Don't Write Off These Laggards

3/19/2012


U.S. stocks have raced out of the gates in 2012, reflecting an improved outlook for U.S. economic growth, solid December-quarter results, and a rebound in foreign bond and equity markets. With the exception of utilities, every S&P 500 sector has gained so far this year.

Through March 13, 428, or 86%, of S&P 500 stocks have managed a positive return this year. The average return is a healthy 12.4%, with a median of 11.0%. Financial stocks lead with an average of 17.4%, followed by consumer discretionary at 16.9%. Utility stocks, strong performers in 2011, are down 0.3%.

DISSECTING THE S&P 500 INDEX
As of March 13, the average stock in the S&P 500 Index had returned 12.4% so far this year. Consumer-discretionary, technology, and financial stocks have set the pace, averaging returns above 16%.
---------- Year-To-Date ----------
---------- Last 12 Months ----------
Industry (No. Of Cos.)
Average
Return
(%)
Median
Return
(%)
% Of
Winners
Average
Return
(%)
Median
Return
(%)
% Of
Winners
Cons. Discretionary (80)
16.9
14.5
90
17.2
14.6
74
Consumer Staples (42)
4.2
2.8
74
15.8
13.7
88
Energy (43)
9.8
7.9
84
(2.9)
(1.1)
47
Financials (81)
17.4
15.6
95
0.1
1.3
52
Health Care (52)
10.6
9.3
88
11.4
6.2
81
Industrials (61)
12.1
11.4
90
6.2
5.4
62
Materials (30)
11.6
11.9
90
3.4
7.1
60
Technology (71)
16.7
16.2
92
6.7
7.3
66
Telecom Services (7)
5.5
6.1
71
(9.9)
3.4
57
Utilities (33)
(0.3)
(1.4)
42
16.3
17.8
94
S&P 500 Stocks
12.4
11.0
86
7.9
6.8
68

Over the past 12 months, 68% of S&P 500 stocks have posted positive returns, with an average return of 7.9% and a median of 6.8%. Energy has the lowest percentage of winners (47%), followed by financials (52%), and telecom services (57%). Based on average returns, eight groups have posted gains, paced by a 17.2% increase for consumer discretionary.

History suggests you should pay attention to stocks with strong share-price momentum, but the market can temporarily leave shares of quality companies behind. With so many stocks up sharply year-to-date and so many portfolio managers chasing performance, now seems a good time for patient investors to look for undervalued and underappreciated companies that have delivered solid results. For one reason or another, the 15 companies listed in the table below have seen their shares tread water. All 15 have trailed the S&P 500 Index over the past year. Yet over the last four quarters, all 15 posted per-share earnings that either matched or outstripped consensus estimates. The stocks sport Quadrix® Overall scores of at least 74, with an average of 87. And with an average Value score of 82, the shares seem attractively priced.

Agilent Technologies ($45; A) has risen 29% so far this year but remains 14% below the July high that preceded a precipitous drop. The shares are down slightly over the last 12 months, underperforming the S&P 500 Index by about 10%. Weak price action belies Agilent's operational strength. Over the last 12 months, per-share profits rose 35% and operating cash flow 60%.

The consensus projects per-share-profit growth of 8% in the fiscal year ending October 2012 and 10% in fiscal 2013. A combination of acquisitions and heavy spending (about 10% of revenue) on research and development suggests new products can help Agilent exceed those targets. At less than 15 times trailing earnings, Agilent trades at an 11% discount to the median maker of life-sciences tools and a 42% discount to its three-year average P/E. Agilent is a Focus List Buy and a Long-Term Buy.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Jan '12
0.69
21.1
0.3
Oct '11
0.81
35.0
4.3
Jul '11
0.73
52.1
5.4
Apr '11
0.65
54.8
14.0

Apache ($108; APA) shares fell 8% over the last 12 months, depressed by political unrest in Egypt (about 22% of 2011 production and 10% of proved reserves) and natural-gas prices that slumped to 10-year lows this month. But acquisitions have enlarged Apache's portfolio of oil and liquefied natural gas, which accounted for 50% of 2011 production and 80% of revenue.

Management has vowed to “live within our cash flow,” planning to spend $9.5 billion on drilling in 2012, up 19%. Apache suggested that cash provided by operations should build on last year's record $9.95 billion. Production is projected to rise 7% to 13%, which would mark a fourth straight year of growth. Apache is a Long-Term Buy.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Dec '11
2.94
34.2
2.4
Sep '11
2.95
34.7
4.6
Jun '11
3.22
32.0
4.2
Mar '11
2.87
36.7
10.0

BMC Software ($39; BMC) warned in October that a wave of defections from its sales team would hurt operations in the next few quarters. Following the announcement, the shares plunged 15% through the end of 2011. Management used that opportunity to repurchase more than 6.5 million shares in the December quarter — the most stock BMC has bought back in a single quarter in more than 20 years.

In February, BMC said it is making progress on rebuilding its depleted sales force. Despite its problems, BMC expects cash provided by operations to climb 1% to 8% in fiscal 2012 ending March — and forecasts more growth in fiscal 2013. BMC's problems won't clear up overnight, but the stock remains a Buy and a Long-Term Buy based on its modest valuation, healthy cash flow, and takeover potential.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Dec '11
0.93
18.0
13.4
Sep '11
0.87
6.0
7.4
Jun '11
0.72
16.0
5.9
Mar '11
0.78
20.0
1.3

Dover ($65; DOV) shares have underperformed the S&P 500 Index by 6% over the past year. The diversified manufacturer faces stiff headwinds, mostly from Europe and the semiconductor market. But Dover said in January that it expects per-share earnings to advance 10% to 17% in 2012; the consensus calls for 15% growth, allowing room for upside. Dover has exceeded analysts' estimates in each of the last 11 quarters. Sticking to its steady diet of niche acquisitions, Dover agreed in February to purchase Maag Group, a Swiss polymer and petrochemicals company with annual revenue of $170 million. At 13 times consensus year-ahead earnings, Dover trades 13% below the median for the industrials sector. Dover is a Long-Term Buy.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Dec '11
1.07
13.8
4.9
Sep '11
1.20
22.4
7.1
Jun '11
1.19
30.8
5.3
Mar '11
0.92
41.5
2.2

J.P. Morgan ($43; JPM) finds itself in a shifting financial landscape replete with tougher regulations and starved for merger deals. The bank also remains ensnared in a legal thicket stemming from the financial crisis. J.P. Morgan agreed to pay $5.3 billion to settle federal and state allegations that it foreclosed on thousands of houses without properly reviewing the paperwork. But it still faces at least two federal investigations concerning mortgage-backed securities.

J.P Morgan's total revenue fell 5% in 2011, but its commodities division generated record sales that exceeded $2.8 billion, outperforming longtime leaders Goldman Sachs ($125; GS) and Morgan Stanley ($19; MS). CEO Jamie Dimon expects net income to grow 26% to $24 billion in 2012, partly powered by cost cuts and new bank branches. J.P. Morgan has raised its quarterly dividend 20%; for more details, see Portfolio Review. The stock is a Long-Term Buy.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Dec '11
0.90
-19.6
0.0
Sep '11
1.02
1.0
12.1
Jun '11
1.27
16.5
5.0
Mar '11
1.28
73.0
10.3

Safety concerns centering on a defibrillator lead contributed to St. Jude Medical ($43; STJ) plunging 25% in the last four months of 2011. But management's 2012 guidance, issued in January, indicated that the number of defective leads might be smaller than previously feared. The shares have jumped 25% so far in 2012, more than triple the gain of the S&P 500 Health Care Sector Index.

St. Jude's rich pipeline of prospective products should help offset lingering weakness in the cardiac-rhythm-management unit (about half of revenue). St. Jude expects per-share earnings to rise 5% to 6% this year to $3.43 to $3.48, a range management called conservative. Yielding 2.2%, St. Jude Medical is a Long-Term Buy.

Quarter
EPS
($)
Change
(%)
Surprise
(%)
Dec '11
0.86
14.7
2.4
Sep '11
0.78
8.3
2.6
Jun '11
0.85
7.6
1.2
Mar '11
0.80
6.7
2.6

 

LAGGARDS THAT COULD BE LEADERS
All 15 of the A-rated stocks below have underperformed the S&P 500 Index over the last year despite matching or exceeding profit estimates in each of the last four quarters. Stocks recommended for purchase are listed in bold.
12-Month
----- Return -----
-- EPS Surprise --
Estimated
----- Current-Year -----
Estimated
------ Next Year ------
----- Quadrix Scores -----
Company (Price; Ticker)
Stock
(%)
Relative
To S&P
500
(%)
Last
Quarter
(%)
Four-
Quarter
Avg.
(%)
EPS
($)
Change
(%)
P/E
EPS
($)
Change
(%)
P/E
Value
Perfor-
mance
Overall
Adobe Systems
($34; ADBE)
(1.1)
(10.5)
10.6
5.4
2.42
3
14
2.65
10
13
67
78
92
AGCO ($51; AGCO)
(0.5)
(9.9)
8.5
41.3
5.07
13
10
5.36
6
10
94
46
99
Agilent Technologies
($45; A)
(0.5)
(9.9)
0.3
6.0
3.18
8
14
3.50
10
13
76
76
93
Apache ($108; APA)
(8.5)
(17.9)
2.4
5.3
12.40
5
9
13.89
12
8
93
45
99
Applied Materials
($13; AMAT)
(14.4)
(23.8)
54.3
17.7
0.96
(26)
13
1.14
18
11
90
52
91
BMC Software
($39; BMC)
(21.9)
(31.2)
13.4
7.0
3.32
11
12
3.53
6
11
85
29
91
Deere ($82; DE)
(5.1)
(14.5)
3.3
5.2
8.02
21
10
8.47
6
10
73
20
90
Dover ($65; DOV)
3.5
(5.8)
4.9
4.9
4.89
15
13
5.46
12
12
70
50
81
DuPont ($53; DD)
2.9
(6.4)
6.1
10.8
4.26
8
12
4.78
12
11
67
45
74
General Dynamics
($73; GD)
(1.4)
(10.7)
1.7
2.7
7.31
0
10
7.69
5
10
84
60
75
Halliburton
($35; HAL)
(19.8)
(29.2)
0.6
4.6
3.92
17
9
4.56
16
8
91
12
92
J.P. Morgan Chase
($43; JPM)
(2.6)
(11.9)
0.0
6.9
4.72
5
9
5.38
14
8
93
68
82
MetLife ($39; MET)
(12.1)
(21.4)
4.8
6.0
5.13
2
8
5.61
9
7
99
72
95
St. Jude Medical
($43; STJ)
(10.6)
(20.0)
2.4
2.2
3.46
6
12
3.69
6
12
74
40
77
Zimmer ($63; ZMH)
2.1
(7.2)
1.4
2.5
5.26
9
12
5.64
7
11
75
62
81
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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