A Portfolio's Value Is The Sum Of Its Parts

2/18/2013


Apple's ($468; AAPL) recent tumble offers yet another reminder that no stock is perfect and no investment strategy should revolve around just one company — or even a few companies.

The Forecasts' Focus List contains our best 12 to 17 ideas for 12-month returns. That's still fairly concentrated, but it allows us to benefit from diversification.

On average, companies on our Focus List have delivered 24% higher per-share profits over the past six months on 12% revenue growth, as shown in the table below, well above the growth of the average company in the S&P 500 Index. Yet Focus List stocks trade at an average of just 13 times earnings, 28% below the S&P 500 average. Our recommendations also average a discount of 22% to their five-year average P/E ratio, versus a 3% premium for S&P 500 stocks.

FOCUS LIST: MORE GROWTH, MORE VALUE
The average stock on our Focus List has delivered stronger operating momentum than the S&P 500 Index average in the past six months, a trend expected to continue in the current year. Equally important, stocks on the Focus List also appear attractively valued.
6-Month Growth
---- P/E Ratio ----
Est. EPS
Growth,
Current
Year
(%)
EPS
(%)
Sales
(%)
Trailing
Versus
5-Yr.
Avg.
Forward
P/E
Focus List
24
12
13.0
0.78
15
12.1
S&P 500 Index
8
5
17.9
1.03
8
16.5
Note: Averages exclude P/E ratios above 75 and less than 0 and growth rates in excess of 200%.

Collectively, the stocks on the Focus List enjoy a better growth profile and more attractive valuation than the S&P 500. Individually, their chief strengths are scattered, such as recent operating momentum, long-term track record of quality, and valuation. Two stocks from each category are being reviewed below, including two new additions, J.P. Morgan Chase ($49; JPM) and Qualcomm ($66; QCOM). Aflac ($49; AFL) was pulled from the list Feb. 8; read more about the downgrade in Portfolio Review.

Momentum

Alliance Data Systems ($152; ADS) appears well-positioned for the ongoing migration toward electronic payments. The company has produced double-digit growth of sales and per-share profits in 11 of the last 12 quarters. Management sees March-quarter earnings per share rising 5% on a 17% sales gain. For the year, Alliance targets 11% higher earnings per share with sales growth of 15%. Since the beginning of January, Alliance has secured long-term contracts with Staples ($13; SPLS) and General Motors' ($29; GM) for one of its most popular rewards programs, Air Miles, used by 70% of Canadian households. The company is also taking advantage of cheap debt to finance expansion in Brazil and India. Alliance is a Focus List Buy and a Long-Term Buy.


J.P. Morgan Chase ($49; JPM) has rediscovered its growth groove, with earnings per share jumping 45% in the second half of 2012 after three straight quarters of lower per-share profits. That momentum should carry into 2013, with the consensus calling for per-share profits to climb 15% in the March quarter and 12% in the June quarter. Still, the fallout of the financial crisis continues to follow J.P. Morgan. Internal emails unearthed in connection with a lawsuit show bank officials allegedly overstated the health of mortgages bundled and sold to investors. Of course, J.P. Morgan's valuation already reflects plenty of bad news. Shares trade at just nine times trailing earnings, a 40% discount to their five-year average. Yielding 2.4%, J.P. Morgan Chase, already a Buy and a Long-Term Buy, is being added to the Focus List.

MOMENTUM LEADERS
--------------- 6-Month Growth ---------------
Company (Price; Ticker)
Sales
(%)
EPS
(%)
Cash Provided
By Operations
Alliance Data Systems ($152; ADS)
11
15
19
Foot Locker ($35; FL)
8
51
14
Helmerich & Payne ($65; HP)
17
18
41
J.P. Morgan Chase ($49; JPM)
5
45
NA
Thermo Fisher Scientific ($75; TMO)
5
13
14


Quality

Over the past five years, Google ($781; GOOG) has delivered annualized growth of at least 20% for per-share profits, revenue, and operating cash flow. Google's upward trajectory has remained remarkably steady. In those 20 quarters, sales growth dipped below 15% just three times, and only once did operating cash flow decline. In recent quarters, growth in internet-search revenue has been driven by ads on mobile devices, which tend to command lower rates than those on personal computers. That trend has contributed to an erosion of operating profit margins and raised concerns of the future profitability of Google's core business. But CEO Larry Page said last month that mobile rates could eventually top desktop rates. Earlier this month, Google rolled out a new advertising platform that charges customers tiered rates based on time of day and the location of the mobile-device user. Google is a Focus List Buy and a Long-Term Buy.


Riding the surge in mobile devices, Qualcomm ($66; QCOM) has treated investors to annualized sales growth of 20% and per-share profit growth of 13% over the past five years. In the last 12 months, sales climbed 29% and per-share profits 26%. Management seems confident sales can rise at least 10% annually over the next five years. Shares trade at 16 times trailing earnings, a 29% discount to their five-year average. Back out net cash of roughly $7.50 per share, and the P/E ratio falls below 15. Qualcomm, already a Buy and a Long-Term Buy, is being added to the Focus List.

QUALITY LEADERS
---- 5-Year Annualized Growth ----
Company (Price; Ticker)
Sales
(%)
EPS
(%)
Operating
Cash Flow
(%)
Return On
Investment
Apple ($468; AAPL)
42
57
54
38
CVS Caremark ($51; CVS)
7
10
16
8
Google ($781; GOOG)
24
20
24
16
Qualcomm ($66; QCOM)
20
13
10
8
UnitedHealth ($57; UNH)
9
9
4
13


Value

Magna International ($54; MGA) makes automotive components and systems used by most of the major carmakers. It also offers a rare blend of encouraging share-price action, cheap valuation, and strong operating momentum. The stock has risen 8% this year and 37% since the end of June. Yet Magna shares trade more than 39% below the median S&P 1500 auto parts and equipment stock relative to trailing earnings, sales, and operating cash flow. Magna has grown sales in 12 straight quarters, with operating profit margins more than tripling during that stretch. Magna is a Focus List Buy and a Long-Term Buy.


Mylan Laboratories ($29; MYL) epitomizes our strategy of growth at a good price. The stock's P/E ratio of 12 lingers well below both its five-year average of 19 and the S&P 1500 drug industry's median of 15. Wall Street expects the generic-drug manufacturer Mylan to report December-quarter earnings per share of $0.64, up 21%, on Feb. 18. For 2013, the consensus calls for earnings of $2.80 per share, implying 9% growth. If the P/E ratio reverts to its one-year average of 15 and Mylan matches the 2013 consensus, the shares will jump 45%. Mylan is a Focus List Buy and a Long-Term Buy.

VALUE LEADERS
------------ Discount To Industry Median ------------
Price/Earnings Ratio
Company (Price; Ticker)
Trailing
(%)
Forward
(%)
Price/
Sales
(%)
Price/
Operating
Cash Flow
(%)
CF Industries ($220; CF)
61
56
16
48
DirecTV ($52; DTV)
24
38
10
55
Magna Int'l ($54; MGA)
41
38
48
48
Mylan Labs ($29; MYL)
24
22
41
3
Wells Fargo ($36; WFC)
11
13
17
NA

 

OUR FOCUS LIST
The Focus List is up 4.8% this year, compared to the S&P 500's 6.5% advance. Since 2003, the Focus List has risen 106.7%, versus 72.7% for the S&P 500. This week, we are adding J.P. Morgan Chase ($49; JPM) and Qualcomm ($66; QCOM) to the Focus List. Aflac ($49; AFL) was dropped from the list Feb. 8.
Price Change
Since Stock's
Addition
-- To List --
Stock's
YTD
Total
Return
(%)
Est. Growth,
Curr. Fiscal
--- Year ---
-- P/E Ratio --
--------- Quadrix Scores ---------
Company (Price; Ticker)
Date
Added
To List
Stock
(%)
S&P
500
(%)
EPS
(%)
Sales
(%)
Trailing
Versus
5-Yr.
Avg.
Momen-
tum
Value
Quality
Overall
Industry
Alliance Data Sys.
($152; ADS)
5/26/11
66
15
5
13
13
17.5
0.95
67
56
95
88
Data Processing
Apple ($468; AAPL)
9/9/10
78
38
(12)
1
17
10.6
0.55
50
95
100
87
Hardware
CF Industries
($220; CF)
9/15/11
26
26
8
21
2
7.9
0.76
86
91
99
99
Chemicals
CVS Caremark
($51; CVS)
10/4/12
5
4
6
21
2
15.6
1.06
88
71
80
93
Drug Retail
DirecTV ($52; DTV)
10/9/08
160
67
4
21
9
12.8
0.73
81
90
97
95
Cable & Satellite
Foot Locker
($35; FL)
9/13/12
-6
4
9
41
4
14.5
0.62
88
76
87
95
Apparel Retail
Google
($781; GOOG)
8/9/12
22
8
10
14
15
19.6
0.82
60
51
96
77
Internet Software
Helmerich & Payne
($65; HP)
1/10/13
11
3
17
4
6
12.4
1.00
92
81
84
99
Oil & Gas Drilling
J.P. Morgan Chase
($49; JPM)
——
13
3
6
9.3
0.61
89
91
57
98
Financial Svcs.
Magna Int'l
($54; MGA)
1/31/13
3
1
8
11
5
9.8
0.67
74
85
83
97
Auto Parts
Mylan Laboratories
($29; MYL)
12/6/12
5
7
5
26
5
11.6
0.61
88
70
73
90
Pharmaceuticals
Qualcomm
($66; QCOM)
——
7
21
5
16.4
0.73
90
55
92
93
Telecom Equip.
Thermo Fisher
($75; TMO)
11/1/12
19
6
17
10
4
15.1
0.74
69
62
74
84
Life Sciences
UnitedHealth
($57; UNH)
8/23/12
6
8
5
4
12
10.8
1.13
60
87
86
84
Managed Care
Wells Fargo
($36; WFC)
6/14/12
11
14
5
8
(1)
10.6
0.67
81
89
60
92
Diversified Banks
Focus List
average
31
16
7
15
7
13.0
0.78
78
77
84
91
Average
S&P 500 stock
8
13
5
17.9
1.03
50
57
63
58

 


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