Decision 2012: Growth Or Value?

10/15/2012


In campaigns waged this fall, in debate halls or on football fields, there is a clear demarcation between rival teams and fan bases. The choice is binary, the sides mutually exclusive, with little patience for the undecided and not much space for common ground.

Investors can be conditioned to approach stocks the same way: growth or value? But the boundaries between these two groups aren't always well defined. For instance, eight of the 14 stocks on our Focus List score above 70 in Quadrix for both Value and Momentum. Five of those stocks also earn ranks above 70 for Quality, indicative of strong long-term growth.

FOCUS LIST
Date
Added
To Focus
List
(%)
Price
Change
Since
Addition
(%)
S&P
500
Change
Since
Addition
(%)
Outperfor-
mance
While
On List
(%)
---------- Quadrix Scores -----------
Company (Price; Ticker)
Momen-
tum
Value
Quality
Overall
Apple ($636; AAPL)
9/9/10
142
31
111
83
63
100
98
Alliance Data Sys.
($142; ADS)
5/26/11
54
9
45
55
48
96
71
Aflac ($48; AFL)
8/23/12
5
3
2
93
98
88
100
American Express
($58; AXP)
7/5/12
(2)
5
(7)
75
73
68
82
CF Industries
($218; CF)
9/15/11
24
19
5
95
87
99
100
CVS Caremark
($49; CVS)
10/4/12
(2)
(1)
(1)
73
60
79
88
DirecTV
($51; DTV)
10/9/08
154
58
96
80
86
97
97
Express Scripts
($63; ESRX)
8/9/12
0
3
(3)
82
45
87
86
Fifth Third Banc.
($16; FITB)
8/23/12
8
3
5
88
77
40
93
Foot Locker
($35; FL)
9/13/12
(5)
(1)
(4)
90
66
82
96
Google
($744; GOOG)
8/9/12
16
3
13
73
38
98
80
Macy's ($40; M)
3/29/12
(1)
3
(3)
77
77
72
93
UnitedHealth
($57; UNH)
8/23/12
7
3
4
73
80
87
92
Wells Fargo
($35; WFC)
6/14/12
10
8
1
77
79
51
91
Focus List Average
30
11
19
80
70
82
91
Note: Quadrix scores are percentile ranks, with 100 the best.

Keeping with the spirit of Decision 2012, we have split our Focus List into growth and value camps. Two stocks in the growth camp and three in the value camp are reviewed below. But if pressed we would submit a split ticket, adhering to our time-tested strategy of picking stocks capable of delivering growth at a good value.

Aflac ($48; AFL) exemplifies our growth-at-a-good-price approach. The insurer has reeled off 12 straight quarters of sales growth and nine consecutive quarters of at least 20% growth in operating cash flow. Yet the stock, with a Value rank of 98, trades at seven times trailing earnings, a 44% discount to its five-year average.

In September, Aflac said it would repurchase $100 million of stock in the December quarter (about 0.4% of outstanding shares) and could repatriate "a significant amount of capital" from its Japan business for buybacks next year. In each year from 2000 through 2009, Aflac bought back 1.1% to 3.1% of its shares. It cut back on repurchases in the last two years, but buyback plans indicate management's confidence in its capital levels and offer another sign that it has gotten a handle on its investment portfolio, which drew heat because of exposure to European bonds. With both sector-specific ranks above 95, Aflac is a Focus List Buy and a Long-Term Buy.


American Express ($58; AXP) has produced sales growth in 10 straight quarters while also steadily expanding operating profit margins. The company owes much of its recent success to the repositioning of its cards for small, frequent transactions that come with daily use, rather than focusing solely on vacations and big-ticket items. New partnerships with luxury brands such as Mercedes Benz could help Amex slide into the wallets of even more affluent shoppers.

Amex also hopes to attract lower-income shoppers without bank accounts through a partnership with Wal-Mart Stores ($74; WMT) that offers a prepaid card called Bluebird. Wal-Mart and Amex estimate that 25% of U.S. households either have no bank accounts or limited access to mainstream retail banking services. The cards have become attractive to Amex — it has similar partnerships with Barnes & Noble ($14; BKS) and Office Depot ($2; ODP) — because they don't carry credit risk. And new regulations brought on by the financial overhaul don't affect them — yet. Amex is a Focus List Buy and a Long-Term Buy.


CVS Caremark ($48; CVS) appears on target to generate its strongest annual growth for earnings per share, sales, and cash provided by operations since 2007. The pharmacy-benefit-management unit has driven much of that growth, while momentum for the retail business is best viewed through the lens of its closest competitor.

Ripples from a rift with Express Scripts ($63; ESRX) continue to confound rival Walgreen ($36; WAG), which reported an 11.1% slump in same-store sales for September — worse than the 7.3% decline projected by analysts. The disappointing results could point to CVS' success in retaining Express Scripts members who left Walgreen during the dispute. Walgreen is now offering a $25 gift card to Express Scripts members, forcing CVS into more promotional activity to keep those customers.

CVS has produced five straight quarters of double-digit gains. Rising analyst estimates anticipate per-share earnings increasing at least 20% in the final two quarters of 2012 on sales growth of at least 10%. CVS Caremark is a Focus List Buy and a Long-Term Buy.


If DirecTV ($51; DTV) satellites are like its valuation ratios, then they give a clear, consistent signal from every direction. And DirecTV's ratios are signaling "buy." Shares trade at just 13 times trailing earnings, a 28% discount to their five-year average and 33% below the median for cable and satellite-TV stock in the S&P 1500 Index.

Yet DirecTV shares set an all-time high in September, lifted by continued strong operating momentum. Per-share profits rose 30% in the 12 months ended June, ahead of its peer group's median growth of 25%. That gap should widen during the last six months of 2012, with DirecTV projected to grow earnings per share by 20%, while its peer group's profits decline 3%.

CEO Mike White hinted that DirecTV's net subscriber additions turned positive for the September quarter despite a difficult environment for the U.S. pay-TV industry. White added that he still prefers share repurchases to a dividend. DirecTV retired more than 7% of outstanding shares in the first half of 2012, and buybacks will likely continue through 2013, though at a slower pace. DirecTV is a Focus List Buy and a Long-Term Buy.


UnitedHealth Group ($57; UNH) shares have rallied 12% since the end of July while consistently scoring at least 80 in Quadrix Value. Two upcoming events could influence the stock's near-term direction. UnitedHealth reports September-quarter results on Oct. 16, with the consensus calling for per-share earnings of $1.26, implying 8% growth, on 9% higher sales. A $4.9 billion acquisition in Brazil could help boost growth starting in 2013. For more on the deal, see Portfolio Review.

Market-share gains in recent quarters should boost results going forward, but utilization rates will come under scrutiny. The economy's gradual improvement likely caused medical utilization to creep higher, though UnitedHealth has already cautioned shareholders to expect such a rise.

Investors are also trying to gauge how the fall elections could shape the health-care sector. Stakes are high for the managed-care industry. UnitedHealth should benefit if Republicans take control of the White House or Congress. Republicans seem intent on defunding the health-reform law — and any major revisions would probably reduce regulation and favor private insurers. UnitedHealth Group is a Focus List Buy and a Long-Term Buy.


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