The re-insurers Munich Re and Swiss Re dominated news flow in the insurance sector (page 1 of 2)

US Equities
• Recommendations update

Since the start of the War in Iraq, investors have cast aside economic data and corporate fundamentals. As President Bush said, the war could be longer and tougher than previously expected. We think news flow from Iraq will continue to lead investor sentiment for the coming weeks.

Hence we would like to reiterate our positive stance on our recommended defense contractor, Northrop Grumman Corp. (NOC, $86.46, CSFB: Outperform). Firstly, the company has successfully built and realigned its business mix to become a critical and broad-based systems supplier to the Pentagon, becoming the third-largest defense contractor, behind Lockheed Martin Corp. (LMT, $48.14, CSFB: Outperform), and Boeing Co. (BA, $26.10, CSFB: Outperform) in term of revenue. Secondly, the sale of TRW Automotive would be used to reduce its outstanding debt, improving its return on capital. TRW Automotive was sold on March 3rd to The Blackstone Group for $4.7bn. However, integration of recent acquisitions could cause further stock price weakness. Thirdly, NOC acts as a primary contractor or as a subcontractor to the major new weapons programs. Hence, with the increase in US defense spending, expected to continue for several years, we believe NOC would benefit from its wide range of competence. Finally, the stock price presents two advantages for good portfolio diversification, in our view. On the one hand, the beta vs. the S&P 500 is low (0.27), which would act as a cushion against price volatility, and on the other hand, correlation with the same index is negative, which would dampen the impact of a declining US market. BUY.

Besides Northrop Grumman, we maintain our Buy rating on Countrywide Financial Corp. (CFC, $57.91, CSFB: Not rated) for the following reasons. Stock price has a low beta vs. the S&P 500 (0.74) and a low correlation with the index. On the business side, the MBA refinance index remains high at 8,136 as of March 21st, hence as the volume of mortgage refinancing remains high, it would generate higher servicing portfolio fees, protecting earnings from a potential downturn in the mortgage origination cycle. In FY 2001, these fees accounted for about 30% in total revenue. Another hedge is the non-mortgage operations, which accounted for 21% of CFC's consolidated revenue in FY 2001 (source: Countrywide Financial). The risk for the coming weeks is that, if the war on Iraq continues for longer than expected, mortgage origination could decrease sharply. However, we do not think this decrease would occur. Federal Reserve is expected to reduce interest rate, which should give another boost to mortgage refinancing.

As near term uncertainties continue, we believe it would be a safe move to lock in profits on some of our recommended stocks.

Two examples of stocks which had seen no weakness over the last week are the integrated oil company Exxon Mobil Corp. (XOM, $36.03, CSFB: Neutral) and the drug maker Pfizer Inc (PFE, $31.81, CSFB: Outperform). Both companies' fundamentals are sound, which actually supports the steadily rising share price, and we also are comfortable with our long-term projections and valuation models for the two companies.

Exxon rose 14% from its 27th January low at $31.58 to $36.03 last Friday. In our view, in the current environment trading oriented investors should consider locking in some of their short-term profits in Exxon at these levels.

Similarly Pfizer, whose share price rose from levels around $28-29 and is now hovering around $32, offers a potential 10% short-term profit for its investors.