Morningstar Advisor - August/September 2010 - 65

Finally, we require that a company score highly in financial health. After all, a distressed company deserves to be cheap. Morningstar’s Financial Health Grade is designed to estimate the probability of financial distress by using market signals—specifically, the level and volatility of a company’s asset values. We grade companies on a bell-shaped curve, so a C represents the mediocre middle. The results of our screen include stocks from all over, crossing sector and industry lines. Some highlights:
General Electric GE Star Rating: QQQQQ Dividend Yield: 2.8%

the last few years are in the rearview mirror. The biggest reason is Seagate finally rid itself of bumbling CEO Bob Watkins. Back for a second tenure, Stephen Luzco has ended the poor execution of the Watkins era and has forced the company to correct its shortcomings: poor execution of product rollouts and a bloated cost structure. Seagate has made great strides since, and further improvement is achievable. We feel Western Digital remains the better run company, but expect the performance gap between the two will continue to narrow during the coming years.
AT&T T Star Rating: QQQQ Dividend Yield: 6.9%

the firm with significant growth over the past decade and a half, which has enabled it to become the third largest telephone company in the world by number of subscribers. While the huge growth rates of the past are gone, Latin America should still allow the firm to grow faster than most of its Europe-based peers.
Supervalu SVU Star Rating: QQQQQ Dividend Yield: 4.8%

Exiting the recession, we think CEO Jeff Immelt finally has the portfolio he wants. Immelt essentially put the company on a diet, trimming the business to an impressive core portfolio. NBC Universal should move out of the picture by year’s end, leaving the energy, health-care, and aviation pieces intact. All of these are wide-moat franchises, in our opinion. In a move repeated by many of the diversified manufacturers in Morningstar’s coverage universe, GE shifted its growth focus from acquisitions to heavy research and development, giving the company one of the strongest new-product portfolios in recent memory. We expect GE Capital to contribute to parent earnings and cash flows, as delinquencies slow and the firm liquidates noncore assets. We are encouraged by Immelt’s recent comments that the dividend will increase by 2011 and share repurchases will be a priority with a stock price target of $22 or less.
Seagate Technology STX Star Rating: QQQQQ Dividend Yield: NA

AT&T’s exclusive arrangement to sell Apple’s AAPL iPhone has been a huge benefit, significantly raising both AT&T’s wireless market share and average revenue per customer. While we’d prefer to see AT&T build its business upon things that it can control— customer service and network quality, for example—we don’t believe that the loss of exclusivity will dramatically alter the firm’s competitive position. The scale and resources that AT&T and Verizon Wireless enjoy is unmatched in the U.S., and we expect these firms will have a leg up in meeting customers’ wireless demands in the future. We aren’t as enamored with AT&T’s consumer fixed-line unit, but this business constitutes only 17% of revenue, and is shrinking. Also, AT&T’s decision to invest relatively lightly in the consumer business looks like the right choice at this point. AT&T’s enterprise services unit is a solid competitor, and should benefit as the economy rebounds.
Telefonica TEF Star Rating: QQQQ Dividend Yield: 7.6%

Supervalu is not a company without operational risks—the firm started on less advantageous footing and is playing catch-up to some of its supermarket peers. We think competitive pressures and a deflationary environment should remain significant headwinds until the back half of 2010 or the beginning of 2011. However, we do believe that the market is sufficiently pricing in a bad scenario: The stock is currently trading at around 7 times fiscal 2011 earnings and 2 times cash flow. The company is finishing a three-year restructuring program to integrate the old Albertsons stores, which we believe can help the firm make incremental improvements. Supervalu has lowered prices and boosted its privatelabel efforts, moves that we believe should help it keep share. We also have a more favorable view on the hard-discount Save-A-Lot stores, which stand to benefit in the weak environment.
Haywood Kelly, CFA, is vice president of equity research at Morningstar.

Seagate, which makes computer hard drives, has turned around its business, and we believe the period of lagging far behind Western Digital is ending. At present, Seagate still does not possess the lean operating cost structure of its rival. However, we are optimistic the self-inflicted wounds that have characterized

Telefonica remains the dominant phone company in Spain. Its very large market share in fixed-line and mobile telephony as well as broadband allows it to generate one of the highest EBITDA margins in Europe. Telefonica’s early push into Latin America has provided

MorningstarAdvisor.com 65


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Morningstar Advisor - August/September 2010

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2010

Morningstar Advisor - August/September 2010
Contents
New on MorningstarAdvisor.com
Contributors
Letter From the Editor
What Aspects of Health-Care Reform Will Most Affect Your Clients?
Bonds, Chicago Style
Investment Briefs
Which Risk Are You Managing?
Eye on the Prize
Advisors Can’t Rely on Fidelity Alone
Health Care Gets Back to Business
An Opportune Time to Bet the Pharm
Reform’s Impact on Other Health-Care Industries
Top Takeover Targets in Biotech
After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Health-Care Investing Alive and Well
Quest for Knowledge
Four Picks for the Present
How to Make Your Bond Portfolio Inflation-Resistant
Weeding Through the Energy Patch
Uncertainty and Value in Basic Materials
Stock Market Doom-Busters
Hunting Down European Debt-Dodgers
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks With Wide Moats
VA Sales Slip a Bit in First Quarter
New at Morningstar
Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Morningstar Advisor - August/September 2010
Morningstar Advisor - August/September 2010 - Cover2
Morningstar Advisor - August/September 2010 - 1
Morningstar Advisor - August/September 2010 - 2
Morningstar Advisor - August/September 2010 - Contents
Morningstar Advisor - August/September 2010 - 4
Morningstar Advisor - August/September 2010 - 5
Morningstar Advisor - August/September 2010 - New on MorningstarAdvisor.com
Morningstar Advisor - August/September 2010 - 7
Morningstar Advisor - August/September 2010 - Contributors
Morningstar Advisor - August/September 2010 - Letter From the Editor
Morningstar Advisor - August/September 2010 - What Aspects of Health-Care Reform Will Most Affect Your Clients?
Morningstar Advisor - August/September 2010 - 11
Morningstar Advisor - August/September 2010 - Bonds, Chicago Style
Morningstar Advisor - August/September 2010 - 13
Morningstar Advisor - August/September 2010 - Investment Briefs
Morningstar Advisor - August/September 2010 - 15
Morningstar Advisor - August/September 2010 - Which Risk Are You Managing?
Morningstar Advisor - August/September 2010 - 17
Morningstar Advisor - August/September 2010 - 18
Morningstar Advisor - August/September 2010 - Eye on the Prize
Morningstar Advisor - August/September 2010 - 20
Morningstar Advisor - August/September 2010 - 21
Morningstar Advisor - August/September 2010 - Advisors Can’t Rely on Fidelity Alone
Morningstar Advisor - August/September 2010 - 23
Morningstar Advisor - August/September 2010 - 24
Morningstar Advisor - August/September 2010 - 25
Morningstar Advisor - August/September 2010 - 26
Morningstar Advisor - August/September 2010 - Health Care Gets Back to Business
Morningstar Advisor - August/September 2010 - An Opportune Time to Bet the Pharm
Morningstar Advisor - August/September 2010 - 29
Morningstar Advisor - August/September 2010 - Reform’s Impact on Other Health-Care Industries
Morningstar Advisor - August/September 2010 - 31
Morningstar Advisor - August/September 2010 - 32
Morningstar Advisor - August/September 2010 - Top Takeover Targets in Biotech
Morningstar Advisor - August/September 2010 - 34
Morningstar Advisor - August/September 2010 - 35
Morningstar Advisor - August/September 2010 - After Reform, Narrow-Moat Firms Have Strong Prospects in Diagnostics
Morningstar Advisor - August/September 2010 - 37
Morningstar Advisor - August/September 2010 - 38
Morningstar Advisor - August/September 2010 - 39
Morningstar Advisor - August/September 2010 - 40
Morningstar Advisor - August/September 2010 - Health-Care Investing Alive and Well
Morningstar Advisor - August/September 2010 - 42
Morningstar Advisor - August/September 2010 - 43
Morningstar Advisor - August/September 2010 - 44
Morningstar Advisor - August/September 2010 - 45
Morningstar Advisor - August/September 2010 - 46
Morningstar Advisor - August/September 2010 - 47
Morningstar Advisor - August/September 2010 - 48
Morningstar Advisor - August/September 2010 - Quest for Knowledge
Morningstar Advisor - August/September 2010 - 50
Morningstar Advisor - August/September 2010 - 51
Morningstar Advisor - August/September 2010 - Four Picks for the Present
Morningstar Advisor - August/September 2010 - 53
Morningstar Advisor - August/September 2010 - How to Make Your Bond Portfolio Inflation-Resistant
Morningstar Advisor - August/September 2010 - 55
Morningstar Advisor - August/September 2010 - 56
Morningstar Advisor - August/September 2010 - 57
Morningstar Advisor - August/September 2010 - Weeding Through the Energy Patch
Morningstar Advisor - August/September 2010 - 59
Morningstar Advisor - August/September 2010 - 60
Morningstar Advisor - August/September 2010 - Uncertainty and Value in Basic Materials
Morningstar Advisor - August/September 2010 - 62
Morningstar Advisor - August/September 2010 - 63
Morningstar Advisor - August/September 2010 - Stock Market Doom-Busters
Morningstar Advisor - August/September 2010 - 65
Morningstar Advisor - August/September 2010 - Hunting Down European Debt-Dodgers
Morningstar Advisor - August/September 2010 - 67
Morningstar Advisor - August/September 2010 - Mutual Fund Analyst Picks
Morningstar Advisor - August/September 2010 - 69
Morningstar Advisor - August/September 2010 - 70
Morningstar Advisor - August/September 2010 - 71
Morningstar Advisor - August/September 2010 - 50 Most Popular Equity ETFs
Morningstar Advisor - August/September 2010 - 73
Morningstar Advisor - August/September 2010 - Undervalued Stocks With Wide Moats
Morningstar Advisor - August/September 2010 - 75
Morningstar Advisor - August/September 2010 - VA Sales Slip a Bit in First Quarter
Morningstar Advisor - August/September 2010 - 77
Morningstar Advisor - August/September 2010 - 78
Morningstar Advisor - August/September 2010 - New at Morningstar
Morningstar Advisor - August/September 2010 - Star Wars, the Sequel
Morningstar Advisor - August/September 2010 - Cover3
Morningstar Advisor - August/September 2010 - Cover4
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