Get Growth, But At A Good Price

1/7/2013


A company's recent operating momentum and glittery outlook can blind investors. Fortunately, a look through the lens of value clears up the picture.

By considering valuation, investors can avoid the costly mistake of getting swept up in enthusiasm over a company's growth.

For example, the median S&P 500 stock in the software & services industry is projected to report 12% higher per-share profits in its next fiscal year. For that growth, investors must pay 15 times projected earnings — about 14% higher than the median P/E ratio of the broad index.

Consider the table below, which lists S&P 500 industry groups that look attractive based on Quadrix scores for both Momentum and Value. That overlap illustrates the basis of our strategy: picking stocks capable of strong growth at a decent price.

STANDOUT INDUSTRY GROUPS
Investors seeking high-potential stocks in attractive industries should follow Quadrix. Among the 24 industries in the S&P 500 Index, the 10 groups listed below earn the highest average Overall Quadrix scores. Notably, nine of the 10 groups contain a Focus List recommendation.
---------------- Quadrix Scores ----------------
--- Overall ---
No. Above
Momentum
---- Value ----
Industry (No. Of Stocks)
Avg.
90
80
Avg.
No.
Above
50
Avg.
No.
Above
50
Food & Staples
Retailing (8)
71
0
3
65
6
62
5
CVS Caremark
(CVS)
Insurance (22)
69
2
7
69
19
78
19
Aflac (AFL)
Health Care
Equip. & Svcs. (30)
68
1
6
50
12
62
22
UnitedHealth
(UNH)
Banks (15)
68
1
6
61
10
73
12
Wells Fargo
(WFC)
Transportation (9)
68
1
2
44
4
69
7
FedEx (FDX)
Media (16)
67
1
3
55
10
61
12
DirecTV (DTV)
Tech Hardware
& Equip. (22)
67
5
5
45
9
68
16
Apple (AAPL)
Software &
Services (31)
66
3
9
51
12
50
12
Alliance Data
(ADS)
Retailing (33)
65
3
10
58
25
55
18
Foot Locker
(FL)
Diversified
Financials (27)
64
3
8
50
14
66
21
Amer. Express
(AXP)
Note: Quadrix scores are percentile ranks, with 100 the best.

Based on profit-growth estimates for 2013, the biggest turnaround stories could occur in automobiles and components, energy, materials, and semiconductors and related equipment. Equally important, these industries seem to have reasonable valuations.

As for specific stocks, we find the growth prospects and valuations of the following three names to be highly attractive.

Per-share profits at American Express ($57; AXP) are projected to rise 9% in 2013, slower than the 12% median growth projected for diversified financials in the S&P 500. But AmEx is a well-managed company in an industry that still has many investors skeptical. Within the industry, AmEx consistently ranks in the top three in return on equity. Moreover, AmEx's cash from operations has exceeded net income in 19 of the past 20 quarters, a sign of earnings quality.

Recent per-share-profit growth stems from steady, if modest, sales growth, consistent expansion of operating profit margins, and stock buybacks, which have trimmed the share count by more than 4% in the past year. Amex is a Focus List Buy and a Long-Term Buy.


Largely because of its Latin American business, DirecTV ($50; DTV) is projected to outgrow the S&P 500 media industry in 2013, topping the median for both revenue and per-share profits. Yet the stock trades at less than 10 times estimated earnings, below its peer-group median of 13.

In the U.S., DirecTV expects programming costs will keep rising next year. The company plans to push through rate hikes averaging 4.5% in February to recoup a portion of those costs. The consensus projects per-share-profit growth of 12% in the December quarter and 23% this year. Look for management to update investors on 2013 guidance in February. DirecTV is a Focus List Buy and a Long-Term Buy.


UnitedHealth Group ($54; UNH) estimates that it holds an 11% share of the Medicaid market and about 23% for Medicare. The company also commands a 16% share of the commercial medical-insurance market. In November, the insurer gave 2013 guidance for per-share profits of $5.25 to $5.50. Wall Street appears to regard that outlook as overly conservative, as the consensus has fallen just $0.02 to $5.56 since the announcement. UnitedHealth has topped the consensus profit estimate by more than 4% in each of the last 15 quarters.

The insurer sees 2013 cash from operations of $7.2 billion to $7.6 billion, implying growth of 3% to 9% and representing 1.3 times net income, consistent with its 2012 ratio. Trading at 10 times estimated 2013 earnings, 30% below the median for its peer group, UnitedHealth Group is a Focus List Buy and a Long-Term Buy.

SECTOR MEDIANS FOR S&P 500 STOCKS
The stocks presented below look good relative to medians for their industries within the S&P 500 Index. All data represent the median stock in an industry group for companies in the S&P 500 Index. For most companies, the current year was completed in December. The median stock in the index is expected to grow per-share earnings 6.8% in 2012 and 10.9% in 2013. All the stocks listed below are A-rated. Stocks on our buy lists are presented in bold.
---------- Estimated Growth ----------
Current Year
-- Next Year --
Estimated
--- P/E Ratios ---
Industry
Company (Price; Ticker)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
Curr.
Year
Next
Year
Autos & Components (5)
2
1
22
6
12
10
Toyota Motor ($93; TM)
205
11
14
6
13
12
Volkswagen ($43; VLKAY)
19
7
15
6
9
8
Banks (15)
19
(3)
7
1
11
10
BB&T ($29; BBT)
50
11
7
1
11
10
Fifth Third Bancorp ($15; FITB)
35
6
1
(2)
10
9
U.S. Bancorp ($32; USB)
21
6
7
2
11
10
Wells Fargo ($34; WFC)
19
6
8
(1)
10
9
Capital Goods (39)
8
3
10
5
15
13
Boeing ($75; BA)
4
19
6
8
15
14
Deere ($86; DE)
9
(1)
7
3
10
10
Commer. & Prof. Svcs. (12)
8
2
12
4
17
15
Cons. Durables (15)
11
4
14
9
16
14
Consumer Services (13)
20
6
12
6
17
15
Diversified Financials (27)
6
0
12
5
13
11
American Express ($57; AXP)
5
5
9
5
13
12
BlackRock ($207; BLK)
13
2
12
9
15
14
Goldman Sachs ($128; GS)
58
13
7
2
11
10
J.P. Morgan Chase ($44; JPM)
12
(2)
5
2
9
8
Energy (43)
(8)
3
12
8
13
12
Chevron ($108; CVX)
(7)
3
0
5
9
9
Exxon Mobil ($87; XOM)
(7)
7
2
(5)
11
11
Halliburton ($35; HAL)
(11)
14
2
4
12
11
Helmerich & Payne ($56; HP)
(6)
5
9
8
12
11
Occidental Petroleum ($77; OXY)
(17)
1
7
5
11
10
Plains All American ($45; PAA)
16
13
(11)
7
15
17
Valero Energy ($34; VLO)
38
6
3
(6)
7
7
Food & Staples Retail (8)
13
6
10
5
14
12
CVS Caremark ($48; CVS)
21
15
16
2
14
12
Walgreen ($37; WAG)
10
2
11
4
11
10
Wal-Mart Stores ($68; WMT)
10
6
9
5
14
13
Food, Bev. & Tobacco (28)
6
2
9
5
16
15
Health Equip. & Svcs. (30)
9
3
9
5
14
12
Aetna ($46; AET)
(1)
5
7
9
9
8
Baxter International ($67; BAX)
5
2
7
6
15
14
Express Scripts ($54; ESRX)
25
103
13
7
15
13
McKesson ($97; MCK)
14
0
10
2
13
12
Medtronic ($41; MDT)
6
2
6
3
11
11
Stryker ($55; SYK)
9
3
6
4
14
13
UnitedHealth Group ($54; UNH)
11
8
5
11
10
10
Zimmer ($67; ZMH)
10
0
9
4
13
12
Household Products (6)
6
1
9
3
18
16
Insurance (22)
9
2
13
3
11
10
Aflac ($53; AFL)
4
16
5
7
8
8
MetLife ($33; MET)
0
0
0
0
6
6
Travelers ($72; TRV)
68
1
25
2
13
10
Materials (31)
3
0
16
5
17
14
CF Industries ($203; CF)
20
2
(7)
(4)
7
8
Media (16)
11
4
13
4
15
13
Comcast ($37; CMCSa)
29
12
10
2
18
17
DirecTV Group ($50; DTV)
21
9
23
8
12
10
Disney ($50; DIS)
11
6
13
6
15
13
Pharma. & Biotech (22)
9
5
11
5
15
13
Abbott Laboratories ($66; ABT)
9
2
(60)
4
13
32
Amgen ($86; AMGN)
24
11
6
3
13
12
Celgene ($78; CELG)
29
14
14
10
16
14
Gilead Sciences ($73; GILD)
1
14
15
9
19
16
Mylan ($27; MYL)
26
11

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