The Outlook

Intelligence for the Individual Investor

July 20, 2011 Volume 83 Number 26

Summer Cliffhangers
The cliffhanger is a commonly used plot device in summer televisions series that dates back to the serialized novels of the 1800s, when the hero was sometimes left hanging from the edge of a cliff at the end of an installment to boost sales of the next chapter. Investors are enduring multiple cliffhangers now, with new twists and turns arriving daily and dangers lurking around every corner. With the imminent threat of a sovereign default by Greece now receding if only temporarily fresh concerns have been raised over a potentially even more serious problem in Italy, where bond yields are rising amid concern it too may need help. Italy has some 645 billion euros in debt maturing in the next four years, and it may have trouble refinancing at the attractive rates it has paid in the past. We see Italys debt load as a real risk, as Europes third largest economy and the worlds third largest

Vaughan Scully S&P Editorial

Italy, debt ceiling, and job growth provide plenty of suspense.

Whats Inside
Intelligencer Observatory Mutual Fund Strategies ETF Strategies OTT Video Water Supply Gap Prepaid Wireless Google+ Stock Screen Master List Platinum Portfolio 2 3 4 5 6 7 8 9 10 11 12

debtor might be too big to rescue, says international equity strategist Alec Young. Closer to home, investors are coping with the even scarier possibility of a sovereign default by the U.S. government itself. A deadlock in Congress over the issue of raising the legal debt limit shows no signs of easing before an August 2 deadline, after which the Treasury Dept. has said the government will be unable to pay its bill without borrowing new funds. We believe the consequences of not raising the debt ceiling are so severe that Congressional bickering makes for good drama but little risk, says chief investment strategist Sam Stovall. Given the massive political capital at stake, its hard to see any agreement taking shape much before 11 pm on August 1, so there is plenty of time for that drama to unfold further.
(Continued on page 3)

S&P Equity Research Recommended Asset Allocation

Cash 15% Foreign Equities 15%

S&P 500 GICS SECTOR PERFORMANCES AND RECOMMENDED SECTOR WEIGHTINGS

S&P 500 SECTOR % CHANGE JULY YTD 2010 P/E ON E2011 EPS E2011 P/E TO PROJ. 5-YR. EPS GROWTH ACTUAL SECTOR % WEIGHTINGS RECOMMENDED S&P SECTOR OVER/UNDER EMPHASIS WEIGHT

Bonds 25% U.S. Equities 45%

Please see page 3 for required research analyst certification disclosures. For important regulatory information, please go to: www.standardandpoors.com and click on Regulatory Affairs and Disclaimers.

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities S&P Composite 1500 S&P 500 S&P MidCap 400 S&P SmallCap 600

0.4 0.5 -0.5 -2.5 -0.6 -1.4 0.5 -0.2 -1.3 0.2 -0.4 -0.5 0.1 0.6

7.9 6.8 9.9 -6.1 12.0 5.4 2.1 2.4 3.0 6.9 4.9 4.5 8.0 7.6

25.7 10.7 17.9 10.8 0.7 23.9 9.1 19.9 12.3 0.9 14.2 12.8 24.8 25.0

13.7 13.8 9.9 9.7 11.6 12.6 11.6 11.6 15.0 14.0 13.8 11.6 14.4 15.4

1.0 1.6 1.2 1.2 1.4 1.1 0.9 1.2 8.1 3.5 1.2 1.2 1.4 1.5

10.7 10.7 12.6 14.8 11.7 11.1 18.3 3.7 3.1 3.4

Marketweight Overweight Marketweight Underweight Marketweight Overweight Marketweight Marketweight Marketweight Marketweight

0% +1% 0% -2% 0% +1% 0% 0% 0% 0%

Sector recommendations are market-cap weighted, influenced by economic, fundamental, and technical considerations.

Data as of 7/12/11. E-Estimated. Source: Standard & Poors Equity Research.

2 STANDARD & POORS THE OUTLOOK JULY 20, 2011

Intelligencer
Headlines, Highlights, and Whats on Our Minds
MASTER LIST CHANGE: Effective after the close on July 18, 2011, there will be

Standard & Poors The Outlook

EDITORIAL Managing Editor Beth Piskora Senior Editorial Manager Vaughan Scully Statistician Chris Peng O P E R AT I O N S Managing Director, Global Business Operations Robert Barriera Vice President, Operations Frank LoVaglio

one change to the High-Quality Capital Appreciation Portfolio. Nordstrom (JWN 50 ) replaces VF Corp. (VFC 114 ).
CORRECTION: An item in the July 6, 2011 issue gave an incorrect date for the

Small/Mid-Cap Growth Portfolios performance listed in the table on page 11. The date given, June 3, 2011, should have been June 24, 2011. The Outlook regrets the error.
A SAFE NUCLEAR REACTOR?: As part of the fallout from Japans Fukushima

For customer service, please call 1-800-852-1641 between 9am and 4pm Eastern Time, Monday through Friday.

Daiichi nuclear disaster, countries using nuclear power are seeking ways to make nuclear plants safer. Liquid fuel nuclear reactors using thorium a chemical element more abundant, but less radioactive, than uranium for fuel and molten salt as a coolant may be the answer. The March 11 earthquake, tsunami, and subsequent loss of electricity stopped primary and backup water pumps resulting in multiple core meltdowns and radiation being released. A thorium/molten salt reactor would operate under much less pressure than a conventional reactor, reducing the risk of explosion. If power is lost, the liquid fuel would solidify and, in theory, cool down by itself. Lightbridge Corp. (LTBR 3 NR), based in McLean, Virginia, is developing thorium-based nuclear fuel technology and two years ago agreed to investigate thorium fuel cycles in Arevas light water reactors. / Art Epstein
HELPING JAPAN POWER UP: When disasters hit cities and towns, loss of power

The Outlook (USPS 415-780, ISSN 0030-7246) is published weekly except for one issue in January, April, July, September, and November by Standard & Poors, 55 Water St. New York, NY 10041.
Annual subscription: $298. Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Send address changes to The Outlook, Standard & Poors, 55 Water St., New York, NY 10041. Copyright 2011 by Standard & Poors Financial Services LLC. All rights reserved. Standard & Poors, S&P, S&P 500, S&P MidCap 400, and S&P SmallCap 600 are registered trademarks of The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies: Harold W. McGraw, III, Chairman, President and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; Elizabeth OMelia, Senior Vice President, Treasury Operations; Kenneth M. Vittor, Executive Vice President and General Counsel. Because of the possibility of human or mechanical error by S&Ps sources, S&P, or others, S&P does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

adds to the suffering of survivors particularly the sick and injured and hinders search, rescue and rebuilding. Pratt & Whitney Power Systems, a unit of United Technologies (UTX 88 ), is supplying mobile power generation equipment to APR Energy for areas in Japan that still do not have enough electricity months after the March disaster. Pratt & Whitney took its advanced technology developed for aircraft S&P 500 TOTAL RETURN (%) engines and applied it to portable ENDED JUNE 30, 2011 gas turbines used for generating YEARLAST LAST power. The company has more than 5-YEAR* 10-YEAR* TO-DATE 12 MONTHS MONTH 2,000 25 megawatt (MW) to 60 MW 2.94 2.72 6.02 30.69 -1.67 industrial gas turbines installed in Monthly total return statistics for all S&P indices are available over 50 countries worldwide. at www.standardandpoors.com. *Annualized average through / Art Epstein 6/30/11.

The Outlook is a publication of Standard & Poors Investment Services. This department operates independently of, and has no access to, non-public information obtained by Standard & Poors Ratings Services, which may in its regular operations obtain information of a confidential nature. Information included in The Outlook may at times be inconsistent with information available in S&Ps MarketScope, an electronically delivered online service. Permission to reprint or distribute any content from this newsletter requires the written approval of Standard & Poors.

S&P EVALUATION SYMBOLS

STARS Rankings
Our evaluation of the 12-month potential of stocks is indicated by STARS: Strong BuyTotal return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. BuyTotal return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. HoldTotal return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. SellTotal return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. Strong SellTotal return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. NR Not ranked.

MARKET MEASURES
INDEX CLOSE FRI. 7/15/11 % CHG. YEAR TO DATE % CHG. PAST 52 WKS. OPERATING P/E RATIO INDICATED EARNINGS FRI. ANNUAL % A2010 E2011 7/15/11 DIVIDEND YIELD

S&P 500 Composite S&P MidCap 400 S&P SmallCap 600 S&P SuperComposite 1500 Dow Jones Industrials Nasdaq Composite BBB Indus. Bond Yield (10-yr.)

1316.14 976.11 445.89 305.43 12479.73 2789.80 4.90

4.7 7.6 7.3 5.0 7.8 5.2 -0.65

28.0 39.4 40.1 29.4

83.77 43.91 17.00 18.64

98.40 53.45 22.80 22.04 ... ...

13.38 18.26 19.56 13.86 ... ... ...

26.37 12.64 4.83 5.83 ... ... ...

2.00 1.29 1.08 1.91 ... ... ...

Quality Rankings (QR)

Our appraisals of the growth and stability of earnings and dividends over the past 10 years for STARS and other companies are indicated by Quality Rankings: A+ Highest B+ Average C Lowest A High B Below Avg. D In reorganization A- Above Avg. B- Lower NR Not Ranked Quality Rankings are not intended to predict stock price movements.

28.1 857.59 33.2 ... -0.77

Data through 7/15/11. A-Actual. E-Estimated. Based on estimated 2011 earnings. Before special factors. Actual change in yield (not percentage change).

STANDARD & POORS THE OUTLOOK JULY 20, 2011

The Observatory
Selected actions for June 30 through July 14.
CURRENT PRICE ($) NEW STARS OLD STARS STARS CHANGE DATE QUALITY RANK NAME SYMBOL

Applied Micro Circuits ASML Holding Baidu Cablevision Systems Capital One Financial Casella Waste Systems Chart Industries Cognizant Technology Solutions Federated Investors First Solar Fossil Hanwha SolarOne Human Genome Intercontinentalexchange Intergrated Device Technology Legg Mason Netgear Red Hat Reed Elsevier Salesforce.com Semtech SunPower Southern Union Sycamore Networks Transatlantic Volterra Semiconductor WD-40 Wellcare Health Plans Western Digital

AMCC ASML BIDU CVC COF CWST GTLS CTSH FII FSLR FOSL HSOL HGSI ICE IDTI LM NTGR RHT RUK CRM SMTC SPWRA SUG SCMR TRH VLTR WDFC WCG WDC

8 35 144 26 51 7 57 75 23 125 129 5 24 127 7 33 43 44 36 153 26 21 44 21 52 23 45 54 37

3 4 3 1 4 2 3 3 2 4 3 2 4 3 2 2 3 3 1 3 2 1 3 3 4 3 1 3 1

4 3 4 3 3 1 4 5 3 3 4 1 3 4 3 3 4 4 2 4 3 3 4 2 3 4 2 4 3

7/12/11 7/11/11 6/30/11 7/5/11 7/13/11 7/8/11 7/11/11 6/30/11 6/30/11 6/30/11 7/6/11 7/12/11 7/14/11 7/5/11 7/12/11 7/8/11 7/5/11 7/13/11 7/7/11 7/7/11 7/12/11 7/7/11 7/14/11 7/5/11 7/13/11 7/12/11 7/8/11 7/11/11 6/30/11

C NR NR BAC NR B+ B+ NR B+ NR C NR C B+ NR B NR NR B NR B B B+ NR B+ NR B+

For daily STARS changes, subscribers can call The Outlook hotline, 800-618-7827, and put in your subscriber access code.
S&P Observatory provides a selection of analytical actions upgrades, downgrades, initiations from S&P Equity Research. Stocks featured in S&P Observatory are selected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a portfolio published by The Outlook. Please note that all investments carry risks. Investors should seek financial advice before investing. All of the views expressed in this research report accurately reflect the research analysts personal views regarding any and all of the subject securities or issuers. No part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Summer Cliffhangers (Continued from cover)

The June employment report made for yet another potboiler, with the domestic economy generating just 18,000 new jobs in the month a strong indication that the economy is losing, rather than gaining, momentum. Coming on the heels of more positive economic news, it revived concerns of a double dip recession and even the possibility of new stimulus measures by the Federal Reserve. Overall, S&Ps Investment Policy Committee is still moderately bullish on domestic stocks, with a 12-month target of 1400 for the 500. Despite recent indications of economic weakness, the committee raised its recommendation for the consumer discretionary sector to Marketweight from Underweight. A recent 20% decline in energy prices and the sectors growing exposure to emerging markets is leading us to take a less cautious stance, S&Ps equity strategy team says.

4 STANDARD & POORS THE OUTLOOK JULY 20, 2011

FUND

STRATEGIES

Health Care Funds Deliver Vigorous Returns

Sectors strong performance looks set to keep going in 2011.
Having now passed the official midpoint for 2011, many investors are reviewing their portfolios for the second half of the year. So far, defensive sectors have outpaced the broad market, with health care the best performing sector after notching a 14.2% return as of July 8 compared with a 6.9% return for the S&P 500. While past performance is not indicative of future results, Standard & Poors Equity Research sees many reasons to have a favorable opinion on health care stocks. Valuations are still below historical levels, and investors are more familiar with and less concerned about the effects of the health care reform package now being phased in. Also, cost-cutting measures announced by companies in many different sub-industries of the health care sector have helped renew investor interest, says Jeffrey Loo, S&P equity analyst. For pharmaceutical companies, which make up by far the largest portion of the health care sector market capitalization, share buyback programs have more than offset concern over patent expirations that start in earnest later in 2011. S&P has positive fundamental outlooks on five of the sectors 10 subindustries, including managed care, health care distributors, biotechnology, health care services, and life science tools and services. There are more than 100 mutual funds focusing on the health care sector. To indentify the most attractive, we screened for funds that have five star ranks from S&P with no sales load and that are open to new investors. In addition, we screened for funds that scored well in S&Ps mutual fund ranking methodology for positive cost factors. We list the three funds that met all of our screening criteria and had the best five-year performance: Fidelity Select Health Care Portfolio This fund outperformed its peer average over the one-, three-, five-, and 10-year periods ended June 30, 2011. As of April 30, all but two of the funds top 10 holdings have Buy or Strong Buy recommendations from S&P analysts, including 5-STARS ranked medical device maker Covidien and medical supply distributor McKesson. The fund has delivered a 15.4% average annual total return since it opened in July, 1981, far surpassing its peer average of 9.18%. Live Oak Health Sciences Fund This is a relatively small fund, with only $26 million in assets under management, but it has performed well over the past several

Michael Souers S&P Equity Analyst

years. In fact, it has beaten peers over the past three- and five-year periods, returning 16.6% year-todate through 6/30/11 versus a 15.0% increase for its peers. The funds manager has been in place since inception in 2001. It has lower turnover than peers (22.0% vs. 132.7%) and boasts a higher than average Sharpe Ratio of 0.74. S&P Equity Analysts have Strong Buy or Buy recommendations on eight of the funds recent top-10 holdings, including 5STARS ranked McKesson. T. Rowe Price Health Sciences Fund Its uncommon to find the largest mutual fund in a particular category delivering consistently stellar performance, but that is the case with this fund. Over the past one-, three-, five- and even 10-year periods through June 30, this fund has significantly bested peers, including a nearly 400 basis point outperformance over the five-year period (11.3% vs. 7.4% for peers). This exemplary record has carried into 2011, with the fund returning 18.4% on a year-to-date basis (vs. 15.0%). As with the other two funds, S&P equity analysts have Strong Buy or Buy recommendations on eight of the funds recent top-10 holdings, including Strong Buy-recommended Celgene, Covidien, and McKesson.

POSITIVE POTENTIAL IMPLICATIONS

FUND NAME / TICKER S&P RANKING YTD *TOTAL RETURN 1-YEAR 3-YEAR 5-YEAR CURRENT PRICE EXPENSE RATIO

Fidelity Select Health Care Portfolio / FSPHX Live Oak Health Sciences Fund / LOGSX T. Rowe Price Health Sciences Fund / PRHSX

5 5 5

15.2 17.0 19.9

35.5 28.6 41.2

12.1 13.2 12.9

8.5 9.5 12.2

144 15 36

0.82 1.38 0.87

Data through 7/14/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. Sources: S&P MarketScope Advisor.

STANDARD & POORS THE OUTLOOK JULY 20, 2011

STRATEGIES

ETF

Oilfield Service ETFs Hope to Win in Iraq

Three ETFs own stocks that will benefit as drilling in Iraq picks up.
While forecasters predict the use of renewable energy will expand greatly in the future, Standard & Poors Equity Research believes that petroleum-derived fuels will still dominate the energy market for decades to come. That could benefit oilfield equipment and services contractors operating in Iraq, as the country moves to develop its abundant oil reserves and significantly increase production. Three wars in the past 30 years, neglect, and investment restrictions by the United Nations during the days of Saddam Hussein left Iraqs oil infrastructure severely damaged and badly in need of repair, modernization, and expansion. Iraqi oil fields are attracting many prominent global energy producers, and there to provide much needed know-how and equipment to drill new wells are U.S. oilfield services companies Halliburton, Baker Hughes, and Schlumberger. American services companies are winning much of the oilfield services/drilling work to be done in Iraq, says Standard & Poors equity analyst Stewart Glickman, who believes long-term prospects for these companies in Iraq are good. At a Baghdad press conference this past April, Iraqi Oil Minister Abdelkarim al-Luaybi announced plans to auction leases for 12 oil and gas blocks in January 2012. Some of the worlds largest oilfield services companies could earn billions of dollars from those new contracts in Iraq, although the expense of starting up large projects would create a significant, if temporary, financial drain. The question is, how much short-term pain will there be for margins? says Glickman, commenting on U.S. oilfield companies operating in Iraq and the Middle East. Any project involves start-up costs that dont get absorbed until the project finally gets off the ground. When those costs are substantial enough, they have the capacity to narrow margins, at least in the Middle East/Asia regions. While 2011 second quarter margins in this region are not likely to be especially impressive, he explains, more interesting and a bigger catalyst will be management expectations for 2012, which I think will be optimistic. Houston-based Halliburton was awarded a contract by

Art Epstein S&P Editorial

ExxonMobil this past April to provide drilling services for 15 wells in the West Qurna oil field in southern Iraq. In August 2010, it received a letter of intent from Royal Dutch Shell to develop one of the worlds largest oilfields, the Majnoon field in southern Iraq, and serve as project manager with Nabors Drilling (a unit of Nabors Industries) and Iraq Drilling. A year ago, Baker Hughes, also based in Houston, announced it signed a three-year agreement with Iraqs South Oil Co. (SOC) to supply wireline seismic technologies to SOC and other Iraqi oil and gas producers and help develop local Iraqi wireline logging capabilities. And another major oilfield services company in Houston, Schlumberger, was awarded a contract in May from a group headed by ExxonMobil to drill wells in the West Qurna, Iraq oilfield. Iraq is expected to become a principal revenue contributor to Schlumbergers Middle East operations and will be larger than most of the companys other markets in the region with
(Continued on page 10)

OILFIELD SERVICE ETFS

FUND NAME / TICKER S&P RANKING YTD *TOTAL RETURN 1-YEAR 3-YEAR 5-YEAR CURRENT PRICE EXPENSE RATIO

iShares Dow Jones US Oil Equip. & Servs. Index Fund / IEZ MW PowerShares Dynamic Oil & Gas Services Portfolio / PXJ MW SPDR S&P Oil Gas Equipment & Services ETF / XES MW

13.0 13.0 12.7

57.7 57.5 53.6

-4.7 -7.7 -4.0

6.5 4.3 7.2

65 25 42

0.47 0.63 0.35

Data through 7/14/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. MW-Marketweight. Sources: S&P MarketScope Advisor.

6 STANDARD & POORS THE OUTLOOK JULY 20, 2011

OTT Video Taking Over from Cable, Satellite?

Netflix, Hulu and others offer programming similar to pay TV.
Instead of tuning in to pay TV networks delivered via cable or satellite, consumers are increasingly accessing entertainment programming through competing services delivered over broadband Internet connections. Standard & Poors Equity Research believes this trend bodes well over the long term for companies that provide video content online. While video delivered over Internet broadband connections has existed in various formats for a few years, services such as Netflix and Hulu have sprung up more recently offering programming that can compete with, and sometimes duplicate, that available from satellite and cable television. These services are known as over the top (OTT) because they are delivered on top of existing services such as broadband Internet connections that have already been paid for. OTT video providers have seen a gradual coming of age of services over the past few quarters, says Tuna Amobi, an S&P equity analyst. In our opinion, one of the main driving forces over the next few years for the continued evolution of OTT video services is Netflix, a rapidly growing DVD-by-mail and streaming-video provider, Amobi says. Subscriptions-based service provider Netflix currently accounts for about 20% of downstream Internet traffic during peak times in the U.S., and offers well over 20,000 movies and TV shows available to stream to more than 100 devices. S&P equity analyst Michael Souers expects Netflix subscriber base to reach more than 30 million in 2011 compared with the 20 million at the end of 2010. The number of OTT viewers worldwide will reach 1.3 billion by 2016 from about 780 million in 2010, according to estimates from ABI Research, a technology marketresearch firm based in New York. In addition to Netflix, ABI thinks that other subscription OTT providers, such as Apples iTunes division and Hulu which is owned by Comcast, News Corp., and Walt Disney will also benefit from OTT content. Amazon.com is another OTT provider. According to ABI, Netflix is the current leader in OTT revenues as it has led consumers to embrace long-form broadband video on their TVs. ABI estimates that Apples iTunes and Hulu each represent about 15% of the current OTT market. Subscription services, such as Netflix Watch Instantly and Hulu Plus, are projected to account for the majority of global OTT service revenues over the next five years. Revenues from such subscription services are estimated to have reached $1.9 billion in 2010, according to market

Isabelle Sender S&P Editorial

research firm IMS Research. ABI forecasts OTT market revenues will climb to about $20 billion by 2016. However, comScores Video Metrix suggests that Netflix isnt the top overall OTT provider based on viewership. Among free U.S. onlinevideo properties, Google sites, driven primarily by video viewing at YouTube.com, ranked as the top online video content property in May with 147.2 million unique viewers, according to Video Metrix. VEVO, a unit operating under Vivendis Universal Music Group, was the months runner up with 60.4 million viewers, followed by Yahoo sites with 55.5 million viewers. Facebook.com came in fourth with 48.2 million viewers, while Viacom Digital, a Viacom unit, ranked fifth with 46.5 million viewers. Hulu, which has both free and paid subscriptions, placed last on the comScores May 2011 content view ranking for its free content and recently put itself up for sale. Microsoft sites, AOL, Time Warners Turner Digital and NBC Universal rounded out the top-10 in comScores monthly survey. The total U.S. Internet audience for free online video in May was 176 million users, for an average of 15.9 hours per viewer, according to research by comScore.
(Continued on page 7)

SELECTED OTT VIDEO STOCKS

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET PRICE P/E RATIO YIELD (%)

Amazon / AMZN Apple / AAPL Comcast / CMCSK Disney (Walt) / DIS Netflix / NFLX News Corp. / NWS

3 5 4 5 2 4

BB B+ A B A-

Medium High Medium Medium High Medium

Growth Growth NA Growth Blend NA

210 358 24 40 287 16

200 440 27 50 225 22

78.9 14.1 16.6 15.4 63.4 14.5

Nil Nil 1.9 1.0 Nil 0.9

*Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. See definitions on page 2. Based on S&P estimated fiscal 2011 earnings. NA-Not available. Source: S&P Equity Research.

STANDARD & POORS THE OUTLOOK JULY 20, 2011

Gap Grows Between Water Supply and Demand

Increasing water reuse will benefit firms like Pentair, Pall.
With more than two-thirds of the Earth covered by water, one would be hard-pressed to imagine scarcity becoming an issue in the not distant future, but it may be. A growing global population, droughts, the industrialization of emerging markets, environmental concerns, and the limited number of large, fresh waterways near metropolitan areas have increased the need to find alternative supplies of fresh water, according to Water Resources Group, an Australia-based owner of water treatment technologies. The company projects a 40% gap between water demand in 2030 and the existing water supply, creating a need for water reuse. A recent report from Global Water Intelligence pointed to a significant rise in the need for desalination and water reuse over the next four years. Industry forecasts for U.S. water infrastructure investment needs range from $200 billion to $1 trillion. The EPA estimates that $335 billion will be invested over the next 15 to 20 years to replace and build public wastewater systems. Pentair Inc. (PNR 40 ), a maker of products for the transport and treatment of water, wastewater, and other fluids, has noted that market drivers include the rising cost of water stemming from the supply/demand imbalance, tighter regulations governing the use of increasingly scarce water resources, and the inability of municipalities to treat industrial wastewater. Pentair recently acquired Norits Clean Water Technologies group, a Netherlands-based provider of membrane technology and ultrafiltration. Pentair expects the deal to strengthen its presence in emerging markets while expanding its desalination, water reuse, and industrial products. It also has a residential water filtration joint venture with GE Water & Process Technologies, a unit of General Electric. In our view, acquisitions will continue in this industry as the market becomes more competitive and companies try to diversify their product mix and expand their technologies in an effort to satisfy growing customer demand for water treatment and related products. The largest user of water in the U.S. is the industrial sector, especially electric utilities, followed by agriculture and residential. However, agriculture accounts for about 75% of the water usage globally. As developing regions, such as China, India and Brazil, continue to grow, the need for purified water will continue to rise, and the industrial percentage will likely shift upward. Meanwhile, the cost of water is rising, as aging water systems need to be replaced and budget-strapped munici-

Stewart Scharf S&P Equity Analyst

palities pass the costs on to consumers. However, water reuse is growing in popularity for irrigation and other uses that dont require the same costly treatment as potable water. More municipalities are seeking reuse and desalination projects as technology makes them more cost efficient. Thus, long-term prospects are very favorable for flow control and filtration-related water treatment companies, based on the need for clean water, and the drivers mentioned earlier. However, we believe near-term results may still be impacted by soft commercial and residential construction markets and, in some cases, volatile commodity prices. We see Pentair benefiting from sales of engineered flow pumps and other filtration products, while it strengthens its position in the desalination and water treatment markets via acquisitions and expansion overseas. It is targeting foreign sales of 40% of the total within a few years, with emerging regions accounting for at least 25%. The companys margins should widen on volume leverage and supply chain cost savings. Additionally, we expect strong results for Pall Corp. (PLL 55), a maker of filters for the life sciences and industrial markets, based on favorable global trends for filtration products in biopharm and power generation, as well as the energy and water segments.

OTT Video Taking Over from Cable, Satellite? (Continued from page 6)
Other pay-TV providers may eventually join the OTT party. In May, GigaOM reported that Verizon demonstrated a Roku channel of their FiOS Flex video-on-demand content a press event, suggesting that Verizon could be willing to potentially join OTT efforts with one of their own in the future. With FiOS Flex View on Roku, Verizon could offer movies and other content, ondemand in an OTT fashion to anyone, provided they have the content rights to do so. Roku, in which Netflix is an investor, is a third party OTT set-top-box provider that already offers a variety of so-called OTT channels. Roku appears to be aggressively wheeling and dealing for content; it already counts on multiple sources for its video including Netflix, Hulu, Amazon, and the National Basketball Association.

8 STANDARD & POORS THE OUTLOOK JULY 20, 2011

Prepaid Wireless Gains Share

Customers want smartphones, dont want two-year contract.
Growth in prepaid wireless subscribers has outpaced that of the overall wireless segment in recent years, and Standard & Poors Equity Research believes prepaid carriers including Leap Wireless, MetroPCS, and Sprint Nextel are well positioned to benefit from this trend in the future. S&P estimates the number of U.S. prepaid wireless subscribers increased 15.2% in the first quarter of 2011 compared with a year ago, while overall wireless subscriber growth was just 7.4%. We do note, however, that the first quarter is seasonally strong for prepaid. We estimate that prepaid carriers took 40.2% of net additions in the first quarter, versus a 33.3% share in the year ago period. On the postpaid side, share was 6% versus 4.7% in the first quarter of 2010, with the remaining share divided between wholesale and connected devices. In a difficult economy, we believe many individuals are skeptical about signing a two-year contract in order to access smartphones and data services, and the prepaid segment provides a solid alternative. Prepaid carriers now offer an attractive selection of smartphones, complementing them with unlimited data packages for as little as $50, without requiring subscribers to enter a two-year contract. Further, prepaid carriers have started to launch advanced data networks that can deliver premium services like video streaming. MetroPCS offers unlimited plans for as little as $50 per month with no annual contract, and unlimited media streaming on smartphones like the Samsung Galaxy Indulge for $60 per month. Sprints prepaid brand, Boost Mobile, provides unlimited voice, data, and text for $50 and offers a selection of five different smartphones. (Boost even has a loyalty program that can lower the monthly payment to $35 over time if subscribers consistently pay their monthly bill on time.) Leap Wireless offers unlimited talk, text, and web for $45 per month, though consumers must choose an unlimited talk, text, and web plan for $55 if they wish to purchase one of the five different smartphones. America Movil (AMX 26 ), through its U.S. subsidiary, TracFone Wireless Inc., offers several smartphones with unlimited voice, text, and mobile web but they require at least a $45 plan. We believe that as postpaid carriers move away from unlimited data plans Verizon ended its unlimited data option to new customers in early July prepaid carriers have a window of opportunity to gain new subscribers. While we believe there was concern that AT&T (T 30 ) and Verizon (VZ 37 ) would aggressively move into the prepaid space, we do not expect a significant move for AT&T prior to its merger with T-Mobile. Also, both carriers already have exposure to the prepaid market; AT&T had 6.6 mil-

James Moorman, CFA S&P Equity Analyst

lion prepaid subscribers as of the end of the first quarter 2011, while Verizon had 4.4 million. Further, both carriers have exposure to the prepaid market through American Movils Tracfone subsidiary, which utilizes AT&Ts GSM network and Verizons CDMA 1xRTT wireless network to resell airtime. While both AT&T and Verizon Wireless tested offering unlimited prepaid data for smartphones at some point, we believe they have drawn different conclusions. In the case of AT&T, the company had tested unlimited 3G prepaid data for $19.99 under their Pay As You Go service, but decided to discontinue the offering in November 2008. Verizon offers unlimited prepaid data for smartphones for $30, though it must be coupled with a voice plan which starts at $44.99. As a result, we believe it is priced at a significant premium to prepaid competitors, such as PCS and LEAP. Overall, we believe that prepaid carriers, with their expanding smartphone lineups and unlimited data plans, will appeal to data-hungry consumers looking to avoid being locked into a two year contract. On the carrier side, we believe MetroPCS stands to benefit from their competitive smartphone portfolio, unlimited data offerings, and 4G network build out. We believe Sprint Nextel will also benefit in prepaid and postpaid, as long as it keeps its unlimited data plan.

PREPAID WIRELESS COMPANIES

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET PRICE P/E RATIO YIELD (%)

Leap Wireless Intl / LEAP MetroPCS Communications / PCS Sprint Nextel / S

3 5 4

NR NR B

High High High

Growth Blend Value

15 17 5

17 23 6.5

NM 14.0 NM

Nil Nil Nil

*Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. See definitions on page 2. Based on S&P estimated fiscal 2011 earnings. NM-Not meaningful. Source: S&P Equity Research.

STANDARD & POORS THE OUTLOOK JULY 20, 2011

Google+ Fills Social Media Gap

New social networking service can be a positive catalyst for Google shares.
Since the June 28 introduction of the Google+ project a new social networking service aimed at competing with Facebook Google has notably outperformed broad market indices and many of its peers. The market seems to be suggesting that Google+ could be the social media game-changer that investors in the search giant have been hoping for. Were not so sure, but wanted to offer some initial thoughts. Weve been using Google+ for more than a week and have been resisting reading what others have been writing about it to ensure this early take is truly our own. We think social media has been a major gap for Google over the past few years. Many have observed that Internet users have been increasingly spending time on social media platforms like Facebook, Twitter and LinkedIn (LNKD 107 NR), indicating online services like Google could be at risk. Google saw the power and potential impact of this trend early on, but didnt successfully seize upon the opportunity by making the right deals or products. In many ways, Google+ is similar to other major social offerings. Users can connect with people, share, and comment on information and content. The circles feature allows users to organize their connections to enable selective consumption and distribution. Hangouts lets users, whether in the same Circle or not, engage in a multi-person video chat. Sparks is a way to quickly find, track and share information based on indicated interests. Facebook has Groups and Twitter has Lists, but Circles is a differentiator because it mandates that connections be categorized in a friendly and seamless way. We think Google+ has been a success over its first two weeks. User adoption and activity have been surprisingly strong so far based on what weve seen. Company executives, managers and employees have smartly been active in connecting with other users, posting content,

Scott Kessler S&P Equity Analyst

Google+ could be the social media game-changer that investors in the search giant have been hoping for.

and soliciting and responding to feedback. While a fortnights worth of positive responses and reviews wont necessarily make product successful, the start has been better than we expected and the potential seems promising. We give the company credit for sticking with social media and working to get it right in new ways, while keeping expectations relatively low.

GOOGLE
RELATIVE PERFORMANCE 150 120 S&P 500 GOOG 90 60 30 0 2009 2010 2011

STATISTICS Ticker: GOOG S&P Ranking: Current Price: 596 12-Month Target Price: 700 Market Cap: $133.4 billion Investment Style: Large Cap Growth

Nonetheless, its still early days for Google+. If it gets this social thing right, substantial benefits could accrue to the company and its stock. Google+ is already providing content and data that can be used to improve search results and relevancy. Additionally, Google+ could potentially serve as another place to provide advertising and help the companys mobile push. We expect further integration of other Google properties (perhaps enhancing their collective power and value). In fact, Googles product developers have been on Google+ asking about ways that Gmail and Google+ could work together. One could see the potential of streaming, posting or archiving a Hangout with YouTube. What about Blogger (soon be called Google Blogs) and Picasa (soon to be called Google Photos)? There are numerous possibilities and opportunities. However, social media giants and darlings arent standing still. Facebook still has 750 million registered users and is innovating aggressively. We think Twitter is the best source of real-time online information. Twitter recently ended a partnership with Google to align itself with Apple (APPL 361 ) instead. In our view, LinkedIn dominates the professional networking market and has a market value around $10 billion. And we wouldnt be surprised to see daily deals companies like Groupon and LivingSocial adding more social features. So while we have seen comments on Google+ about how some are starting to use it as a primary social media platform, and we believe theres reason for optimism, we dont see it as a game changer yet. We do think, however, that Google+ can be a positive catalyst for the shares.

10 STANDARD & POORS THE OUTLOOK JULY 20, 2011

Consumer Discretionary Choices

S&P Equity Strategy recently upgraded this sector to marketweight.
On Monday, July 11, S&P Equity Strategy upgraded its recommended weighting to the U.S. consumer discretionary sector to marketweight from underweight. Despite sluggish job growth and housing weakness, the 20% decline in energy prices over recent months has fueled resilience in the sectors performance leading us to take a less cautious, if not overweight, stance, explains Alec Young, S&Ps equity strategist. In addition, our upgrade reflects an increasingly global profile, with many of the sectors most heavily weighted constituents now garnering a large share of their sales from fast growing middle classes in emerging economies, lessening the negative impact of a sluggish domestic recovery, in our view. The sector makes up 10.7% of the S&P 500. To put S&P Equity Strategy advice into action, investors would want to have 10.7% of their U.S. equity allocation in consumer discretionary stocks. The table on this page lists the 18 consumer discretionary stocks that garner a 5-STARS (strong buy) ranking from S&P equity analysts, who believe these stocks will significantly

Beth Piskora S&P Editorial

STOCK SCREEN OF THE WEEK

COMPANY / TICKER QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET P/E PRICE RATIO YIELD (%)

Chicos FAS / CHS Coach / COH Discovery Communications / DISCA Disney (Walt) / DIS DreamWorks Animation / DWA General Motors / GM Johnson Controls / JCI Magna International / MGA Nordstrom / JWN Polo Ralph Lauren / RL

B B+ NR A NR NR A B AABANR NR ANRA NR

Medium Medium Medium Medium High Medium Medium Medium Medium Medium Medium Medium Medium High Medium High Medium Medium

Growth Growth Growth Growth Growth NA Blend NA Growth Growth Blend Growth Growth Value Blend Growth Blend Blend

16 65 41 40 21 30 41 52 50 135 22 81 77 54 69 78 114 50

21 77 55 50 25 42 48 72 57 144 31 87 86 85 73 84 120 60

17.2 19.6 15.8 15.4 12.3 7.1 17.2 10.0 15.9 21.4 10.6 23.4 17.2 7.4 15.3 45.3 15.7 14.0

1.3 1.4 Nil 1.0 Nil Nil 1.6 1.9 1.8 0.6 2.9 1.4 2.5 Nil 1.7 Nil 2.2 2.0

Superior Industries / SUP Tiffany / TIF Time Warner Cable / TWC TRW Automotive / TRW Tupperware Brands / TUP Under Armour / UA

VF / VFC Viacom / VIA.B

Master List issue. *Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. See definitions on page 2. Based on S&P estimated fiscal 2011 earnings. Source: S&P Equity Research.

outperform over the coming 12 months. Another alternative is an exchangetraded fund, the Select Sector SPDR-

Consumer Discretionary (XLY 40 Overweight), which holds positions in every consumer discretionary stock in the S&P 500.

Oilfield Service ETFs Hope to Win in Iraq (Continued from page 5)

the exception of Saudi Arabia, said Schlumberger Chairman & CEO Andrew Gould in the Financial Times last month, which also noted the company had five rigs drilling in Iraq and expects to have 10 in operation by early next year. iShares Dow Jones US Oil Equipment & Services Index Fund and PowerShares Dynamic Oil & Gas Services Portfolio are two S&P Marketweight ranked exchangetraded funds (ETFs) with broad exposure to oilfield services companies, both listing Halliburton, Baker Hughes, Schlumberger, and Nabors Industries in their top-ten holdings. SPDR S&P Oil & Gas Equipment & Services ETF, also ranked Marketweight, includes in its top ten: Cameron International, which installed more than half the surface wellheads and block preventers at Iraqs wells, and Houston-based National Oilwell Varco, also a provider of oil equipment and services in Iraq.

STANDARD & POORS THE OUTLOOK JULY 20, 2011

11

High-Quality Capital Appreciation Portfolio

12/31/2010 7/08/2011 Base Currency: US Dollar
To enter the High-Quality Capital Appreciation Portfolio, a stock must have an S&P Quality Ranking of A- or better, which indicates an above-average 10-year history of earnings and dividend growth and stability. A recent S&P study showed that over the long term, stocks with the best S&P Quality Rankings outperform lower quality stocks on a risk-adjusted basis. Stocks must have a four- or five-STARS ranking to enter this portfolio. S&Ps Senior Portfolio Group may replace any stock in the portfolio with another stock at any time, for reasons that can include a downgrade in the S&P STARS and S&P Quality Ranking of the constituents or other fundamental factors. The High-Quality Capital Appreciation Portfolio outperformed its benchmark from the beginning of the year through July 8, rising 10.0% vs. a 6.9% advance in the S&P 500. The data we have provided show which stocks contributed to, or detracted from, the portfolios performance year-to-date through July 8.

CURRENT HIGH-QUALITY CAPITAL APPRECIATION PORTFOLIO

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET PRICE P/E RATIO YIELD (%)

Apache / APA C.H. Robinson Worldwide / CHRW Church & Dwight / CHD CVS Caremark / CVS Express Scripts / ESRX Fastenal / FAST Hudson City Bancorp / HCBK Intl Business Machines / IBM McKesson / MCK Mylan / MYL Nike / NKE Oracle / ORCL United Technologies / UTX VF / VFC Wal-Mart Stores / WMT

5 4 4 5 5 5 4 5 5 5 4 5 4 5 5

AA+ A+ A+ AA A A+ AAA+ AA+ A A+

High Low Low Medium Medium Medium Low Medium Medium Medium Medium Medium Low Medium Low

Blend Growth Growth Blend Growth Growth Blend Growth Blend Growth Growth Growth Growth Blend Blend

120 79 42 37 52 34 8 174 83 24 92 32 88 114 54

160 95 44 46 65 48 12 196 100 29 100 40 96 120 65

10.3 29.4 19.2 13.2 16.0 27.9 10.1 13.1 13.4 12.0 18.3 13.6 16.4 15.7 11.9

0.5 1.5 1.6 1.4 Nil 1.5 4.0 1.7 1.0 Nil 1.3 0.8 2.2 2.2 2.7

*Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. Price/earnings ratios are based on Standard & Poors estimated fiscal 2010 per-share earnings. See definitions on page 2. Source: S&P Equity Research.

LEADERS
COMPANY NAME YTD RETURN (%)

LAGGARDS
COMPANY NAME YTD RETURN (%)

VF Fastenal Intl Business Machines McKesson Church & Dwight Mylan United Technologies CVS Caremark Nike Oracle C.H. Robinson Worldwide Occidental Petroleum* Wal-Mart Stores

31.49 22.28 20.26 20.12 18.89 18.22 14.77 9.58 9.15 8.43 1.61 0.46 0.28

Procter & Gamble** Express Scripts Apache Hudson City Bancorp

-0.51 -0.64 -1.90 -35.01

The Outlook
Intelligence for the Individual Investor

The YTD Return column represents the performance for the period of time the security was in the portfolio, so if the security was not in the portfolio for the full YTD period, its the performance of the security from when it was added to the portfolio to 7/8/11. *Replaced on January 18. **Replaced on April 18.

12 STANDARD & POORS THE OUTLOOK JULY 20, 2011

S&Ps Platinum Portfolio

This portfolio potentially offers the best of both worlds: S&Ps STARS ranking system, based on fundamental analysis, and Fair Value, S&Ps proprietary quantitative model.
Each Platinum stock initially carries the highest possible investment ranking from Standard & Poors equity analysts and our Fair Value system. S&Ps STARS rankings are based on expected total return potential. Stocks with the fiveSTARS ranking are expected to outperform the total return of the S&P 500 index by a wide margin over the coming 12 months.

PLATINUM PORTFOLIO
RANKINGS FAIRCURRENT TICKER VALUE STARS QUALITY PRICE RANKINGS FAIRCURRENT TICKER VALUE STARS QUALITY PRICE

Aeropostale Apple Computer Aspen Insurance Avnet Celgene Chevron

ARO

3 5 4 5 5 5 5 3 5 5 3 5 5 5 5 5 5 3 3 4 5 4 5 3

B+ B NR C BA B B+ B B+ B+ B A+ NR AA+ B+ B B+ B+ A+ B NR A-

17 358 26 30 61 105 16 15 96 65 37 18 37 21 52 82 93 12 62 24 37 41 596 35

Intl Business Machines

Jacobs Engineering Johnson Controls Kyocera Marvell Technology Medtronic MEMC Electronic MetroPCS Microsemi Monolithic Power Sys. Mylan NICE-Systems Oracle Oshkosh Philip Morris Randgold Resources Reliance Steel & Alum. Rio Tinto Thermo Electron Travelers Wal-Mart Stores Western Digital Xerox

IBM JEC JCI KYO

5 5 2 5

5 5 5 4 5 3 3 5 5 4 5 5 5 5 5 4 5 5 5 5 5 1 5

A+ B+ A NR NR A BNR B NR ANR AANR NR B+ NR B AA+ B+ B

174 41 41 104 15 38 8 17 20 14 24 36 32 31 66 87 48 70 62 58 54 37 10

AAPL 5 AHL AVT CELG CVX CHS 5 5 4 5 3

MRVL 5 MDT WFR PCS 5 5 4

S&P STARS rankings are based on expected total return potential.

S&Ps Fair Value model employs a proprietary algorithm to calculate the price at which a stock should be trading at current market levels. Fair Value ranks stocks in five tiers; those with the 5 designation are considered to be the most undervalued and to have the greatest price appreciation potential. Stocks are removed only if they lose the top ranking in both systems. Year-to-date through July 8, the portfolio rose 10.1%, vs. a gain of 6.9% in the S&P 500 on a capital appreciation basis.

Chicos FAS Cisco Systems Cliffs Natural Resource Coach Computer Sciences CSG Systems Intl CVS Caremark DreamWorks Animation Express Scripts ExxonMobil FedEx Fifth Third Bancorp Fiserv GameStop General Mills Gilead Sciences Google Hewlett-Packard

CSCO 5 CLF COH CSC 5 2 5

MSCC 5 MPWR 5 MYL NICE 4 4

CSGS 5 CVS DWA 4 4

ORCL 5 OSK PM 5 4

ESRX 5 XOM FDX FITB FISV GME GIS GILD 4 5 5 5 5 2 5

GOLD 5 RS RIO TMO TRV 5 5 5 5

WMT 5 WDC XRX 5 5

GOOG 5 HPQ 5

Master List issue. See definitions on page 2.

Performance calculations do not take into account reinvestment of dividends, capital gains taxes, or brokerage commissions and fees. If the foregoing had been factored into the portfolios investment performance, it would have been lower. This performance calculation also does not take into account timing differences between the portfolio selections and purchases made based on those selections by actual investors. Over certain periods, the portfolio incurred losses and over time the portfolio is expected to continue to pose a risk of negative investment returns. Because the portfolio has a high turnover rate, we believe it is best suited for tax-deferred accounts such as IRAs and is less suited for other accounts. Investors should seek financial advice before investing based on the portfolio. This portfolio does not address the specific investment objectives, financial situation, and particular needs of any person. Stocks in the portfolio will not be suitable for all investors. Past performance is not a valid indicator of future results. Source: S&P Equity Research.