Time to take profits on shares

US Equities

Last week we issued partial profit taking calls on the integrated oil stock ConocoPhillips (COP, $65.48, CSFB: Outperform), the oil service stock Halliburton Co (HAL, $26.03, CSFB: Outperform), and the mid cap biotech stock Neurocrine Bioscience Inc (NBIX, $55.50, CSFB: Outperform), after they hit our target price during December.

We maintain a positive view on the three companies and have increased the target prices accordingly. The partial profit taking aims to rebalance the positions after these stocks have risen between 16.67% to 23.43% from the recommended price.

As we are cautious on US equities in the short term, we would also like to extend our call to consider taking some profits in financial stocks, which have been performing quite well over the past months, such as Wells Fargo & Co (WFC, $58.17, CSFB: Outperform), Allstate Corp (ALL, $43.46, CSFB: Outperform), Bank of America Corp (BAC, $79.09, CSFB: Outperform), as well as on the small cap defence stock Teledyne Technologies Inc (TDY, $18.74, CSFB: Not rated) and in Pfizer Inc (PFE, $35.55, CSFB: Outperform), as these stocks are getting close to our 12-months target prices.

Bank of America could see some weakness in the coming days, as according to the newspaper the Observer, the company is being scrutinized by Italian officials and the SEC for its relationship with Parmalat Finanziaria Spa.

As the SEC could also be investigating Parmalat's public bond sales in the US, we could see negative news flow involving Bank of America, putting the stock under pressure in the short term.

Gold mining stocks have been performing very well in the last two years, as gold prices were on the rise. The stocks have in this period outperformed the bullion, as a result of the leverage of these companies' earnings to the price of price.

At the beginning of the up-trend in gold price, gold mining companies struggled to make profits as their cost per ounce for gold were higher than the price on the market. With rising gold prices gold miners started turning profitable and a slight increase in gold prices gave a boost to the bottom line.

But as gold mining companies have recently been able to generate healthy margins on the gold sold, the stocks could actually been looked at as deep in the money options, whereas further increase in gold prices would not result in the same substantial increase in profitability, and consequently would loose their attractiveness relative to the underlying, in this case spot gold.

We expect gold mining stocks to remain more volatile than spot gold prices and given the above situation switch a portion of the holdings in gold mining stocks into the gold bullion.

We have Newmont Mining Corp (NEM, $48.64, CSFB: Neutral) and Placer Dome Inc (PDG, $18.21, CSFB: Outperform) on the recommendation list, which are up 69.42%, respectively 86.77% since we first recommended the stocks.

We would like to advise investors to take partial profit in the gold mining stocks after this strong performance, especially in light of our view that they could be underperforming the rising gold prices going forward.

A stock that would offer an attractive switching idea for the profits taken is the drug maker Schering-Plough Corp (SGP, $17.70, CSFB: Underperform), which would be a turnaround play, after the stock suffered over the last three years amidst struggles to grow following the patent loss of its flagship drug Claritin.

The company CEO has undertaken drastic measures to turn the company around and bring it back to growth. Cost savings and new products scheduled to be launched in 2004 (cholesterol) and 2005 (anti-fungal, cancer) should boost profitability.

While the market is still sceptical about Schering-Plough, this could be an opportunity to take action and pick up the stock, looking for a 12-18 months recovery. We see a target price of USD 23, based on our discounted cash-flow model

Europe


• Review of 2003 and outlook for 2004

• Adidas-Salomon surpassed our target price yielding 26% since recommendation on 20 May 2003.

We would advise to take at least partial profit but given the positive momentum and Adidas-Salomon's favourable USD/EUR exposure, we increase our target price to EUR 103, which represents an additional upside of 15.7% from our old target price and 9% from current levels.

It was a quiet week in terms of corporate and economic news and trading remained thin with many markets closed over the Christmas/New Year period. However, on Friday the purchasing manager index surprised on the upside, especially in Germany with growth in manufacturing at its fastest for the last 3 years.

Within Germany, the export data - especially given the continued strength of the Euro - surprised the most jumping from 55.3 to 57 in December. The index for the whole Eurozone rose only slightly reflecting weakness in France, Italy and Spain.

The positive data from Germany confirm our view that this year, Germany could become one of the drivers in Europe. However, the wild card still remains domestic demand.

Nevertheless, we believe long-term investors should add to positions with a German exposure on weakness. It is also important to point out that the German Index contains the most cyclical names, which we expect to continue performing well at least in the first months of 2004.

Adidas-Salomon (ADS GY; EUR 94.71) jumped 4.88% on Friday surpassing our target price after the CEO reiterated in an interview a forecast of 10% profit growth this year as the US business recovers. Since our recommendation on 20 May 2003 the stock has yielded 26%.

We would investors advise to take at least partial profit, but given the positive momentum and Adidas-Salomon's favourable USD/EUR exposure, we increase our target price to EUR 103, which represents an additional upside of 15.7% from our old target price and 9% from current levels.

Nevertheless, European markets managed to close the year at a new year-high level despite the Euro climbing above USD 1.25.

Recovery and rising risk appetite dominated financial markets in 2003. Looking back at 2003, investors were rewarded with the following positive gains on an index level:

DJ Euro Stoxx 50 Price Index 19.24%
DJ Euro 50 Price Index 14.39%
DJ Euro Stoxx 300 Price Index 21.60%
DJ Stoxx 600 Price Index 17.46%
DAX Index 37.08%
OMX (Stockholm) Index 32.93%
IBEX 35 Index 31.45%
SMI Index 30.79%
CAC 40 Index 18.91%
FTSE 100 Index 18.37%

Given the peak-to-trough fall (2000 Index Peak to 2003 Index Trough) of the Dax 30 index of 73% (CAC 65%, 60% Italy) it is not surprising that Germany leads the way with a 72% Trough to Peak rebound followed by Switzerland with 50%.

Looking at the sectors it is interesting to note that bank and industrial goods sectors lead the table with a performance above 30% before the technology and cyclical sectors. The laggards were the non-cyclical goods sector, food & beverage and the retail sector.

As Germany posted the biggest rebound on a country level, on a stock basis, companies, which got beaten down during the last two years managed to post the biggest gains. Companies such as Alcatel (CGE FP; EUR 10.5), Ericsson (ERICB SS; SEK 13.1), ASML (ASML NA; EUR 16.34), ABB (ABBN VX; CHF 6.27), Commerzbank (CBK GY; EUR 15.84) and Swiss Life (SLHN VX; CHF 227) all posted a performance of over 100% for the full year.

Although we expect the current momentum to continue for at least the first couple of weeks, which will favour cyclical sectors and companies, we believe it would be prudent to shift focus from the high beta leaders over the past year into some of the lagging old economy type sectors and stocks.

For example, we remain bullish from a structural point of view for the energy sector, which is characterised by supply shortages, swelling Asian demand and geopolitical factors threatening supply disruptions. Our favourites Total (FP FP; EUR 148.7) and Eni (ENI IM; EUR 15.394) come also with an attractive dividend yield.

We would also point out telecom as a forgotten sector. Vodafone (VOD LN; GBP 1.3975) continues to gain marketshare and France Telecom (FTE FP; EUR 22.99) represents a combination of further cost-cutting potential, above sector average top-line growth, strong asset position (Orange), relatively benign domestic operating environment and strong commitment from management to use cash flow to increase distribution to shareholders.

Valuations in Europe look reasonable in absolute terms with a PER04 of 13x and good value in relative terms against government bonds, corporate bonds and cash. Consensus estimates for earnings growth are for around 14%.