Some Stocks Are Easier To Own

8/6/2012


There is no such thing as a permanent Hold. Even the best companies lose their way, or issue bad news that points to more bad news, or deliver excellent price gains and become expensive.

That said, we acknowledge that for many investors, breaking up is hard to do. Most of us probably own stocks we should have sold long ago. Fortunately, we do have some good news for investors who have trouble letting go — our Quadrix stock-rating system can help identify stocks safer to buy and hold.

EASY RIDING
To generate the Easy Hold score, we rely on seven statistics that tend to provide steady, if not always exceptional, returns. In rolling 12-month periods since the start of 1995, the top one-fifth of S&P 1500 stocks as measured by the Easy Hold score delivered positive returns 84% of the time (winning percentage) and averaged 14.4% returns. Standard deviation measures the dispersion of returns around the average.
Avg.
S&P
1500
Stock
----------------------- Top Quintile As Measured By . . . -----------------------
----------------------------- Quadrix Scores -----------------------------
Easy
Hold
Overall
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Avg. 12-Month
Return (%)
12.6
14.4
15.2
13.1
15.4
13.3
12.3
9.1
12.3
Standard
Deviation (%)
20.8
17.8
20.4
21.1
27.0
20.6
18.4
21.5
20.9
Winning %
76
84
81
76
75
78
76
73
76
Note: Earnings Estimates data only goes back to 2004.

We reviewed dozens of statistics, focusing on those most effective at predicting steady returns. Then we created an Easy Hold score comprised of seven metrics. Three of the statistics measure quality (long-term operating growth and return on equity), two measure momentum (short-term operating results), one financial strength, and one earnings-estimates revisions. Notably absent are valuation ratios. Stocks with the lowest valuations tend to earn high returns, at the cost of high volatility. 

The top quintile (one-fifth) of S&P 1500 Index stocks as measured by the Easy Hold score outperformed the average stock in the index in 84% of rolling 12-month periods in back-tests since the start of 1995. We call this winning percentage.

While top Easy Hold scorers delivered more dependable and less volatile returns, they didn't match the performance of top Overall or Value scorers. In addition, as the nearby charts show, stocks with high Easy Hold scores don't match the fundamental strength of high Overall scorers.

The Overall score, which considers dozens of statistics in six categories, remains our best weapon in the fight to select exceptional stocks. But investors who prefer to buy and hold — or who simply have little stomach for volatility — might feel more comfortable with stocks that also earn high Easy Hold scores. The table below lists A-rated stocks that earn Easy Hold scores above 80 — as well as high Overall scores, which suggest broad-based fundamental strength. Two particularly attractive Easy Holds are reviewed below.

In the June quarter, Chevron's ($110; CVX) per-share profits fell 5% to $3.66 but topped the consensus by 13%. Revenue fell 9% to $62.61 billion. Earnings at the exploration-and-production unit fell 4% to $5.62 billion, hurt by lower oil and natural-gas prices and the shutdown of a Brazil oil field in the wake of a spill. Downstream earnings jumped 80% to $1.88 billion, mostly on higher margins for refined products.

Over the last three years, the company invested more than $65 billion in capital projects, mostly large offshore drilling operations. Oil and gas production fell 2.7% in the quarter, but Chevron expects better days ahead. Helped by the massive Gorgon and Wheatstone liquefied-natural-gas (LNG) projects off the coast of Australia, Chevron expects annual production growth of 4% to 5% from 2014 through 2017, after 1% gains in 2012 and 2013. Liquids (oil and LNG) account for nearly 70%  of company production, more than most of its peers, limiting exposure to weak U.S. natural-gas prices.

At eight times trailing earnings, Chevron trades at a 16% discount to its three-year average P/E ratio. A combination of attractive valuation, rich 3.3% yield, and production-growth potential exceeding that of its peers makes Chevron an appealing option for both aggressive and conservative investors. The stock is a Buy and a Long-Term Buy.


As an easy hold, KLA-Tencor ($51; KLAC) is more counterintuitive. The midsize (stock-market value of $8.52 billion) maker of semiconductor equipment is undeniably cyclical, and its profit history is uneven. But the market doesn't expect a smooth profit ride from stocks in this industry. Despite three consecutive quarters of profit declines, KLA-Tencor shares have risen 28% over the last year. Expectations are low — the company projects per-share profits will decline 19% to 36% in the September quarter — and profits have topped the consensus by at least 9% in each of the last three quarters, suggesting analysts don't have a good handle on KLA-Tencor.

In the June quarter, the company earned $1.49 per share excluding special items, down 1% but $0.18 above expectations. Sales were flat at $892 million, also topping the consensus. KLA-Tencor credited the outperformance to stronger-than-expected consumer demand for tablet computers and smartphones, as well as an unusually low tax rate. However, the company lowered its profit projections for the September quarter, suggesting that demand would slow in the second half. Shares rose on the news, probably because the lower guidance eliminated some of the uncertainty surrounding demand trends.  

KLA-Tencor trades at 11 times trailing earnings, 26% below its peer-group average and 34% below its own three-year norm. In the wake of a 14% dividend increase last month, the shares yield 2.7%. KLA-Tencor is a Buy.

For Easy Hold scores on every stock in the S&P 1500 Index, visit www.DowTheory.com/Go/Easy.

ATTRACTIVE EASY HOLDS
Below we list 18 A-rated stocks that score at least 80 in our Easy Hold metric, which considers seven statistics with a history of projecting steady returns. Stocks recommended for purchase are presented in bold.
12-Month
-- Growth --
3-Year Ann.
-- Growth --
---------- Quadrix Scores ----------
Easy
Hold
Score
Company (Price; Ticker)
Div.
($)
Yield
(%)
Trailing
P/E Ratio
Sales
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Momen-
tum
Value
Quality
Overall
Sector
Aflac ($44; AFL)
1.32
3.0
7
15
44
12
30
93
97
84
99
85
Financials
Agilent Tech.
($38; A)
0.40
1.0
12
10
30
9
40
71
83
92
96
91
Health Care
American Express
($58; AXP)
0.80
1.4
13
6
22
5
53
75
56
67
79
95
Financials
Apple ($611; AAPL)
2.65
0.4
14
48
68
57
78
79
68
100
95
86
Technology
CF Industries
($196; CF)
1.60
0.8
8
39
136
18
27
92
89
100
100
100
Materials
Chevron
($110; CVX)
3.60
3.3
8
6
17
8
18
25
83
73
73
81
Energy
CSX ($23; CSX)
0.56
2.4
13
5
13
6
18
53
66
88
88
99
Industrials
KLA-Tencor
($51; KLAC)
1.40
2.7
11
0
(6)
28
NA
22
72
87
70
97
Technology
McKesson
($91; MCK)
0.80
0.9
14
8
19
5
14
54
69
80
83
81
Health Care
Merck ($44; MRK)
1.68
3.8
11
3
40
28
(7)
80
52
55
80
95
Health Care
Microsoft
($29; MSFT)
0.80
2.7
11
5
1
8
19
49
75
88
83
93
Technology
Norfolk Southern
($74; NSC)
1.88
2.5
13
10
27
7
17
72
68
84
94
93
Industrials
Oracle ($30; ORCL)
0.24
0.8
12
4
14
17
21
64
74
96
96
97
Technology
TJX Companies
($44; TJX)
0.46
1.0
21
7
37
8
27
97
26
96
91
100
Technology
U.S. Bancorp
($34; USB)
0.78
2.3
13
4
27
5
47
92
60
49
92
90
Financials
UnitedHealth
($51; UNH)
0.85
1.7
10
8
8
8
17
71
83
86
92
92
Health Care
Wal-Mart Stores
($74; WMT)
1.59
2.1
16
7
11
4
11
74
45
79
84
99
Cons. Staples
Wells Fargo
($34; WFC)
0.88
2.6
11
(2)
11
7
59
72
79
51
92
85
Financials
Note: Quadrix scores and Easy Hold score are percentile ranks, with 100 the best.   NA Not Available.

 


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