UBS Makes a Huge Change in Quality Growth at a Reasonable Price Portfolio

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The end of first-quarter earnings reporting has led many of the companies we cover on Wall Street to make some portfolio changes, and not all the changes are strictly earnings related. Acquisitions and mergers can often change the metrics at the acquiring company and the company being acquired, and that is exactly the reason that one of the portfolios we cover made a move recently.

The team at UBS that manages the Quality Growth at a Reasonable Price (Q-GARP) portfolio replaced a top cable stock recently, and stated this in the report why.

Last October AT&T Inc. (NYSE: T) agreed to buy Time Warner Inc. (NYSE: TWX) for a mix of cash and AT&T stock. Assuming the deal closes (which we expect in late 2017), Time Warner shares will likely be influenced by the performance of AT&T, a company that does not currently meet our criteria for attractive, multi-year growth.

Time Warner was removed from the portfolio and Mondelez International Inc. (NASDAQ: MDLZ) was added. Shares of this consumer sector giant make good sense for conservative accounts. The company manufactures and markets snack food and beverage products worldwide. It offers biscuits, including cookies, crackers and salted snacks; chocolates, and gums and candies; powdered beverages and coffee; and cheese and grocery products. The company’s primary brand portfolio includes LU, Nabisco and Oreo biscuits; Cadbury, Cadbury Dairy Milk and Milka chocolates; Trident gum; Jacobs Kaffee; and Tang powdered beverages.

Mondelez sells its products to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores and other retail food outlets through direct store delivery, company-owned and satellite warehouses, distribution centers and other facilities, as well as through independent sales offices and agents.

Shareholders receive a 1.65% dividend. The UBS price target for the stock is $50, while Wall Street consensus price target is $48.69. The shares closed Tuesday $46.05 apiece.

We also screened the Q-GARP portfolio for stocks that look like good summer plays and found the following three.

Home Depot

This company remains the undisputed leader in the home improvement retail category. Home Depot Inc. (NYSE: HD) is the world’s largest home improvement specialty retailer, with 2,270 retail stores in all 50 states, the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, 10 Canadian provinces and Mexico.

Home Depot stores sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance and professional service programs to do-it-yourself (DIY), do-it-for-me (DIFM) and professional customers.

The company posted strong first-quarter results, and the UBS report said this:

For a business the size of Home Depot to put up a 5.5% comp (6.0% in the U.S.) is pretty remarkable, in our view, especially on top of the many years of growth it’s already achieved. The company only needs same-store-sales growth of 4.3% over the next 3 quarters to meet its comp guidance for the year. We think this is attainable, even when considering the $250 million of expected currency pressure (which amounts to 25 bps or 1/4 of 1% of headwinds).

Home Depot shareholders receive a 2.3% dividend. The $175 UBS price target is above the consensus target of $170.73. Shares closed Tuesday at $154.83.

O’Reilly Automotive

This is a great summer stock to own, as consumers will want their vehicles in top shape for vacation trips. O’Reilly Automotive Inc. (NASDAQ: ORLY) is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States. The company sells its products to both DIY and professional service provider customers.

Its product line includes new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, temperature control, chassis parts, driveline parts and engine parts; maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products; and accessories, such as floor mats, seat covers and truck accessories.

UBS has a $320 price target for the shares, which were hit hard yesterday when a competitor missed consensus estimates. The posted consensus target is at $301.70, and shares closed Tuesday at $240.18.

Visa

This top credit card issuer is becoming a huge leader in digital pay. Visa Inc. (NYSE: V) is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. The company operates one of the world’s most advanced processing networks, VisaNet, that is capable of handling more than 56,000 transaction messages a second, with fraud protection for consumers and assured payment for merchants.

Visa is not a bank and does not issue cards, extend credit or set rates and fees for consumers. Visa’s innovations, however, enable financial institution customers to offer consumers more choices: pay now with debit, pay ahead of time with prepaid or pay later with credit products.

The company posted solid earnings and the guidance was effectively raised to the high-end of the range.

Shareholders receive a 0.7% dividend. Recently UBS raised its price target to $102 from $97, and the consensus target is $102.61. Shares closed Tuesday at $93.86.

Good summertime stocks to buy and a solid consumer addition to the Q-GARP portfolio. It’s very possible we will have a grinding, sideways move this summer, so these stocks makes good sense as they are also defensive in nature.