Finding value in current markets (page 1 of 3)

US equities

Last week, the U.S. stock market ended in positive territory, with the S&P 500 having a return of 1.51%. Among the best performing sectors, Office Electronics gained 11.01%, Wireless Telecommunication Services (6.97%), and Fertilizers & Agricultural Chemicals (6.95%). The worst performing sectors were Homebuilding (-1.13%), Construction & Engineering (-1.71%), and Health Care Distributors losing 1.97%.

This week ISM Manufacturing, Vehicles Sales, Factory orders, and Unemployment Rate would be the major economic figures to be released.

For investors seeking stocks with attractive valuations, we recommend companies that did not rally as much as the market. Among our recommendations, these companies are Aflac Inc. (AFL, $32.02, CSFB: Neutral) having a return of 0.34% since March 31st, compared with a 19.71% return for the S&P 500, The Allstate Corp. (ALL, $35.75, CSFB: Outperform) with a 9.16% return, and Northrop Grumman Corp. (NOC, $95.48, CSFB: Outperform) with 12.26%.

Aflac Inc. is under pressure due to weaker-than-expected sales in the U.S. Instead of having 10%-15% sales growth in the U.S., the company reported only 4% in 2Q, and 8.8% in 1Q. However, we believe investors have over-reacted, because AFL reported an impressive 11%-growth in Japan in 2Q, where the company made about 75% of its revenue in 2002.

Investors avoided Allstate because of a lack of new customers. However, in the last quarterly report, ALL's profit increased 71% y-o-y after the company raised its rates. We believe the insurer would continue to benefit from its pricing power in the near-term, attracting more investors.

It is not a surprise that Northrop Grumman underperformed the market because this is a defensive stock, having a beta of 0.27 vs. the S&P 500. Hence, we believe this company is suitable for portfolio diversification. On the business side, the company is involved in major new weapons programs and would benefit from an increasing defense budget next year.

The technology sector research firm IDC published the most recent server computer market share data, which placed International Business Machines Inc (IBM, $82.01, CSFB: Neutral) at the top spot, with USD 3.23 billion in sales, or 30% market share.

IBM has been increasing its market share form 28% a year ago on sales of $2.93 billion. Hewlett Packard Co (HPQ, $19.93, CSFB: Neutral) came in second with 28%, flat year on year. The industry's revenue totalled USD 10.6 billion, a 0.2% increase from a year ago, which may indicate that IT spending is on the way to a recovery, but is too early to talk about a rebound.

Another winner is Dell Inc (DELL, $32.62, CSFB: Outperform), which was able to increase its share of the server market to 9.9% from the previous year's 8.4%. Dell aims to grow its server revenue in order to help boost its total sales.

Sun Microsystems Inc (SUNW, $3.90, CSFB: Underperform) has been on the losing side with its share of the market declining to 14% from 17%, due to a year on year drop in sales of 19%.

This is due to the increasing popularity of servers using Intel architecture and Windows operating system over Sun's Unix based systems. Sun can claim to be increasing its market share for Unix based servers, where it sells 33% in terms of value, but we expect the shift towards Intel/Windows products, as well as increasingly Linux based servers to continue.

We see both our recommended stocks IBM and Dell well positioned in the race for market share in the server area, with IBM being able to leverage its leading position and Dell to transfer its successful business model from the PC into the server market.