How We Play Industries

3/5/2012


The Forecasts doesn't make blanket industry or sector recommendations.

For example, while agricultural-chemical stocks average Quadrix® Overall scores of 82, you will never hear us advising readers to buy the group. Why not? Because not every high-scoring stock is a good investment, and even in groups with high average Overall scores you'll find some stinkers with weaker scores.

What we might say, however, is that the agricultural-chemical group has solid fundamentals, and of the several high-scoring stocks in that group we prefer CF Industries ($192; CF).

We do pay attention to sector and industry trends, and not surprisingly we find many of our recommendations in groups with strong average Overall scores. For a breakdown of more than 150 industry groups, visit www.DowTheory.com/Go/Groups.

In the table below, we present more information on the 20 high-scoring groups and list A-rated stocks in those groups. In the following paragraphs, we review three of those stocks.

AutoZone ($376; AZO) shares are on cruise control, scoring above 80 for Quadix Overall in 24 consecutive months and producing a total return of 16% so far in 2012 and 46% over the last 12 months. Industry trends also tilt in favor of AutoZone, a leading retailer and distributor of replacement auto parts. The average age of U.S. automobiles has climbed to a record 10.8 years, and Americans now hold on to new cars for roughly six years, 27% longer than before the recession. U.S. gasoline demand continues its yearlong decline, but better fuel economy has also contributed to the slowdown.

For the quarter ended Feb. 11, AutoZone earned $4.15 per share, up 24% and $0.11 above the consensus. Revenue rose 9% to $1.80 billion, while U.S. same-store sales grew 5.9% on top of 9.5% growth in the year-earlier period. U.S. commercial sales rose 25% to $267 million. AutoZone, with 13 straight quarters of at least 20% growth in per-share profits, is a Buy and a Long-Term Buy.


CF Industries ($192; CF) delivered record sales (up 54%), cash provided by operations (up 74%), and earnings per share (up more than 300%) in 2011. The stock has rallied 17% since we recommended it in August but still trades at just eight times trailing earnings, 25% below its three-year average. New supply coming online in the Middle East could pressure prices for the company's nitrogen fertilizer (82% of 2011 sales), but demand hovers near record levels. CF Industries anticipates a strong season for U.S. corn, a fertilizer-intensive crop poised to benefit from an early planting season and the global shortage caused by drought conditions in South America.

Free cash flow, up 98% to a record $1.76 billion last year, should help irrigate internal investments and shareholder returns. Capital spending is projected to surge 62% to $400 million this year, an all-time high. In the last six months of 2011, CF Industries shaved nearly 9% from its share count, paying an average price of about $153 for its shares. Roughly $500 million remains on the share-repurchase authorization, enough to buy back 4% of outstanding shares at current prices. Moreover, strong profit growth — Wall Street envisions annual earnings per share rising at a 20% annual pace over the next five years — could supply the essential nutrients for a bumper dividend in the years ahead. CF yields just 0.8% but hiked the payout 300% in August. CF Industries is a Focus List Buy and a Long-Term Buy.


The first waves of baby boomers are rolling into Medicare, potentially adding billions in new revenue for companies offering Medicare Advantage coverage. UnitedHealth Group ($56; UNH) is a leader in the managed-care group, with both sector-specific ranks exceeding 90. Its Overall score has topped 80 at the end of every month in the last two years. The insurer's outlook brightened in February when the White House issued 2013 payment guidelines for Medicare Advantage, private plans that offer comprehensive care to Medicare beneficiaries. The official reimbursement rate won't likely be released until April, but the unofficial estimate exceeded analysts' expectations.

Medicare Advantage, UnitedHealth's fastest-growing customer segment in each of the past two years, grew by 117,000 members, or 5%, in February with the acquisition of privately held XLHealth. Specializing in plans for Medicare recipients with special needs, XLHealth is expected to add about $2 billion in annual revenue. Also in February, UnitedHealth acquired a pair of Florida health plans with a total of 85,000 Medicare Advantage members.

UnitedHealth is introducing cloud-based initiatives aimed at making the retrieval of patent records more efficient and also plans to overhaul its payment system to doctors and hospitals by aligning payments to better and more efficient care. Projected to grow revenue 8% to $109.61 billion this year, UnitedHealth Group is a Buy and a Long-Term Buy.

TOP STOCKS IN TOP GROUPS
Below we list 23 A-rated stocks in top-scoring industry groups. Stocks recommended for purchase are presented in bold. Yields, Quadrix scores, returns, P/E ratios, and growth rates for industries reflect averages.
12-Month Returns
--- Since 1994 ---
---------- Quadrix Scores ----------
Total
-- Return --
1-Year
--- Growth ---
Est.
5-Yr.
EPS
Growth
(%)
Industry
Company (Price; Ticker)
Average
Stock In
Industry
(%)
% Of
Periods
Positive
(%)
Div.
Yield
(%)
Momen-
tum
Value
Quality
Overall
YTD
(%)
12
Mos.
(%)
P/E
Ratio
Sales
(%)
EPS
(%)
Chemicals — Agricultural
5.4
58
2.0
77
58
91
82
21
(9)
17
43
51
20
CF Industries ($192; CF)
0.8
95
92
100
99
32
37
8
54
185
18
Banks
15.8
74
3.2
50
82
60
79
17
(5)
11
6
17
13
U.S. Bancorp ($29; USB)
1.7
86
78
41
91
8
7
12
3
37
9
Wells Fargo ($31; WFC)
1.5
56
89
51
88
14
(1)
11
(6)
23
10
Oil & Gas — Integrated
17.7
86
3.0
59
79
66
77
13
0
10
25
25
13
Chevron ($110; CVX)
3.0
65
89
77
87
4
9
8
25
40
1
ConocoPhillips ($77; COP)
3.4
56
89
63
80
7
3
9
31
43
(3)
Exxon Mobil ($87; XOM)
2.2
52
86
63
75
3
4
10
27
35
5
Occidental Petroleum
($105; OXY)
2.0
80
82
88
95
13
5
13
26
49
16
Consumer Finance
9.5
72
1.4
62
69
68
73
11
5
14
9
22
15
American Express
($54; AXP)
1.3
76
69
68
86
14
25
13
7
29
12
Retail — Automotive
7.4
68
0.4
70
58
61
72
20
22
17
11
18
18
Advance Auto Parts
($86; AAP)
0.3
88
58
89
96
23
37
17
4
29
15
AutoZone ($376; AZO)
0.0
84
46
94
88
16
46
18
8
26
15
Steel
5.2
59
1.8
67
77
54
70
14
(14)
14
25
31
12
Retail — Homefurnishing
(0.6)
46
0.4
69
39
70
69
21
24
31
8
20
15
Bed Bath & Beyond
($60; BBBY)
0.0
87
59
93
90
4
25
16
9
32
16
Chemicals — Diversified
7.6
63
1.8
54
68
61
68
26
0
13
18
17
11
DuPont ($51; DD)
3.2
60
69
69
68
13
(3)
13
20
19
10
Insurance — Life & Health
9.0
72
1.7
46
85
46
68
16
(3)
14
0
4
10
Aflac ($47; AFL)
2.8
79
97
69
95
9
(18)
7
7
(16)
10
Health Care — Mgd. Care
9.6
69
0.4
48
66
65
68
14
30
13
5
0
12
Aetna ($47; AET)
1.5
93
87
87
99
11
27
9
(1)
33
11
UnitedHealth Group
($56; UNH)
1.2
51
73
84
89
10
33
12
8
12
11
Industrial Distributors
9.6
66
1.6
72
51
59
67
18
13
18
23
37
15
Services — Education
1.2
41
0.7
41
72
75
67
1
(12)
17
12
(5)
20
Housewares & Specialties
2.5
60
1.5
53
76
57
67
9
11
10
7
21
10
Construction/Farm Eq.
10.9
70
0.8
71
56
57
66
25
(1)
17
33
38
18
AGCO ($52; AGCO)
0.0
87
93
92
100
22
(4)
12
27
156
17
Caterpillar ($116; CAT)
1.6
83
67
85
96
28
15
15
41
80
23
Deere ($83; DE)
2.0
76
72
90
93
8
(6)
12
20
26
11
Technology Distributors
5.1
65
0.7
54
75
59
66
8
3
13
13
29
12
Cable & Satellite
26.1
97
1.4
51
64
68
66
14
4
20
11
13
18
Comcast ($29; CMCSa)
2.2
80
67
83
92
24
16
19
47
21
15
DirecTV Group ($46; DTV)
0.0
66
88
97
90
8
0
15
13
41
19
DISH Network ($29; DISH)
0.0
66
80
81
90
3
36
10
10
27
8
Chemicals — Commodity
4.9
60
0.9
56
64
64
65

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