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

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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.