Haves And Have-Nots
You've heard both sides of this argument:
• Buy stocks with price momentum, because stocks going up tend to continue going up.
• Buy stocks when they're out of favor, because quality companies down on their luck should recover.
Neither of those ideas are fundamentally wrong, and investors can make money either way.
As a whole, the top-performing groups have superior sales and profit growth and higher Quadrix Overall and Momentum scores. The weak performers average higher Value scores and lower price/earnings ratios.
While the discrepancy in Overall scores suggests the laggards are fundamentally weaker, some groups like Telecom Services — Wireless and Services — Education earn above-average Overall scores. Conversely, groups like Homebuilding and airlines possess plenty of price momentum but little investment appeal. For a look at Quadrix scores on more than 150 industry groups, visit www.DowTheory.com/Go/Groups.
Up 14% since we first recommended the stock in early February, Macy's ($40; M) shares hit a 57-month high in April. The stock has managed a 67% total return in the past year, while its industry group, department stores, delivered a median loss of 3%. Earning a Quadrix Performance score of 91, the stock has also outrun most of our research universe. Yet a Value score of 72 suggests the shares remain attractively valued.
The price momentum reflects Macy's ability to gain share in the department-store market while also expanding operating profit margins. For 15 consecutive months, Macy's monthly growth in same-store sales has exceeded the average for department stores tracked by Thomson Reuters. During that stretch, Macy's averaged 5.1% growth and topped its peer group by an average of 1.6%. In a March buoyed by an early Easter, Macy's reported 7.3% higher same-store sales, ahead of the 5.9% average for its peer group. Looking ahead to April, Macy's forecasts 1% to 1.3% growth, versus 10.8% growth in the same month last year. Macy's is a Focus List Buy and a Long-Term Buy.
PPL ($27; PPL) yields 5.3% and earns a Value score of 85. At 10 times trailing earnings, shares trade 29% below their three-year average P/E ratio and 37% below the median utility. Yet PPL sharply outgrew its industry in 2011, with per-share earnings advancing 9% on a 49% jump in revenue, well ahead of median growth of 2% and 1% for diversified utilities. Acquisitions in November 2010 and May 2011 drove much of PPL's gains, but the company's return on assets also rose to its highest level in three years, suggesting improved efficiency as well.
The consensus projects per-share profits will fall 14% in 2012 but rise at an annualized rate of 6% over the next five years. PPL expects 70% of 2012 per-share earnings to come from its regulated electric and natural-gas utilities. Capital investments are projected to increase PPL's regulated asset base by 8% over the next five years, setting the stage for future sales and profit growth. The company also operates a power-generation and marketing business. PPL is a component of our Top 15 Utilities portfolio.
Rogers Communications ($40; RCI) has delivered a 6% total return to investors so far this year while the median wireless telecom provider managed a flat return. Despite that solid return, the shares still look cheap, earning a Value score of 72. At 13 times trailing earnings, Rogers trades 8% below its three-year average and in line with its peer group. The next catalyst for Rogers, the March-quarter earnings report, is scheduled to arrive April 24. The consensus calls for earnings per share of $0.76, flat compared to last year, on 2% higher revenue. But the company has exceeded consensus profit estimates by 4% or more in each of the last four quarters.
Growth is moderating for Canadian telecoms, and rising competitive pressures in the cable and wireless markets threaten operating profit margins. Rogers expects to grow sales in all three segments this year, with the strongest gains likely at its media business. Rogers expects up to 5% higher free cash flow for the year. The company hiked its quarterly dividend 11% in February. Rogers has also reportedly discussed partnering with Apple ($610; AAPL) on a television set, which could help revive growth in coming years. Yielding 4.0%, Rogers is a Long-Term Buy.