Looking For Growth At A Good Price

10/8/2012


Our recommended stock-market exposure depends on the status of the Dow Theory and the opportunities available in individual stocks. We currently recommend you keep 10% to 15% of equity portfolios in a short-term bond fund as a partial hedge, largely because the Dow Transports have not confirmed new highs in the Dow Industrials since February.

Increasingly, though, we're also worried that stocks have rallied sharply even as profit expectations have been cut. The median stock in the S&P 500 Index now trades at 15 times expected current-year earnings, less than 5% below the nine-year norm. Still, it's a mistake to let medians and averages define your opportunity set. We're still finding quality stocks with attractive valuations and solid profit outlooks, and our buy lists compare favorably to the average S&P 500 stock on both valuation and expected growth. (See table below.)

However, we are more skeptical regarding consensus 2013 profit forecasts than we were in early June, and the S&P 500 Index has gained nearly 14% since June 4. We are especially dubious of the profit-growth rebounds forecast for cyclical companies tied to the global economy. That skepticism, along with declining Quadrix scores, explains this week's rank changes.

Our Long-Term Buy List has the lowest turnover of our buy lists. But we'll drop any stock if we no longer feel it has superior two- to four-year potential. Apache ($87; APA) and CSX ($21; CSX) are being dropped from the Long-Term Buy List. Their replacements, BB&T ($33; BBT) and Thermo Fisher Scientific ($60; TMO), are reviewed in Portfolio Review.

Both Apache and CSX have seen their Quadrix Overall scores drop below 75, hurt by poor scores for Momentum, Earnings Estimates, and Performance. While both stocks are fairly cheap, consensus 2013 profit forecasts for both seem optimistic.

On our Buy List, limited to our favorite 25 to 30 names for year-ahead returns, McKesson ($86; MCK) no longer makes the grade. The stock's Overall Quadrix score has dropped to 73, partly because of a mildly disappointing June quarter. The stock remains a Long-Term Buy but no longer qualifies as a top year-ahead pick, so it is being dropped from the Buy List and replaced by Thermo Fisher.

Bed Bath & Beyond ($62; BBBY) has been sent to the penalty box for the second time in 2012, this time for reporting lower profit margins for the August quarter. The sell-off seems overdone; same-store sales remain on a healthy uptrend, and we expect margins to rebound as recent acquisitions are integrated. But the stock is no longer among our favorite 12 to 17 year-ahead picks, so we're dropping Bed Bath & Beyond from the Focus List, replacing it with CVS Caremark ($48; CVS). CVS, reasonably valued and showing bullish share-price action, seems capable of exceeding profit expectations over the next year.


BUY LISTS BY THE NUMBERS

Our Quadrix rating system favors stocks with modest valuations and attractive growth rates. Those preferences are evident in median P/E ratios and expected growth rates for our buy lists, shown below.

Focus
List
Buy
List
Long-Term
Buy List
S&P 500
Index
(Large-Cap)
Average Quadrix Overall Score
91
89
86
60
% of stocks with Overall above 90
50
42
37
8
% of stocks with Overall above 80
86
81
71
19
% of stocks with Overall below 20
0
0
0
3
Medians
Price/earnings — trailing
13.4
13.1
13.4
15.3
Price/earnings — estimated current year
12.7
12.3
12.3
14.8
EPS growth — estimated current year
18.3
16.6
14.1
7.6
EPS growth — estimated next year
11.8
11.1
10.8
11.7
EPS growth — estimated next five years
12.4
12.1
11.9
10.6

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com