Don't Be Fooled by Today's Big Moves

A Rebound in Financials?

At first blush, it looks like Morgan Stanley (MS) and Bank of America (BAC), two stocks I called “Duds” yesterday, are proving me wrong.

Both stocks are up more than 4% on their earnings announcements this morning, and some analysts are predicting that their operating results are good news for the entire financial sector.

Not so fast, I say.

Bank of America is the big story—up big thanks to surprising profits of nearly $1.6 billion. That IS a surprise, when you consider that a year ago, that was roughly the amount of BAC’s quarterly loss.

But look behind the numbers, and the story is less cheerful.

For starters, there is trouble at the heart of BAC’s business. While some costs were cut and credit reserves for bad loans declined, the investment bank unit numbers were u-g-l-y. Trading plunged 73% from the prior year and investment banking fees fell 34%.

Making up for these shortfalls were big asset sales, the kind of one-time events that may make this quarter look good, but can’t be repeated.

Among the one-time items were a $2.9 billion gain from the sale of China Construction Bank shares, $1.2 billion gain from a massive exchange of debt and a smaller gain from the sale of some Canadian credit card operations.

To see what’s really going on at a company like BAC, I look at metrics that aren’t obscured by big one-time events.

On my scorecard, Bank of America gets a failing grade on Sales Growth, Return on Equity and Cash Flow. Plus, the last few weeks’ buying pressure on the stock isn’t anything to write home about, so it’s very unlikely today’s move will be sustainable.

My analysis says the rot runs deep at Bank of America and will still need time to be worked out. Steer clear.

Now take a look at Morgan Stanley. Despite today’s pop in the stock, the picture is also not good.

Revenue, down 26%. Institutional securities division revenues, down 42%. Profits… well, there were no profits. MS lost $227 million for the quarter.

Now, a big chunk of this loss was related to settling a long-running legal clash over the bond insurer, MBIA. And the loss is smaller than what analysts were expecting.

But the signs of weakness in Morgan’s core operations are clear, and cannot be ignored. My stock-grading system gives Morgan a D on the critical factor of Return on Equity. More importantly, MS gets an F on my quantitative metric.

One quarter of “not as bad as we thought!” results doesn’t outweigh those facts, so I won’t be buying any MS shares any time soon, and neither should you.

A Health Care Powerhouse to Buy Now

Away from the financials, we’ve got a reversal of the big bank bamboozle–great results but the stock is going down today.

I’m talking about the announcement this morning from United Healthcare (UNH).

A few hours ago, management at UNH revealed stellar operating performance. In particular, its Optum segment, which focuses on population health management and care delivery, grew sales by 23%! OptumHealth now serves nearly one in five Americans. The company also served an additional 170,000 people in the fourth quarter, helping to boost the company’s top- and bottom-lines.

Total fourth-quarter sales rose 8% and net earnings advanced 22%, or $1.17 a share. The Street forecast earnings of $1.03 per share, so UnitedHealth Group yielded a 14% earnings surprise!

Looking forward, the company reiterated they do have some challenges in the quarters ahead, due to rising medical costs, its largest expense. The company forecast 5% to 6% sales growth and forecast that 2012 net earnings would likely be even with 2011’s, if not a little lower.

Investors are still trying to figure out how to digest the full-year guidance, so the stock is trading a little lower in today’s trading.

I think investors will soon realize the good news and underlying strength in UNH’s business and move the stock higher. For starters, we’re only three weeks into the New Year, so UnitedHealth is prudently being conservative with its guidance. The fact remains that its Optum business is booming, and as consumer confidence and spending continues to pick up, we’ll start to see greater health care use. I’m still very bullish about UNH and consider this a solidly positive earnings announcement.

Here’s why: Under my rating criteria, United Healthcare earns no fundamental grade lower than a “C,” and has held an overall A rating (strong buy), for six out of the last nine months. That’s why I would be a buyer of UNH here, not a seller.

In fact, those strong results are the reason why UNH is a recommended stock in my Blue Chip Growth advisory service.

See How Your Stocks Stack Up

Remember, earnings are critically important, but they are just one of a number of important ways you can measure a stock.

And the short-term reaction to them can be misleading.

To really understand what’s going on underneath the surface, a quick 5-minute checkup with my stock-rating system, PortfolioGrader, will open your eyes.

PortfolioGrader is the screening system my money management firm uses to separate the wheat from the chaff, or in earnings season, the short-term bouncers from the long-term outperformers. With its help, we’ve been able to beat all the major indexes by a wide margin for nearly three decades now.

With over 5,000 stocks in our database, you might just want to see what kind of grades the stocks in your portfolio get.

I’ll be in touch again tomorrow with a complete wrap-up on all of today’s important announcements, plus more big earnings previews.

See you then.

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