Outperformers That Still Look Cheap

7/30/2012


What’s that feeling? The creeping fear of another painful recession in the making. What’s that sound? The trickle of funds flowing in and mostly out of equity mutual funds, just a subdued shuffling of money as hordes of investors stay on the sidelines. But seeing is believing, and 59% of our current recommendations show positive returns over the past year. Hurt by an abundance of economic concerns in the U.S. and overseas, the S&P 500 Index returned 2% over the last year and lost 2% over the last three months. However, the index managed a 36-month return of 45%.

Adjustments to profit forecasts often move stock prices, sometimes in unexpected ways. The 2012 profit-growth estimate for the S&P 500 Telecommunications Sector Index has fallen by nearly 10 percentage points since Jan. 1 — only energy and materials have seen their outlooks dim by more. Yet the telecom sector has returned 14% so far this year, outperforming all other sectors, as investors jump at the space’s perceived safety and fat dividend yields. But that strategy may be played out, considering the average telecom stock earns a middling Quadrix® Value score of 54 and trades at 18 times trailing earnings.

SECTOR COMPARISON
---------- Total Return ----------
Average
--- Quadrix Scores ---
S&P 500 Sector Indexes
(No. Of Stocks)
Last 3
Months
(%)
Last 12
Months
(%)
Last 36
Months
(%)
Average
Trailing
P/E Ratio
Value
Overall
Cons. Discretionary (81)
(2)
7
80
18
54
62
Consumer Staples (41)
3
14
55
17
42
50
Energy (44)
(2)
(12)
36
14
66
59
Financials (81)
(6)
(5)
20
18
60
52
Health Care (52)
1
9
43
17
56
68
Industrials (61)
(5)
(3)
59
15
63
64
Materials (30)
(4)
(11)
33
17
62
60
Technology (71)
(4)
6
49
16
59
49
Telecom (8)
10
17
59
18
54
44
Utilities (31)
7
14
43
16
46
41
S&P 500 Index (500)
(2)
2
45
17
57
57
Note: Quadrix scores are percentile ranks, with 100 the best.

The trick, of course, is to identify stocks capable of extending their rallies. Five A-rated stocks have outperformed the S&P 500 Index by more than four percentage points in the last three-month, 12-month, and 36-month periods — and still score at least 60 in Quadrix for Value: CF Industries ($194; CF), Comcast ($31; CMCSa), McKesson ($93; MCK), Target ($61; TGT), and U.S. Bancorp ($33; USB). Attractive Value scores suggest these stocks could have more room to run.

In addition, all five of the stocks are expected to grow profits at least 10% in the current fiscal year and have seen the current-year estimate rise over the last three months. Two of our top picks are reviewed below.

Comcast’s ($31; CMCSa) total return has topped the S&P 500 Index by 9% over the last three months, 26% over the past year, and 84% over the past 36 months. Comcast scores a 90 for Performance, but a Value score of 60 suggests the stock is not overextended.

Comcast’s cable business is pushing through rate hikes, while its NBC broadcast division has negotiated 6% to 7% higher rates on 78% of its advertising inventory. NBC received $1.8 billion in advertising commitments for the fall television season, up about $100 million from last year. Free cash flow soared 56% to $8.67 billion in the 12 months ended March. The cable-TV provider raised its dividend 44% in February. Yielding 2.1%, Comcast is rated Long-Term Buy.


The largest U.S. pharmaceuticals distributor, McKesson ($93; MCK) should see improved profitability as more blockbuster drugs lose patent protection and face generic competition. Analysts project 4% sales growth for the June quarter, with earnings per share up 17% to $1.48. McKesson was scheduled to post results July 26, the day after the Forecasts went to press.

Rising profit estimates have boosted McKesson shares, which set an all-time high in July. The stock outperformed the S&P 500 Index by 5% in the last three months and 12% in the past year. Yet McKesson remains reasonably valued at 13 times estimated 2012 earnings, 8% below the industry median. Scoring above 90 for both sector-specific ranks, McKesson is a Buy and a Long-Term Buy.


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