Buy Laggards -- If They Score Well

1/13/2014


There's no denying that the pool of reasonably priced stocks shrinks after a banner year like 2013. But is buying 2013's laggards with the hope that they will play catch-up in 2014 a winning tactic?

To answer that question, we looked at a strategy of buying the one-fifth of the S&P 500 Index with the weakest 12-month returns and holding those stocks for the next 12 months. Our study looked at 276 rolling 12-month periods beginning January 1990.

For the entire time period reviewed, the average 12-month total return for the average S&P 500 stock was 13.2%, versus 14.0% for the laggards. But . . .

Standard deviation of returns was substantially higher for the laggards (30.8%) than the average S&P 500 stock (18.4%) over the time period. Standard deviation measures the dispersion of returns around the average, and is a common proxy for risk.

Thus, while the laggards averaged slightly better 12-month returns, investors would have assumed much greater risk to generate those returns. The good news is that our Quadrix stock-rating system can up your chances of finding individual laggards ready to become leaders.

Returning to our research, laggards with high Quadrix Overall scores tended to do significantly better than the market. Indeed, buying only the bottom-quintile laggards with Overall Quadrix scores above 80 produced an average 12-month return of 16.8%, well above the average return of 13.2% for all S&P 500 stocks. And laggards with both Overall and Quadrix Value scores above 80 did even better, averaging 18.3% returns. 

The table below lists stocks rated Buy or Long-Term Buy that failed to beat the S&P 500's total return of 32.4% in 2013. That the list contains only nine stocks is a testament to the strong year Forecasts recommendations posted in 2013. Also note that five of the nine were within 4% of the S&P 500 Index total return and stretch the definition of "laggard."

LAGGARDS WORTH BUYING
The nine stocks below represent the only stocks now on the Forecasts Buy and Long-Term Buy lists that underperformed the S&P 500 Index in 2013. All of these laggards sport solid Quadrix Overall and Value scores, which bodes well for 2014 performance.
2013 Performance
Quadrix Scores
Company (Price; Ticker)
Div.
($)
Yield
(%)
52-Week
Price Range
($)
Total
Return
(%)
Relative
To S&P
500
Index
(%)
Value
Overall
EMC ($26; EMC)
0.40
1.6
27
-
21
0.2
(32.2)
91
83
Apple ($540; AAPL)
12.20
2.3
575
-
385
7.6
(24.8)
93
98
Cisco Systems
($22; CSCO)
0.68
3.0
26
-
20
16.8
(15.6)
95
73
Qualcomm
($73; QCOM)
1.40
1.9
74
-
59
22.1
(10.3)
78
99
Aflac ($65; AFL)
1.48
2.3
68
-
48
28.4
(4.0)
94
81
U.S. Bancorp ($41; USB)
0.92
2.2
41
-
32
29.3
(3.1)
78
83
Express Scripts
($70; ESRX)
0.00
0.0
71
-
53
30.1
(2.3)
85
89
Foot Locker ($41; FL)
0.80
1.9
42
-
31
31.4
(1.0)
83
96
Schlumberger
($88; SLB)
1.25
1.4
95
-
69
31.8
(0.6)
72
83
Note: Quadrix scores are percentile ranks, with 100 the best.

All of these stocks earn solid Quadrix scores for Overall and Value, and the Forecasts believes these 2013 underperformers will outperform the S&P 500 in 2014. One especially attractive laggard for 2014 is Apple ($540; AAPL).

Apple was the second-worst performer on our recommended list in 2013, posting a total return of less than 8%. That performance placed Apple squarely in the bottom quintile of performers on the S&P 500 (432nd place, or the bottom 14% of S&P 500 components).  However, 2014 should be a much better year for the technology giant, with quarterly earnings comparisons easier to beat. Per-share profits are expected to rise 10% in the fiscal year ending September 2014, and you can buy that double-digit earnings growth at less than 13 times the fiscal 2014 profit estimate of $43.71 per share.

The stock's 2.3% dividend yield provides a nice kicker to total returns. And the dividend, which jumped 15% in 2013, should see at least similar growth in 2014.

Apple's Quadrix Overall score is 98, with a Value score of 93. As our research shows, laggards with such solid Overall and Value scores tend to significantly outperform the market over the next 12 months. Apple is a Focus Buy and Long-Term Buy.


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