International Business Machines Corp.

MCDONALD’S CORP. $54 (New York symbol MCD; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.1 billion; Market cap: $59.4 billion; Price-to-sales ratio: 2.6; WSSF Rating: Above Average) plans to open 500 new restaurants in China over the next three years. It opened 146 restaurants in 2008, and now operates about 1,015 restaurants in China out of about 32,000 worldwide. Expanding in China makes sense for McDonald’s, despite the country’s slowing economy. Demand for low-cost fast food is still strong, and construction and labour costs are falling. McDonald’s is a buy. J.C. PENNEY CO., INC. $16 (New York symbol JCP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 222.2 million; Market cap: $3.6 billion; Price-to-sales ratio: 0.2; WSSF Rating: Average) earned $2.57 a share in its fiscal year ended January 31, 2009, down 47.9% from $4.93 in the prior year. Sales fell 6.9%, to $18.5 billion from $19.9 billion. Same-store sales fell 8.5%. The drop was largely the result of lower consumer demand for jewelery and home furnishings, although sales of women’s clothing and cosmetics held steady....

STATE STREET CORP., $19.40, New York symbol STT, fell 50% this week after it disclosed higher-than-expected potential losses on its $79-billion investment portfolio. As of December 31, 2008, it had unrealized losses of $5.5 billion (after tax), up 66.7% from $3.3 billion at the end of the third quarter. State Street faces more losses from off-balance-sheet “conduits,” which trade securities backed by mortgages, credit card receivables and other loans. The company does not own conduit assets, but has agreements to provide them with backup loans. State Street believes the credit quality of these securities remains high, and that investors will receive full value when they mature, but a sharp drop in demand for all asset-backed securities has hurt their current market value. As a consequence, these conduits now have unrealized losses of $3.6 billion. Accounting rules may force State Street to bring these conduit assets onto its balance sheet at their currently depressed value. This could, in turn, force the company to issue new common or preferred shares in order to cover these losses and strengthen its balance sheet. Current market...

INTERNATIONAL BUSINESS MACHINES CORP. $86 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.3 billion; Market cap: $111.8 billion; WSSF Rating; Above average) is the world’s largest computer company, with operations in over 170 countries. It specializes in large mainframe computers for governments and corporations. The company now gets over 50% of its revenue from its service division. Steady revenue streams from long-term contracts for designing and maintaining computer systems cuts IBM’s risk. IBM continues to expand its software operations, mostly through acquisitions. The company is now the world’s second-largest software maker after Microsoft Corp. Owning its own software business makes it easier for IBM to design and build customized computer systems for its clients. As well, using its own software lets IBM avoid paying licensing fees to other software makers....

In the early 1990s, IBM began to lose its decades-long dominance over the computer industry to newer companies like Microsoft (software) and Intel (chips). That prompted the company to focus on selling its expertise. It subsequently sold most of its less profitable operations, including its home computer division. This transformation continues to pay off. Demand for computer services tends to be more stable than other aspects of the computer industry, even in today’s volatile economy. That’s because IBM’s services help businesses cut costs and improve productivity. The stock now trades for less than 10 times earnings. That’s less than half its p/e of around 25 during the last recession in 2001....

This downturn is going a lot further down that I ever expected. I still see it as a financial panic, rather than an indicator of the depth of the recession that now seems to have started. In other words, the market drop reflects a drying up in lending activity and fear of a depression, rather than a drying up in business activity. In the depths of a market downturn, some observers always predict that we are on the verge of another 1930s depression. In the 1930s, however, the U.S. and other governments did all the wrong things. They raised taxes, raised tariffs and did nothing to halt bank failures. The U.S. and other governments are doing all the right things to revive lending and credit, in my view. They are injecting funds into the financial system, arranging takeovers of failing financial companies, and moving to protect depositors. Eventually these efforts will pay off. Lending will then swiftly revive, and the market will go through a sharp recovery. There is no way to tell when that will happen, but you can bet that it will spur widespread disbelief, and warnings that it is just a temporary reprieve and that the downturn will soon resume....

MOLSON COORS BREWING CO. $49.91, New York symbol TAP, fell 10% this week, as rising costs for raw materials and energy more than offset rising sales. In the three months ended June 29, 2008, earnings before unusual items fell 2.0%, to $172.6 million from $176.1 million a year earlier. Per-share earnings fell 4.1%, to $0.93 from $0.97, on more shares outstanding. Sales rose 5.9%, to $1.8 billion from $1.7 billion. Sales gains in the United States and the UK offset a small drop in Canada. The company’s latest cost-cutting plan will help it cope with higher grain and other costs. So far, it has cut its annual expenses by $138 million. It should reach its goal of $250 million in annual savings by the end of 2009. The company’s new joint venture with SABMiller plc will also enhance its long-term profitability. Molson Coors is still a buy....

INTERNATIONAL BUSINESS MACHINES INC. $124 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.4 billion; Market cap: $173.6 billion; WSSF Rating: Above average) earned $1.65 a share in the three months ended March 31, 2008, up 36.4% from $1.21 a year earlier. Revenue rose 11.4%, to $24.5 billion from $22.0 billion. IBM continues to gain from its strategy of expanding its software operations, which generate higher profit margins than hardware sales. Software revenue grew 14% in the latest quarter. IBM also gets over 60% of its revenue from its international operations, which limits its exposure to a slowing economy in the United States. IBM is a buy....

AUTODESK INC. $31.09, Nasdaq symbol ADSK, fell over 15% this week after it reported earnings that fell short of earlier forecasts. In the fiscal year ended January 31, 2008, Autodesk earned $1.88 a share before unusual items, up 22.9% from $1.53 in the prior year. Revenue rose 22.2%, to $2.2 billion from $1.8 billion. The company spent 22% of its fiscal 2008 revenue on research. Autodesk gets roughly 90% its earnings from its core AutoCAD software products, which engineers and architects use to design machinery, buildings and so on. An economic slowdown, particularly in housing, could cut demand for AutoCAD, and this has weighed on the stock price. Plans to expand its salesforce will also put pressure on Autodesk’s short-term profit margins. Autodesk is still a hold....

INTERNATIONAL BUSINESS MACHINES CORP. $106 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.4 billion; Market cap: $148.4 billion; WSSF Rating: Above average) is the world’s largest supplier of computers and information services. It operates in over 170 countries. IBM has long been a leader in large, mainframe computers for corporations and governments. As well, in the past five years, IBM has expanded its services and software operations through the purchase of over 60 companies for $20 billion. The company is now the world’s second-largest software company after Microsoft Corp. IBM now gets over 50% of its revenue from services, which include designing and maintaining computer systems for its customers. Services also give IBM steady, long-term revenue streams, which helps cut the risk of these acquisitions....

Computer technology stocks are among the most volatile in the Manufacturing & Industry sector of the economy, as we’ve seen with the current market turmoil. We think that the best way to invest in technology is through large, established, broad-based technology companies capable of funding expensive research and bringing new products to market. A great example is IBM. Its wide exposure to hardware and software limits its reliance on any single product. Its focus on computer services also gives it steadier revenue streams than most computer companies....