com J.P. Morgan Securities LLC
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Sadhak Bindal
(1-212) 622-2684 sadhak.x.bindal@jpmorgan.com J.P. Morgan Securities LLC
BRL
AUD
CAD
Oct-10
Jan-11
Apr-11
Jul-11
Source: Bloomberg
We believe Kinross could benefit from the weakening resource currencies such as Brazils real and also the euro as it builds its big asset in Mauritania. Also, any new positive results from the drilling at the new targets it identified at the Tasiast mine could help the stock price as it reports Q3. We visited the mine in March11 and came back impressed with prospects for new targets on the property. Currently we estimate most of the gold equities are discounting a gold price around $1200/oz gold price, but we believe if gold prices remain at higher levels we could see gold equities move higher, implying higher gold prices. Assuming an implied gold price of $1300/oz, we believe KGC offers significant potential upside. In the next five years, we estimate KGC offers significant production growth of about 70% to 4.5-4.9mozs. We believe KGC is currently undervalued as investors wait for the promised growth.
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Tyler J. Langton
(1-212) 622-5234 tyler.j.langton@jpmorgan.com
Brian P. Ossenbeck
(1-212) 622-1023 brian.p.ossenbeck@jpmorgan.com J.P. Morgan Securities LLC
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Ariel Avila
(1-212) 622-8021 ariel.x.avila@jpmorgan.com J.P. Morgan Securities LLC
52
Nadia Lovell
(1-212) 622-4885 nadia.s.lovell@jpmorgan.com J.P. Morgan Securities LLC
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Internet
Despite Weak Fundamentals, Yahoo! Offers Potential Near-Term Upside Catalysts
Douglas Anmuth AC
(1-212) 622-6571 douglas.anmuth@jpmorgan.com
Shelby Taffer
(1-212) 622-6518 shelby.x.taffer@jpmorgan.com J.P. Morgan Securities LLC
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Richard Choe
(1-212) 622-6708 richard.choe@jpmorgan.com
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Marija Krgovic
(1-212) 622-5552 marija.krgovic@jpmorgan.com
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IT Hardware
Apples Stock Should Outperform Near Term with or without Macroeconomic Stabilization
Mark Moskowitz AC
(1-415) 315-6704 mark.a.moskowitz@jpmorgan.com
Anthony Luscri
(1-415) 315-6702 anthony.s.luscri@jpmorgan.com
Mike Kim
(1-415) 315-6755 mike.j.kim@jpmorgan.com J.P. Morgan Securities LLC
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SMid Semiconductors
Technology Market Trends and Tier-1 Customers Should Help BRCM Weather Macro Uncertainty
Harlan Sur AC
(1-415) 315-6700 Harlan.Sur@jpmorgan.com
John S. Ahn
(1-415) 315-6758 John.S.Ahn@jpmorgan.com J.P. Morgan Securities LLC
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Software
Economic Weakness Presents Risk to September Earnings Reports
John DiFucci AC
(1-212) 622-2341 john.s.difucci@jpmorgan.com
Darren Jue
(1-212) 622-4071 darren.r.jue@jpmorgan.com
We continue to believe the European region will be weak and the US wont make up the difference in the global economy. Typically, we would encourage investors to buy value stocks in these market conditions. However, we believe many companies are at risk to miss September quarter numbers, including CA (OW), QSFT (OW), MSFT (N), and SYMC (OW). See our note Lowering Estimates Based on Europe, US Government, and Financial Services dated September 6, 2011 for additional detail. We would encourage investors to buy any of the following stocks in the event of a miss: CA, QSFT, and SYMC.
Marc P Griffin
(1-212) 622-5615 marc.p.griffin@jpmorgan.com
Sandeep Madhur
(1-212) 622-6516 sandeep.madhur@jpmorgan.com J.P. Morgan Securities LLC
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Software Technology
Synopsys: Bookings and Cash Flow Should Have Legs Through 1H12
Sterling Auty, CFA AC
(1-212) 622-6389 sterling.auty@jpmorgan.com
Lauren Choi
(1-212) 622-6102 lauren.coi@jpmorgan.com
Saket Kalia
(1-212) 622-6477 saket.kalia@jpmorgan.com J.P. Morgan Securities LLC
Source: Bloomberg 61
Other Companies Recommended in This Report (all prices in this report as of market close on 27 September 2011) CA Technologies (CA/$20.56/Overweight), Microsoft (MSFT/$25.67/Neutral), Quest Software (QSFT/$16.60/Overweight), Symantec (SYMC/$17.15/Overweight)
Disclosures Part of this report is a product of the research department's Global Equity Derivatives and Delta One Strategy group. Views expressed may differ from the views of the research analysts covering stocks or sectors mentioned in this report. Structured securities, options, futures and other derivatives are complex instruments, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated option transactions. Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important EMEA Disclosures
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J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 47% 50% 45% 70% Neutral (hold) 42% 46% 47% 64% Underweight (sell) 11% 32% 8% 52%
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
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Equity Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of nonUS affiliates of JPMS, are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P
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