Avnet Gets Upgraded as Semiconductor Stocks in General Repopulate our High Quality List

Model Portfolio Daily Update:  January 18, 2011

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Of Note:

Avnet Inc. (AVT) was upgraded to Buy from Neutral with a $41 price target today by Longbow Research.  This is the 26th major positive sell side action we have presaged in our model portfolios for the month to date.  According to a news item by TheFlyOnTheWall.com, Longbow cited bullish checks for European IT VARs, component demand, and valuation.

We speculate the real reason the stock was upgraded because of hype surrounding semiconductor growth prospects in tablets and handsets, driven first by Microsoft's announcement it would develop software for ARM Holdings (ARMH) chip.  Subscribers will note in our most recent weekly ranking update piece that four new semiconductor stock ideas appeared on our list this week — a huge positive and anecdotally optimistic turn of events.  What is going on here is we may see an unexpected new product cycle in the industry, which is great for investors that like to own low PE stocks relative to their growth outlook.

Also interestingly, a number of our “low-quality” Energy stocks — many of which have been going the wrong way (up) — have experienced a few additional downgrades recently.  The surge in speculative Energy names may be coming to an end, perhaps leaving the door open for larger-cap refining and distribution names such as Marathon Oil Corporation (MRO) and Ultrapar Holdings Inc. (UGP), both high quality companies, with the ladder backed by a surging Brazilian economy.

United Airlines Continental (UAL) is likely down again today due to renewed fears of rising jet fuel prices, exacerbated by Delta Air Lines Inc. (DAL) report of less than expected EPS due to rising jet fuel costs.  Based on the factors we measure, UAL is a much better company than DAL yet both trade roughly in line with one another at roughly 5.2x next year's consensus EPS estimate.  We would point out earlier reports that UAL is taking out capacity as other airlines are still adding some.  When UAL reports on January 26, there may be opportunity for a small relief rally if earnings come in as expected; in our opinion it deserves to trade in line with DAL.  Nevertheless, we are aware that airlines are huge sentiment plays which seems to overshadow nearly any other factor.  We will be looking forward to that report.

Speaking of conference calls, Parker Hannifin (PH), Freeport McMoRan (FCX) and PNC Financial Services Group (PNC) report earnings prior to the market open on Thursday January 20.  UAL and several other of our portfolio names report on January 26.

About this report
This daily update is a supplement to a monthly report dated December 31, 2010 that details the model portfolio strategies of Ascendere Associates LLC (“Ascendere”).  For more information, please see our list of frequently asked questions, suggested tips on using our newsletter or an interview with us on Covestor Live.  See also our long-only model based on actual trade data. Please see our disclosures and disclaimers at the back of this report.