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Stock Strategist

This Year's Value Creators and Destroyers -- Page 2

A look at who created and destroyed the most value in the past six months, by market cap.

Mentioned: , , , , , , , , ,

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When looking at individual names, we understand that our focus on market capitalization makes it impossible for anything but mega-cap and large-cap names to make this list. Still, looking at the percentage changes, anywhere from 10% for ExxonMobil to 50% for  Valero Energy (VLO), nine of our top 10 value creators handily beat the S&P 500. By adding another $45 billion to its market cap, ExxonMobil refused to give up the title of top value creator it earned in 2006.

While  AT&T (T) is bringing up the bottom of the list, we would like to point out how our screen can distort reality. AT&T's actual market capitalization is closer to $244 billion after its acquisition of BellSouth. However, we wanted to know how much value AT&T created for its existing shareholders, which is the $15 billion stated above. AT&T has the scale and customer relationships to create a competitive advantage. However, we believe the stock is overvalued currently, as it rates only 1 star.

  Top 10 Value Creators
Company Market Cap on
12-31-06
($ million)
Market Cap on
06-21-07
($ million)
Change
($ million)
Percent
Change

Morningstar
Rating

ExxonMobil (XOM) 446,944 491,679 44,735 10%
Apple (AAPL) 72,901 106,464 33,563 46%
Schlumberger (SLB) 74,416 101,044 26,628 36%
Intel (INTC) 116,762 139,998 23,237 20%
Chevron (CVX) 160,294 180,612 20,317 13%
Google (GOOG) 140,979 157,398 16,419 12%
General Electric (GE) 383,564 399,954 16,390 4%
Verizon (VZ) 108,723 123,904 15,181 14%
Valero Energy (VLO) 31,354 46,927 15,573 50%
AT&T (T) 137,384 152,140 14,757 11%

We note that there is not a lot of opportunity at the top. With five of our top 10 fairly valued and five overvalued, we would not expect to see many of these same stocks on our top 10 list for the second half of 2007. In fact, the opportunity lies with our top 10 value destroyer list. It is not uncommon for mega-cap stocks to jump from one list to the other.  Intel (INTC) was actually our top value destroyer in 2006 and now is number four on our value creators list.

With five 5-star stocks and four 4-star stocks, we're particularly excited about this value destroyers list. Morningstar looks at stocks based on their fundamentals, not based on their latest stock-price movements, so opportunity often abounds on the value destroyers list. Three excellent health-care stocks,  Amgen (AMGN),  Johnson & Johnson (JNJ), and  Genentech (DNA) appear on the list. The stock prices of Amgen and Johnson & Johnson suffered when the firms' anemia drugs were slapped with additional safety warnings and the prospect of restricted government reimbursement. After taking into account the likely effects of these changes and reducing our fair value estimate for Amgen, these two stocks are still trading significantly below our fair value estimates. This is an opportunity to buy a branded drug for a generic price.

  Top 10 Value Destroyers
Company Market Cap on
12-31-06
($ million)
Market Cap on
06-21-07
($ million)
Change
($ million)
Percent
Change

Morningstar
Rating

Bank of America (BAC) 239,758 224,040 -15,717 -7%
Amgen (AMGN) 79,685 66,807 -12,878 -16%
Johnson & Johnson (JNJ) 191,415 180,079 -11,336 -6%
Citigroup (C) 273,691 263,667 -10,024 -4%
Procter & Gamble (PG) 203,656 196,083 -7,573 -4%
Starbucks (SBUX) 26,737 19,823 -6,914 -26%
Wachovia (WB) 90,049 83,993 -6,056 -7%
Motorola (MOT) 49,703 43,877 -5,826 -12%
Genentech (DNA) 85,511 80,072 -5,439 -6%
Merrill Lynch (MER) 82,298 77,171 -5,127 -6%

Our Conclusions
While day traders and hedge funds may disagree with us, six months is an extremely short time period for stock price movements. Short-term stock movements do not necessarily translate into actual changes in a company's intrinsic value. While our top 10 value creators gained $227 billion in market cap during the first half of 2007, our fair value estimates for the group grew much slower, up $99 billion. On the value destroyers list, we did not see value destruction but rather intrinsic value growth--the destroyers combined to lose $87 billion of market capitalization in the first half of 2007, while our fair value estimates increased by $70 billion. In fact, we reduced our estimate of the intrinsic value of only one value destroyer (Amgen, discussed above) during the past six months. As long-term investors, short-term stock movements are fairly meaningless; unless, that is, you are on the hunt for bargains.

Jaime Peters does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.