The Outlook                                               Intelligence for the Individual Investor        February 29, 201...
2 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012Intelligencer                                                            ...
STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 3The ObservatorySelected actions for February 17 through February 23.     ...
4 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012  FUNDSTRATEGIES             Clipper Fund                                ...
STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 5                                                                         ...
6 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012                                                                         ...
STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 7                                                                         ...
8 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012                                                                         ...
STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 9                                                                         ...
10 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012Consumer-Facing Tech Stocks                                             ...
STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 11Total Return Portfolio                                                  ...
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  1. 1. The Outlook Intelligence for the Individual Investor February 29, 2012 Recovery Time Beth Piskora S&P Capital IQ Editorial Volume 84 But can it last? Number 8 If you’ve ever had surgery, you know recov- can be incredibly resilient; the average declineWhat’s Inside ery time for the human body can take sub- lasts 137 days while the average recovery is stantially longer than the original operation. only 108 days. Of course, past performance isIntelligencer 2 The stock market is not unlike the human no guarantee of future results.Observatory 3 body in that regard; it can get cut down very And what happened after the marketMutual Fund Strategies 4 quickly, then take much longer to recover. resumed its pre-correction level? In 17 of the Such was the case in 2010, when the market, 19 corrections (defined as a decline of at leastETF Strategies 5 as measured by the S&P 500 suffered a 70- 10%, but not 20%) since 1946, the marketEurope: Be In It 6 day correction, and took 125 days to re-gain moved higher still. The average subsequent its earlier level. Similarly, in 1980, the down- gain was 9.8%, over 121 days. But rememberEuropean Banks Deleverage 7 ward correction lasted 43 days, while the what they say about past performance.Auto Exports 8 recovery took 109 days. (See table.) There may not be a sufficient catalyst toTitanium 9 Looking at all the corrections and recover- move the market significantly higher this ies since 1946, however, shows the market (Continued on page 3)Stock Screen 10Master List 11Platinum Portfolio 12 CORRECTIONS AND RECOVERIES DATES DECLINES RECOVERIES SUBSEQUENT GAINS HIGH LOW % CHG. # DAYS DATE % CHG. # DAYS % CHG. # DAYS 2/2/46 2/26/46 -10.2 24 4/9/46 12.3 42 2.0 50S&P Equity Research 6/12/50 7/17/50 -14.0 35 9/22/50 16.5 67 4.5 63Recommended Asset 1/5/53 9/14/53 -14.8 252 3/11/54 17.5 178 40.6 358Allocation 9/23/55 10/11/55 -10.6 18 11/14/55 13.8 34 0.0 0 8/3/59 10/25/60 -13.9 449 1/27/61 17.1 94 18.6 319 Foreign 9/25/67 3/5/68 -10.1 162 4/29/68 11.7 55 4.5 73 Cash 4/28/71 11/23/71 -13.9 209 2/4/72 16.3 73 7.3 192 15% Equities 15% 11/11/74 12/6/74 -13.5 25 1/27/75 15.9 52 14.1 49 7/15/75 9/16/75 -14.1 63 1/12/76 17.3 118 11.9 253 Bonds 9/21/76 3/6/78 -19.4 531 8/15/79 24.6 527 2.8 51 25% 10/5/79 11/7/79 -10.2 33 1/21/80 12.2 75 5.7 23 U.S. Equities 2/13/80 3/27/80 -17.1 43 7/14/80 22.2 109 8.7 70 45% 10/10/83 7/24/84 -14.4 288 1/21/85 18.5 181 11.7 177 10/7/97 10/27/97 -10.8 20 12/5/97 12.2 39 0.0 0 7/19/98 8/31/98 -19.3 43 11/23/98 24.1 84 7.7 67 7/16/99 10/15/99 -12.1 91 11/16/99 13.8 32 3.5 45 11/27/02 3/11/03 -14.7 104 5/12/03 18.0 62 22.5 275Please see page 3 for required research 4/23/10 7/2/10 -16.0 70 11/4/10 19.4 125 10.0 106analyst certification disclosures. 4/29/11 10/3/11 -19.4 157 2/24/12 24.2 144 ??? ??? Avgs. 19 -13.8 137 17.3 110 9.8 121For important regulatory information, please Source: S&P Capital IQ. Table shows S&P 500 actions since 1946. Past performance is no guarantee of future results.go to: and clickon “Regulatory Affairs and Disclaimers.”
  2. 2. 2 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012Intelligencer S&P Capital IQ’s The OutlookHeadlines, Highlights, and What’s on Our Minds EDITORIAL Managing Editor Beth PiskoraPORTFOLIO CHANGES: Hess (HES 67 ★★★★) replaces Nordstrom (JWN 53 Senior Editorial Manager Vaughan Scully★★★), and Cummins (CMI 122 ★★★★★) replaces United Technologies (UTX Statistician Chris Peng84 ★★★) in the High-Quality Capital Appreciation Portfolio, effective after the R E S E A R C H & A N A LY T I C Sclose on Monday, February 27, 2012. Wal-Mart Stores (WMT 59 ★★★★) was Managing Director, Global Equity Research Stephen Biggardeleted from the Platinum Portfolio effective February 22, 2012.OIL PRICE FORECAST: As of February 2012, the U.S. Energy Information For customer service, please call 1-800-852-1641 between 9am and 4pm Eastern Time, Monday through Friday.Administration (EIA) sees global demand growth for crude oil of 1.5% in The Outlook (USPS 415-780, ISSN 0030-7246) is published2012 and 1.7% in 2013. Demand is expected to outstrip supply in both years, weekly except for one issue in January, April, July, and November by S&P Capital IQ, 55 Water St. New York, NY 10041.increasing the likelihood of a global inventory drawdown. Based on S&PCapital IQ’s U.S. and global gross domestic product growth forecasts, we have Annual subscription: $298. Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Sendraised our forecasts for U.S. benchmark West Texas Intermediate for 2012 by address changes to The Outlook, S&P Capital IQ, 55 Water St., New York, NY 10041.$9.69 to $100.69/bbl, and for 2013 by $6.83 to $114.67/bbl. Libyan supplies Copyright ©2012 by Standard & Poor’s Financial Services LLC. Allhave begun to come back online, but we don’t expect a full recovery until late rights reserved. “Standard & Poor’s,” “S&P,” “S&P 500,” “S&P2012. Attention has turned to the situation in Iran, where they have halted MidCap 400,” and “S&P SmallCap 600” are registered trade- marks of The McGraw-Hill Companies, Inc. Reproduction insales to Britain and France and are considering an embargo to other EU mem- whole or in part prohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies: Harold W.bers as a pre-emptive measure to the EU’s embargo of Iran set to begin in July. McGraw, III, Chairman, President and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief FinancialSeparately, reflecting the increased production from unconventional sources, Officer; Elizabeth O’Melia, Senior Vice President, Treasury Operations; Kenneth M. Vittor, Executive Vice President andwe cut our forecasts for U.S. Henry Hub spot natural gas price for 2012 by General Counsel. Because of the possibility of human or mechan-$0.87 to $2.66/MMbtu, and by $0.39 to $3.75/MMbtu for 2013. / Michael ical error by S&P’s sources, S&P, or others, S&P does not guarantee the accuracy, adequacy, or completeness of anyKay, S&P Capital IQ Equity Analyst information and is not responsible for any errors or omissions or for the results obtained from the use of such information.ASIAN ENERGY: On February 21, 2012, S&P Capital IQ-Asia raised its energy The Outlook is a publication of S&P Capital IQ. This depart- ment operates independently of, and has no access to, non-sector recommendation to Overweight from Marketweight. Increased geopolit- public information obtained by Standard & Poor’s Ratingsical tensions around the Strait of Hormuz, slower Libyan production restarts, Services, which may in its regular operations obtain informa- tion of a confidential nature. Information included in Theas well as supply concerns from other countries in the Middle East and Africa Outlook may at times be inconsistent with information avail- able in S&P Capital IQ’s MarketScope, an electronically deliv-have pushed up international oil prices, according to S&P Capital IQ Equity ered online service. Permission to reprint or distribute any content from this newsletter requires the written approval ofAnalyst Ahmad Halim. S&P Capital IQ. “To take advantage of rising average selling prices, we recommend investorsto go long on upstream-centric energy companies, while we are less positive ondownstream producers which are likely to be hit by slower demand growthand higher feedstock costs,” says Halim. S&P CAPITAL IQ EVALUATION SYMBOLS He believes threats from Iran to close the Straight of Hormuz, one of the STARS Rankingsworld’s most strategically important transit points through which much of the Our evaluation of the 12-month potential of stocks is indicated byoil produced in Persian Gulf countries must pass, is raising the risk of short-term STARS: Strong Buy—Total return is expected to outperformsupply disruptions. Iran recently cut crude oil supplies to the U.K. and France. the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising S&P Equity Research has buy recommendations on PetroChina (00857 in price on an absolute basis.HKD12 ★★★★) (PTR 150 ★★★★) and CNOOC (00883 HKD18 ★★★★) Buy—Total return is expected to outperform the total return of a relevant benchmark over the(CEO 226 ★★★★). / Art Epstein ■ coming 12 months, with shares rising in price on an absolute basis. Hold—Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in priceMARKET MEASURES on an absolute basis. CLOSE % CHG. % CHG. ‡OPERATING †P/E RATIO INDICATED Sell—Total return is expected to underperform the FRI. YEAR TO PAST —EARNINGS— FRI. ANNUAL % total return of a relevant benchmark over the comingINDEX 2/24/12 DATE 52 WKS. E2011 E2012 2/24/12 DIVIDEND YIELD 12 months, and the share price is not anticipated to show a gain.S&P 500 Composite 1365.74 8.6 1.7 96.46 105.05 13.00 28.62 2.10 Strong Sell—Total return is expected to underperform the total return of a relevant benchmark by a wideS&P MidCap 400 985.36 12.1 0.3 50.86 61.67 15.98 13.44 1.36 margin over the coming 12 months, with shares fallingS&P SmallCap 600 459.76 10.8 4.2 20.73 26.88 17.10 5.45 1.19 in price on an absolute basis. NR Not ranked.S&P SuperComposite 1500 316.11 9.0 1.7 21.52 23.73 13.32 6.33 2.00 Quality Rankings (QR)Dow Jones Industrials 12982.95 6.3 4.8 ... ... ... ... ... Our appraisals of the growth and stability of earnings and dividends over the past 10 years for STARS and other companies are indicatedNasdaq Composite 2963.75 13.8 4.6 ... ... ... ... ... by Quality Rankings:BBB Indus. Bond Yield (10-yr.) 4.35 -0.14 ◊ -1.31 ◊ ... ... ... A+ Highest B+ Average C Lowest A High B Below Avg. D In reorganizationData through 2/24/12. E-Estimated. †Based on estimated 2012 earnings. ‡Before special factors. ◊Actual change in yield A- Above Avg. B- Lower NR Not Ranked(not percentage change). Sources: S&P Capital IQ and Thomson ONE. Quality Rankings are not intended to predict stock price movements.
  3. 3. STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 3The ObservatorySelected actions for February 17 through February 23. STARS CURRENT NEW OLD CHANGE QUALITY NAME SYMBOL PRICE ($) STARS STARS DATE RANK Acme Packet APKT 33 2 3 2/21/12 NR Airgas ARG 81 2 3 2/21/12 A- Cnooc CEO 226 4 3 2/21/12 NR DealerTrack Holdings TRAK 28 2 3 2/17/12 NR Dollar Tree DLTR 88 2 3 2/22/12 B+ Emulex ELX 10 2 3 2/17/12 C Frontier Communications FTR 5 4 3 2/17/12 B- H&E Equipment Services HEES 18 3 4 2/21/12 NR Lazard LAZ 30 2 3 2/22/12 NR Newfield Exploration NFX 37 3 4 2/22/12 B- Nordstrom JWN 53 3 4 2/17/12 A- Nustar GP Holdings NSH 35 3 4 2/17/12 NR Petrochina PTR 150 4 3 2/17/12 B+ Range Resources RRC 65 1 3 2/21/12 B Rockwood Holdings ROC 54 3 4 2/22/12 NR Stifel Financial SF 38 2 3 2/22/12 B Wal-Mart Stores WMT 59 4 5 2/21/12 A+ Weatherford International WFT 16 3 4 2/21/12 NR Wellcare Health Plans WCG 67 4 3 2/22/12 NRSource: S&P Capital IQ. For daily STARS changes, subscribers can call The Outlook hotline, 800-618-7827, and put in your subscriber access code.The Observatory provides a selection of analytical actions — upgrades, downgrades, initiations — from S&P Capital IQ. Stocks featured in the Observatory areselected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a portfolio published by The Outlook.Please note that all investments carry risks. Investors should seek financial advice before investing.All of the views expressed in this research report accurately reflect the research analysts’ personal views regarding any and all of the subject securities or issuers.No part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.Recovery Time (Continued from cover)time, cautions S&P Capital IQ Chief Capital IQ’s global equity strategist, into, or are about to run into, huge lay-Equity Strategist Sam Stovall. advises investors to keep an eye on ers of overhead supply, he says, which “The market is in the midst of an Europe and China — two additional should elicit some type of pullback ininter-quarter earnings wilderness,” he sources of potential negative catalysts. the near term. Finally, some of thepoints out. “What’s more, psychologi- From a technical perspective, says major emerging markets are also sittingcally-important thresholds usually S&P Capital IQ Chief Technical right under multi-year zones of over-take a few attempts to break above.” Strategist Mark Arbeter, the S&P 500 head supply, and are also extremely Beth Ann Bovino, deputy chief has run into stiff chart resistance in the overbought and seeing multiple priceeconomist for Standard & Poor’s, 1,360 to 1,370 region from the highs momentum divergences, he says.agrees about the potential for nega- put in last year, and he sees bearish The S&P Capital IQ Investmenttive catalysts. She foresees significant daily momentum divergences that Policy Committee continues to rec-headline risk relating to the upcoming many times coincide with short- to ommend an allocation of 45% U.S.U.S. presidential election, the poten- intermediate-term tops. In addition, he equities, 15% foreign equities, 25%tial for another debt-ceiling crisis sim- notes, the Dow Transports continue to bonds, and 15% cash. In terms ofilar to the one that roiled markets last weaken and are now almost 5% below sector weightings, the committeeyear, and a still-high unemployment their recent high. He thinks this non- advises overweighting consumerrate potentially unnerving investors. confirmation warrants caution. The discretionary, consumer staples, Meanwhile, Alec Young, S&P major European indices have also run and industrials. ■
  4. 4. 4 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 FUNDSTRATEGIES Clipper Fund Brian J. Egli S&P Capital IQ Editorial This fund garners a five-star ranking from S&P Capital IQ. Christopher Davis and Kenneth mistakes, and refine their we ask two important questions: Feinberg, co-managers of the research process. “That said,” he What kinds of businesses would Clipper Fund since 2006, are on notes, “our investment philoso- we like to own and how much a mission. After posting the worst phy and approach are based on should we pay for them? returns of their careers for certain unwavering principles Ultimately, we seek to purchase CFIMX over a five-year period that remain constant through durable businesses at value prices that included the outset of the time. So while we can always find and to hold them for the long financial crisis, they are on the ways to improve in regards to the term to allow the power of com- rebound, steering the fund application of our investment dis- pounding to work. We approach toward better times. cipline, we never change our investing in stocks as though we Losses on American investment style or lose sight of were buying entire businesses International Group (AIG 29 what has worked well over the outright with the intention of ★★★★), and not adding to posi- last 40 or so years as a research holding those businesses for five tions in stocks like Wells Fargo organization.” or more years.” (WFC 30 ★★★★) and American “Our investment approach S&P Capital IQ believes it is Express (AXP 53 ★★★★★) when begins with the recognition that important to assess a fund’s they were near $8 and $10 per stocks represent ownership inter- underlying holdings in addition share, respectively, to offset these ests in real businesses,” Davis to its performance, risk and cost losses, were key factors behind says. “From that starting point considerations, and our propri- the subpar showing, the co- etary ranking methodology managers say. But as they CLIPPER FUND incorporates all of these stated in the fund’s mid- analyses in establishing a 2011 performance report, Ticker: CFIMX fund’s ranking. “with more than $70 million As of September 30, of our own money invested S&P Ranking: 2011, CFIMX’s major in Clipper Fund alongside holdings included Costco shareholders, we, our col- Current Price: $67 (COST 84 ★★★), leagues and our families American Express, Loews share the cost of these unsat- Total Net Assets: $1 Billion (L 39 ★★★), CVS isfactory results and have Caremark (CVS 44 every incentive to fix them.” Asset Class/Region/Type: ★★★★★), and Bank of Recent figures indicate Equity/Domestic/Large Cap Core New York Mellon (BK 22 their efforts are working. ★★★). The fund’s net The fund’s one-year trailing 12-Month Total Return: 4.8 expense ratio of 0.76% total return through vs. a peer average of February 17, 2012, was 3-Year Total Return (Average Annualized): 30.7 1.22%, as of September 2.34% vs. a peer average of 30, 2011, helped it garner 1.87%. Since inception Inception Date: 2/29/1984 an overall positive ranking (1984), the fund has for costs from S&P Gross Expense Ratio: 0.76 returned an average of Capital IQ’s fund ranking 11.35% a year vs. 5.71% Data through 2/23/12. methodology. for peers. The financial services *Total returns include reinvested dividends Davis says that he and and consumer staples sec- and capital gains, all annualized; calculations Feinberg constantly strive to tors dominate the fund, at do not reflect the effect of sales charges. adapt to new realities, incor- 40% and 19% of assets, porate lessons learned from Sources: S&P Capital IQ. respectively. ■
  5. 5. STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 5 ETF STRATEGIES Todd RosenbluthA Top-Ranked Growth ETF S&P Capital IQ ETF AnalystS&P Capital IQ gives it high marks for performance, risk, and cost.Cyclical sectors have led the From a bottom-up perspec- with favorable assessments inS&P 500 index higher thus far tive, on average, the stocks the performance analytics,in 2012, and S&P Capital IQ within this ETF’s portfolio are risk considerations, and costexpects some of them to outper- considered undervalued by factors categories of ourform in the months ahead as S&P Capital IQ equity ana- methodology.well. For investors looking for lysts and have above-average Looking at its holdings, IVWdiversified exposure to growth S&P Quality Rankings. When earns a positive score for S&Pareas of the market at a low combined with some favorable STARS and a neutral score forcost, the iShares S&P 500 cost factor analysis, such as S&P Fair Value. While theGrowth Index ETF is a com- its modest gross expense ratio ETF’s top-10 assets are just apelling investment option, in of 0.18% and a tight bid/ask snapshot in our review, recent-our view. spread, IVW ranks well in ly at 30% of the overall port- S&P Capital IQ thinks the S&P’s broad coverage of equi- folio, nine of the 10 are cur-gains posted by the “500” thus ty ETFs. iShares S&P 500 rently considered attractivefar this year are due in part to Growth Index Fund earns an based on S&P STARS and sixreduced risk aversion among overall overweight ETF rank- are considered attractive basedinvestors. Better-than-expected ing from S&P Capital IQ, on S&P Fair Value. Some ofU.S. growth, receding the stocks that areconcerns over a appealing to S&P CapitalEuropean credit crunch ISHARES S&P 500 GROWTH INDEX FUND IQ on both metricsthanks to aggressive include Apple (AAPL 520lending by the European Ticker: IVW ★★★★), IBM (IBM 198Central Bank, and ★★★★★) and Philipresilient economic S&P Ranking: OW Morris International (PMgrowth in China have all 83 ★★★★★).combined to boost prices Current Price: $73 Within risk considera-for U.S. equities. S&P tions, S&P Capital IQCapital IQ currently rec- Total Net Assets: $6.8 Billion looks at standard devia-ommends investors over- tion to assess the volatilityweight the consumer dis- Asset Class/Region/Type: of its three-year returns.cretionary and industrial Equity/U.S. Domestic/Large Cap Growth In comparison to all ETFssectors in their portfo- in our universe, IVWlios, as well as the slight- 12-Month Total Return: 9.8 earns a favorable score,ly more defensive con- with a standard deviationsumer staples sector. 3-Year Total Return (Average Annualized): 24.5 of 16.7. For cost factors, IVW had high expo- S&P Capital IQ uses thesure to these three sec- Inception Date: 5/22/2000 gross expense ratio, thetors as December 2011, bid/ask spread, and the Gross Expense Ratio: 0.18with a combined 36% of price to NAV of the ETF.assets, in addition to Data through 2/23/12. IVW receives positive26% in information *Total returns include reinvested dividends assessments for the firsttechnology, a sector that two inputs and a neutral and capital gains, all annualized; calculationsS&P Capital IQ’s strate- for the third one, as the do not reflect the effect of sales charges.gists lowered to a mar- ETF recently was tradingketweight recommenda- OW-Overweight. essentially in line with itstion in mid-February. Source: S&P Capital IQ. $73 NAV. ■
  6. 6. 6 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 Vaughan ScullyEurope: Be In It S&P Capital IQ EditorialExposure to Europe is still important in a well-diversified portfolio.There’s nothing like the threat of tracks the MSCI Europe Index of all Europe region funds, with anmultiple sovereign defaults and near about 460 stocks, garners an over- average annual return of 26.3% aszero economic growth to dim a weight recommendation from S&P of February 21. Launched in August,region’s investment attraction. Just Capital IQ’s proprietary ETF rank- 2000, the fund delivered an 11%about everything that could go ing system. The fund has $6.1 billion average annual return since then. Aswrong economically for Europe has in assets (across multiple share class- of January 31, according to Invesco’sgone wrong: sovereign bailouts, a es including a traditional mutual website, the fund’s holdings wererecessionary economy, inflexible fund) and has average daily trading mostly industrial (36.3% of assets),labor markets, large government volume of more than one million consumer discretionary (15.9%), andbureaucracies, and a persistently shares. U.K.-based companies have information technology (13.2%)strong common currency that has the largest geographical allocation, companies. Geographically, the U.K.prevented ailing nations from with about 31% of assets as of year- was the largest allocation at 33%,devaluing their way out of trouble, end 2011, followed by Switzerland followed by Ireland (16%) andto name but a few. and France at slightly more than Germany (10.2%). With all of that to contend with, it 13% each. For those looking to own larger,comes as something of a surprise With so much turmoil in the better known companies, the T.that broad European equity indices region, however, some investors Rowe Price European Stock fund hashave posted strong gains for the year may prefer the benefit of an active a top-10 holdings list stocked withto date, even as the region’s econom- manager. There are about 20 dif- household names like Royal Dutchic activity slows. In the first eight ferent mutual funds targeting the Shell (RDS.A 74 ★★★), Sanofi (SNYweeks of the year, the S&P Europe European region that are currently 38 ★★★), and Novartis (NVS 57350 index gained almost 8%. open to new investors and not ★★★★). The fund’s 21.1% average While still well aware of the region’s designed for institutional clients. annual return over the past threeproblems, S&P Capital IQ has turned Over the past three years, their years is ahead of the peer average ofmore positive on Europe recently, cit- performance ranges from an aver- 19.5%, and its costs are below aver-ing the ECB’s move to ease pressure age annual total return of more age. The fund has about $663 mil-on banks. “We have become incre- than 30% to less than 10%. Net lion in assets, and has delivered anmentally more positive,” says Robert expense ratios vary from about 1% average annual total return of 7.3%Quinn, S&P Capital IQ’s chief to 1.8% for Class A shares. since it opened in February, 1990.European equity strategist. Among these funds, three stand Another alternative is Invesco If you want to “be in it,” there are out for strong historical perform- European Growth Fund, which wasmany different ways to go. There are ance, low cost, and a five star rank- the third best performing Europeancurrently more than 20 exchange ing from S&P Capital IQ’s fund region equity mutual fund over thetraded funds focused on Europe, ranking methodology. past three years with an averagethough most of them are individual Over the past three years, the annual return of 23.2%. It deliveredcountry funds. For broad exposure Invesco European Small Company an average annual total return ofto Europe from an ETF, Vanguard Fund delivered the second best per- about 11.3% since it opened inEuropean Stock Index ETF, which formance (for Class A shares) among November, 1997. ■POSITIVE POTENTIAL IMPLICATIONS S&P *TOTAL RETURN **CURRENT EXPENSEFUND NAME / TICKER RANKING YTD 1-YEAR 3-YEAR 5-YEAR PRICE RATIOInvesco European Growth Fund; A / AEDAX 5 10.9 3.4 24.3 -1.4 31 1.51Invesco European Small Company Fund; A / ESMAX 5 14.0 -2.1 27.4 -3.1 11 1.71T. Rowe Price European Stock Fund / PRESX 5 12.9 -0.8 22.6 -1.4 15 1.08Vanguard European Stock Index Fund; / VGK OW 11.3 -5.7 21.0 -3.8 46 0.14Data through 2/23/12. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. OW-Overweight.Sources: S&P Capital IQ..
  7. 7. STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 7 Standard & Poor’sECB Loans Won’t Stop Bank Deleveraging Ratings ServicesEurozone banks are positioning themselves defensively.As the first quarter of 2012 unfolds, short term, the business model of the opinion the links between sovereignthe eurozone banking industry faces bank, in our view, is unsustainable and bank credit risk are numerous,unfavorable funding conditions, because of the concentrated nature and the transmission from one to thedespite a half trillion euros of three- and limited availability of the funds. other in the debt market is rapid, inyear loans from the European In our opinion, all banks in Greece both directions. The higher cost ofCentral Bank (ECB) at the end of and Ireland, a few banks in Portugal, wholesale funding seems a perma-2011. Standard & Poor’s Ratings and certain singular cases such as the nent fixture of the brave new worldServices (which operates independ- Dexia group, have entered a state of of banking in the eurozone.ently from S&P Capital IQ) views dependency on the ECB and ELA. In response to this difficult marketthe Long-Term Refinancing Domestic banks in Spain, Italy, and environment and the weak eurozoneOperations (LTRO) as an extraordi- other eurozone countries have not economy, the top-tier eurozone banksnary emergency relief measure that borrowed from the ECB (and under are positioning themselves defensively,reduces the risk of a funding crisis. the ELA) to the same extent as building up stocks of short-term liq-Since the operation, wholesale term Greek and Irish banks, but may uidity, paring down risk assets todebt markets have opened, and bor- increase their usage in the near term. meet tougher regulatory standards forrowing conditions have eased. While The interbank market in Europe capital adequacy, and tightening cred-these developments are positive, we remains cautious, and risk premiums it standards. We expect the banks tobelieve, the ECB action in itself illus- the banks pay for term borrowings pay down maturing wholesale debttrates weaknesses in the eurozone are still high. In our observation, the and continue to deleverage, favoringbanking industry’s funding profile. gap between large banking groups credit to home markets, and cutting We see the partial reopening of the with market access (albeit at wide back cross-border corporate loanswholesale term debt markets in the risk premiums) and banks with little and funding of bank subsidiaries infirst quarter of 2012 as moderately or no ability to tap wholesale funds foreign countries.positive for bank credit. However, remains firmly in place. We also see The deleveraging is already under-we expect future periods of instabili- that this tiering of banks in the way in many countries of the euro-ty and risk-averse behavior in the European Economic and Monetary zone. The nominal growth of loansmarkets as the eurozone works outs Union (EMU or eurozone) according of eurozone banks to eurozone resi-its political issues during a period of to cost of funding and access to dents declined to 1.2% year on yearprojected slow growth and possible wholesale debt markets closely through December 2011. In the sec-recession. tracks the credit tiering of eurozone ond half of the year, annualized The greatly expanded role of the governments in the markets. In our nominal loan growth was zero. InECB as a significant source of several countries — Ireland,bank funding and a purchaser Spain, Greece, Portugal, andof government and covered EUROZONE DEPOSITS AT ECB SOAR Belgium — loans declinedbonds in the open market will, 600 during the year.we expect, be temporary. While The pace and scope ofthe two three-year LTRO ten- 500 deleveraging will be one ofders establish a relatively long 400 the defining issues of theperiod for the industry to eurozone banking industryadjust, the ECB exit, in our 300 in the years to come.opinion, represents a large risk Although the very largethat will grow over the coming 200 amount of loans from thethree years as the first quarter 100 ECB may slow down this2015 maturity of the three-year process, we believe banks inLTRO approaches. 0 Europe will use them more To the extent that a bank JUL. ‘07 JUL. ‘08 JUL. ‘09 JUL. ‘10 JUL. ‘11 for liability management,uses the ECB (or, in the case of namely, paying off maturing Deposit facility Fixed-term depositsELA loans, national central wholesale debts that fundbanks) to fund recurring busi- Note: Data through Feb. 3, 2012. Source: European Central Bank. Copyright © 2012 by assets already on the Standard & Poors Financial Services LLC. All rights reserved.ness, even if that business is balance sheet. ■
  8. 8. 8 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 Art EpsteinU.S. Auto Exports Speeding Up S&P Capital IQ EditorialU.S. exports of new light vehicles are up 52% since 2002.Exports from the U.S., particularlymotor vehicles, have been growing at AUTO STOCKS 12-MONTHa record pace, according to a recent ‡QUALITY CURRENT TARGET †P/E YIELDU.S. Department of Commerce trade COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)report. Ford Motor / F 4 B- High Value 12 15 6.9 1.7 Motor vehicles and parts, one of General Motors / GM 5 NR Medium NA 27 34 6.3 Nilthe leading manufacturing sectors for Honda Motor / HMC 3 NR Medium Foreign 38 36 27.0 1.8U.S. exports last year, rose by 17.7% Nissan Motor / NSANY 4 NR High Foreign 21 24 10.5 1.4to $119.9 billion in 2011 compared Toyota Motor / TM 3 NR Medium Foreign 84 83 46.2 1.4to 2010, according to the December *Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. ‡See definitions on page 2.2011 U.S. international trade report †Based on S&P estimated fiscal 2012 earnings. NA-Not available. Source: S&P Capital IQ.released February 10, 2012.Automotive vehicles and parts repre- since the end of the recession. Japan, floods in Thailand, and thesented one of the largest categories of Another reason for the increase, he appreciation of the yen.goods exported from the U.S. in 2011 says, is improvement in the quality For the next decade, Honda plans to— a record $132.5 billion. of U.S. automakers’ vehicles: the Big maintain its production in Japan at “U.S. exports posted a record $2.1 Three now make cars that last about the current level of one milliontrillion in 2011, helping to fuel the longer and need fewer repairs. units annually. It wants to reducepositive momentum we have seen in Also, more consumers from grow- exports from Japan by 50% and man-the U.S. economy as a whole,” said ing emerging middle class populations ufacture more of its models in interna-Commerce Secretary John Bryson on have more money to spend on cars. tional plants.the trade report, adding that the U.S. Ford says it is looking at emerging Toyota began exporting its U.S.-is on course to reach President markets of Asia-Pacific and Africa to made cars and trucks in 1988.Obama’s goal of doubling exports by help it achieve a global sales growth Today, the company’s vehicles thatthe end of 2014. rate of 50% by 2015. Currently, are made in Kentucky, Indiana, and U.S. vehicle exports are forecast to Asia-Pacific and Africa contribute Texas are sold in 21 countries. Theseincrease by about 5.8% to 1.65 mil- around 15% to Ford’s total sales exports increased 30% in calendarlion units in 2012 from 1.56 million and the company seeks to increase year 2010 to approximately 100,000units last year, and are projected to that contribution to 30% by the end units, according to Toyota.rise to 2.02 million units in 2015, of this decade. According to Ford, In November 2011, Toyota beganaccording to research by IHS the strong demographic trends in making Corollas at a new plant inAutomotive. these regions have created a great Blue Springs, Mississippi, it’s 10th Most of the cars and trucks export- deal of growth potential; China, plant in the U.S.ed from the U.S. are shipped to India, and Southeast Asian nations The free trade agreement betweenCanada, Germany, China, Saudi together have about two billion peo- the U.S. and South Korea thatArabia, and Mexico, according to the ple who increasingly can afford to became effective late last year helpedCommerce Department. More auto buy vehicles. Toyota decide to export American-exports are going to Canada and “Based on a confluence of factors, built Camry cars and Sienna mini-Mexico due to the North American in a dramatic turnaround, not only vans to South Korea. In DecemberFree Trade Agreement. has the U.S. become more attractive 2011, Toyota announced plans to One explanation for the rise in for manufacturing vehicles, but it export about 6,000 Camry vehiclesexports of vehicles made by has become an export base for sales annually to South Korea from itsGeneral Motors , Ford Motor, and to other regions,” says S&P Capital Georgetown, Kentucky plant.Chrysler (58.5% owned by Fiat IQ’s Levy. In a statement this month, ToyotaSpA (FIATY 6 NR)), is the increase Exporting cars from the U.S. has said it will shift more of itsin U.S. auto industry competive- become more attractive for Toyota Highlander SUV production fromness, says S&P Capital IQ Equity Motor, Honda Motor, and Nissan Japan to its Princeton, Indiana facilityAnalyst Efraim Levy, as labor costs Motor, who have been stung by last and will export some of these U.S.-have fallen and efficiency is up year’s earthquake and tsunami in made SUVs to other countries. ■
  9. 9. STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 9 Matt MorrowTitanium In Strong Demand S&P Capital IQ EditorialDemand for titanium comes from the aerospace and energy industries.Titanium has been in strong demand ing countries in Asia-Pacific and the implications for companies in thatlately, which bodes well for publicly Middle East. market.traded players such as Titanium Next-generation commercial air- “Titanium and carbon-fiber com-Metals, Allegheny Technologies (ATI craft (such as the Boeing 787 and posite materials used in modern air-45 ★★★), Carpenter Technology Airbus A350) use a significantly craft construction are compatible,(CRS 51 ★★★) and RTI higher percentage of both titanium with the result that as compositeInternational Metals (RTI 24 NR), and carbon fiber reinforced compos- use rises, so does titanium use,”according to S&P Capital IQ. ites to reduce weight and increase says Richard Tortoriello, an S&P One of the strongest readily fuel efficiency. Capital IQ equity analyst. “Foravailable metals by weight, titani- Larkin views Titanium Metals as example, the Boeing 787 containsum also has excellent corrosion the beneficiary of an upturn in 50% composite material by weightresistance. It is used by the com- commercial aerospace production, and 15% titanium, 5% more thanmercial aerospace industry both growing acceptance of titanium in its steel content.”in jet engine components and in other industrial markets, and a rise Another titanium producer, RTIair frame components. In addi- in Asian demand for titanium. He International Metals, recentlytion, titanium is used in ground believes these favorable develop- reported a 23% year-over-yearcombat vehicles as well as in ments, combined with the compa- increase in revenue to $529.7 mil-naval vessels. Titanium-based ny’s low debt levels, should enable lion and a 37% increase in its year-alloys are also in armor plating, Titanium Metals to capitalize on a end backlog to $476 million,structural components, chemical cyclical upturn in titanium reflecting an overall return toplants, power plants, desalination demand. Larkin does caution that growth in all of its markets, includ-plants, and pollution control while the aerospace market looks ing the aerospace, defense, energy,equipment. like it is in a very strong cyclical and medical markets, according to “Titanium’s corrosion resistance uptrend, delays in certain projects the company. RTI expects theand light weight makes it desirable could have negative short-term upward trend in the titanium millfor use in commercial and military product cycle to continue through-aerospace applications,” says Leo out 2012, supported by the recentLarkin, metals equity analyst for TITANIUM METALS announcements of productionS&P Capital IQ. 200 175 increases by the major commercial TIE Titanium Metals is one of the 150 aircraft manufacturers. 125world’s largest producers of milled S&P 500 100 Carpenter Technology Corp’s 75and melted titanium products, and 50 Dynamet subsidiary is a domesticthe largest U.S. producer of titani- 25 0 and international supplier of titani-um sponge (the raw material for 2010 2011 2012 um alloy products for the aerospace,titanium). The company’s main STATISTICS medical, consumer, motorsports, andcustomers for titanium products recreation industries. Ticker: TIEin commercial aerospace are Allegheny Technologies, anotherBoeing and Airbus, as well as specialty metals producer, said S&P Ranking:manufacturers of large civil air- total titanium mill product ship-craft engines including Rolls- Current Price: 15 ments for 2011 were 45 millionRoyce, General Electric Aircraft pounds, an increase of 20% com-Engines, Pratt & Whitney, and 12-Month Target Price: 19 pared to 2010, and benefited fromSnecma. a better value-added product mix According to Titanium Metals, Market Cap: $2.6 billion to the aerospace and medical mar-commercial aerospace is the fastest kets. In the oil and gas market,growing market for titanium — in Investment Style: Large Cap Blend Allegheny benefits from the trendjet engine components and airframe toward horizontal and directionalstructures. The growth is driven by Source: S&P Capital IQ.the demand for air travel in develop- (Continued on page 10)
  10. 10. 10 STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012Consumer-Facing Tech Stocks Beth Piskora S&P Capital IQ EditorialThe issues listed in the table garner 4- or 5-STARS rankings from S&P Capital IQ.Much has been written about therecent outperformance of price- STOCK SCREEN; the stock gained 25% in ‡QUALITY CURRENT TARGET †P/E YIELDthe first seven weeks of the year COMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)causing S&P Capital IQ Equity Apple / AAPL 4 B Medium Growth 516 650 12.6 NilAnalyst Scott Kessler to downgrade Baidu / BIDU 4 NR High Foreign 133 180 26.6 Nilit to buy (4-STARS) from strong Canon / CAJ 4 NR Low Foreign 45 50 16.1 3.2buy (5-STARS) in late January. Dell / DELL 4 B+ Medium Growth 17 19 7.9 NilStill, Kessler expects the Internet EarthLink / ELNK 5 B- Low Value 8 10 80.0 2.5travel company to outperform the Microsoft / MSFT 4 A- Low Growth 31 33 11.4 2.6market over the year. Plantronics / PLT 4 B Medium Blend 38 46 15.5 0.5 In fact, Kessler and other technol- / PCLN 4 B Medium Growth 587 650 23.5 Nilogy equity analysts are bullish on a Yahoo / YHOO 5 B Medium Growth 15 20 16.7 Nilnumber of consumer-facing technol- *Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility, competitive position,ogy stocks, including those listed in industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. ‡See definitions on page 2. †Based on S&P estimated fiscal 2012 earnings. Source: S&P Capital IQ.the table. Kessler points out that many tionary sector outperformed the “The second half of the year willconsumers no longer consider S&P 500 for the four most recent likely bring a boost from the intro-in-home or in-car technology a calendar years. ( is duction of Windows 8,” notesnice-to-have, instead considering classified as a consumer discre- Dylan Cathers, an S&P Capital IQit a must-have. And despite U.S. tionary stock, though the other technology equity analyst, “whileeconomic weakness, the U.S. con- issues in the table, while con- interest in mobile devices — bothsumer is not slowing considerably. sumer-facing, are all classified as phones and tablets — remains aIn fact, the consumer discre- technology stocks.) bright spot.” ■Titanium In Strong Demand (Continued from page 9)drilling, deep water projects, and “The U.S. onshore oil and gas “Although other companies aresour gas projects. industry is undergoing massive involved in the production of “The oilfield capital equipment changes to reflect the growth of new titanium, Titanium Metals is theproviders sometimes use titanium unconventional resources,” agrees purest play for investors interest-in their products for its durabili- Michael Kay, an S&P Capital IQ ed in this metal,” says Larkin.ty,” explains Stewart Glickman, energy equity analyst. “Many of Or, for a more diversifiedan S&P Capital IQ energy equity these new oil and gas basins are in approach, an investor might con-analyst. “For example, National regions that have previously been sider the Market Vectors RareOilwell Varco uses titanium in untapped and need major infrastruc- Earth/Strategic Metals ETFsome of its valve products, as ture buildouts. Pipelines, land rigs, (REMX 18 NR). It holds a num-well as in some of its pipe inspec- and gathering and processing facili- ber of the titanium producerstion tools. The general trend in ties require significant amounts of mentioned in this article, as welldrilling is that it is taking place in titanium in construction.” as additional international pro-places where by virtue of the Titanium Metals is S&P Capital ducers of titanium and othergeology, higher technology con- IQ’s only buy-ranked titanium rare earth or strategic metals. ■tent is needed.” producer.
  11. 11. STANDARD & POOR’S THE OUTLOOK FEBRUARY 29, 2012 11Total Return Portfolio 12/31/2011 — 2/17/2012To enter the Total Return Portfolio, which is designed may replace any stock in the portfolio with anotherfor long-term total return, a stock must have a current stock at any time for reasons that can include a down-yield at least equal to or greater than that of the S&P grade in the STARS, a dividend reduction, or other500. The company must not have cut its regular divi- fundamental factors.dend in the past five years at the time of entry into the The Total Return Portfolio underperformed itsportfolio, and that dividend must be secure in the benchmark from the beginning of the year throughopinion of the S&P Capital IQ analyst who follows February 17, rising 4.5% vs. an 8.6% gain in thethe stock. S&P Capital IQ’s Senior Portfolio Group S&P 500. ■TOTAL RETURN PORTFOLIO 12-MONTH ‡QUALITY CURRENT TARGET †P/E YIELDCOMPANY / TICKER ‡STARS RANKING *RISK STYLE PRICE PRICE RATIO (%)Abbott Laboratories / ABT 4 A Low Growth 56 61 11.2 3.6Altria Group / MO 4 A Low Blend 30 30 13.8 5.5AT&T / T 5 B+ Low Value 30 34 12.4 5.9Chevron / CVX 5 A Medium Blend 108 132 8.1 3.0Coca-Cola / KO 5 A+ Low Growth 69 78 16.7 3.0Deere / DE 4 A Medium Blend 84 111 10.1 2.0ExxonMobil / XOM 5 A+ Low Blend 87 103 10.2 2.2Honeywell / HON 4 A- Medium Value 59 68 13.3 2.5ITC Holdings / ITC 4 NR Low Blend 75 84 18.8 1.9Kinder Morgan Energy / KMP 5 NR Low Blend 90 99 38.5 5.2KLA-Tencor / KLAC 4 B Medium Growth 49 58 11.9 2.9McDonald’s / MCD 5 A Low Growth 101 109 17.7 2.8Microsoft / MSFT 4 A- Low Growth 31 33 11.4 2.6PPG / PPG 5 B+ Medium Blend 92 102 12.9 2.5United Parcel / UPS 4 B+ Low Growth 77 95 15.5 3.0*Based on our analysts’ assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors.Please note that all investments carry risks. †Price/earnings ratios are based on S&P estimated fiscal 2012 per-share earnings. ‡See definitions on page 2. Source: S&P Capital IQ.Portfolio Focus: UPS Bidding to Expand in EuropeSensing an opportunity to break UPS’s chief rival FedEx had 3.3%, So far, TNT Express has rejectedout of its third-place, “also ran” while DHL, which is owned by UPS’s latest offer, 9 euros perstatus in Europe, United Parcel Deutsche Post, was the market share in cash, as inadequate, andService – the world’s largest leader with 17.6%. its shares have since traded aboveexpress and package delivery com- TNT Express is losing money on that, implying at least somepany – is bidding for TNT its own, posting an operating loss of investors believe a higher offerExpress, Europe’s second largest about $139 million in 2011 as an will emerge. Who might offerexpress delivery company that was independent company. The company that, however, is less clear. DHLspun off from Dutch mail delivery announced that in an effort to cut would probably not win antitrustcompany PostNL in May, 2011. In costs and improve profitability, it approval if it sought to combine2010, UPS had 7.7% of the will scale back its operations outside the largest and second largestEuropean delivery market, while of Europe, particularly in Asia and delivery companies, and FedExTNT had 9.6%, according to a Brazil, and hopes to use partners might not be able to afford theBloomberg News report citing sta- instead of its own network when price. / Vaughan Scully ■tistics from Transport Intelligence. possible.