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The Stocks James Barrow Is Selling

February 08, 2012 | About:
Mara Kohn

Mara Kohn

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James Barrow is executive director of Dallas-based investment firm Barrow, Hanley, Mewhinney & Strauss, the lead portfolio manager for the Vanguard Windsor II and Selected Value Funds.

Jim Barrow has a preference when buying companies. He chooses those firms with below-market P/E and P/B ratios and above-market dividend yields, whatever their market conditions may be.

As his team states: “We stay fully invested with a defensive, conservative orientation based on our belief that superior returns can be achieved while taking below-average risks."

Barrow, Hanley, Mewhinney & Strauss owns 159 stocks with a total value of $40.7 billion, according to records as of September 2011.

Hewlett-Packard (HPQ): Some of Hewlett-Packard’s main activities are the selling of information technology products and services to businesses and consumers worldwide. It is estimated that services will constitute about one-third of sales together with the recent EDS acquisition. Personal computers account for 30% of sales, while printers account for 20% and enterprise storage and servers account for 13%.

Some divisions of HP are being threatened. There are some changes in PCs and a shift change from processing and storing data locally to the cloud. These threaten to compress margins. Something similar is happening with printing as single-function devices become commodities. HP's technology and its server technology’s market may pave the way for HP’s success but some competitor’s new interests raise concerns. Indeed, if HPQ fails to capture significant share in storage, networking and servers, its business will become vulnerable.

It reported fourth-quarter non-GAAP net revenue of $32.3 billion, down 3% from the same quarter in 2010. The company posted non-GAAP diluted earnings per share of $1.17. It is expected that HP will post earnings of $1.13 a share on revenue of $32.05 billion. Management is focused on injecting capital into the PC division and the IT services business to encourage research and limit acquisitions. This is a change vis-a-vis a previous strategy which did not encourage investing in key assets.

Why did John Barrow invest in HPQ given last performance? HPQ is a leader in its industry. Despite certain headwinds it has the sources to reverse the situation and boost growth.

Oracle Corporation may constitute a possible buyer of HPQ since it is a good candidate. This would translate into an 18% return for Oracle in case of a buy out.

Bristol-Myers Squibb (BMY): Bristol-Myers Squibb mainly trades with the discovery, development and marketing of pharmaceuticals for various diseases and disorders. Bristol has focused on branded drugs rather than on non-pharmaceutical businesses like its peers do. In so doing, it sold off unrelated business lines. This increases patent losses and the dependence on its pipeline. Altogether, they can bring more volatility in sales.

Some other risks such as generic threats, decreasing pricing power due to managed care constraints and product liability cases also threaten the firm.

Why did John Barrow sell BMY? There has been some unevenness regarding BMY's management of dividends. It is believed that potential dividend growth is poor. The dividend raise of 3% during the month meets analysts' slow-growth expectations. Bristol-Myers' annual payout for next year is estimated to be $1.36.

Xerox (XRX): Xerox’s main products and services are document-production and document-management equipment and software such as high-end digital and color production, office equipment, digital and color office printers and some other professional services as well.

Since some other companies have been recently acquiring firms, IBM (IBM) seems like a probable buyer of XRX due to its condition of potential takeover candidate. But in order to be so, the firm needs to prove it by changing its product mix and avoiding some of the fiscal troubles in Europe. Xerox principal competitor is Canon (CAJ) which has reported higher price to earnings, price/earnings growth and price to sales ratios. These can be attributed to Canon's superior margins – 43.34% gross and 10.01% operating.

In terms of quarter results, Xerox reported a decrease in earnings of 2% vis-a-vis the prior quarter. However, it has seen a slight increase of 0.3% lately. Xerox’s balance sheet weakened during this period, with a 29% drop in cash and cash equivalents to $785 million, although long-term debt decreased in the same period by 0.2% to $7.1 billion. There is no doubt that Mr. Barrow took into account all these elements to make the decision to sell the stock.

Nokia (NOK): Nokia’s main products and services are mobile devices, mobile network equipment and software. Network operators, service providers and corporations represent Nokia’s main customers. Nokia provides its services through its 50%-owned Nokia Siemens Networks joint venture.

Though Nokia reported some troubles, it shows that it is still in the race. Nokia’s total revenue declined 13% and non-IFRS operating profit dropped 60% year over year as Nokia continued to give away smartphone market share. Smartphone shipments fell 38% to 16.8 million units, with the average sale price falling to EUR 131, down 2%. The gross margin on smartphones collapsed to 23.3% from 30.5%. Although feature phones showed better results, with volume up 8% to 90 million units their gross margin declined 170 basis points from the prior year even when the average sales price fell 20% to EUR32. Nokia has always been a leader in the market but it has recently been keeping an eye on Apple (AAPL), RIM (RIMM) and Android handset. Its partnership with Microsoft still paves the way for a potential competition.

CBS (CBS): The CBS television network, 30 local TV stations, and 50% of CW, a joint venture between CBS and Time Warner are some of CBS' television assets. Showtime, CBS Radio, CBS Outdoor, and Simon & Schuster are also owned by the firm.

NFL gives CBS News Corp and Comcast additional leverage upon the negotiation of retransmission fees from pay TV distributors. This occurs while the price tag is high. Although it has not been disclosed, individual packages official price may have increased 63%. The average annual increase of costs has been estimated at 6% to 7%.

The company has not been performing well. I think Barrow sold the stock because of the decrease in audience rating and advertising dollars.

Rating: 3.0/5 (9 votes)

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