When Your System Is Working, Work Your System
When your portfolio enjoys a run of good performance, it's tempting to relax and let things ride.
It's also a mistake. The lesson we take from our market-beating returns so far in 2014 (and since the introduction of our Quadrix stock-rating system in 2000) is that our growth-at-a-good-price, by-the-numbers approach is working. That's all the more reason to make sure our buy lists are limited to our best ideas — even if that means giving up on recommendations with above-average potential.
Your goal as an equity investor is to grow the dollar amount of your portfolio, not to come out a winner on a high percentage of your picks. Whether a stock can rally back to your purchase price is not a central question. Instead, ask yourself if a stock you own is one you would buy today. If the answer is no, you should sell.
Selling a winner can be a tougher decision if it will trigger a taxable gain, but you don't want a reluctance to pay taxes to result in your portfolio being stocked with mediocre names. Of course, mediocre is a relative term, and there is no maximum number of stocks that is appropriate for all investors.
For example, if you bought DirecTV ($83; DTV) at $20.09 when we added it to the Focus List in October 2008, it may make sense to hold — if you think its takeover deal with AT&T ($35; T) will go through and you think you may be able to avoid the tax hit entirely by passing the stock on to your heirs. That is a tough call, one that only you can make.
By contrast, the decision to drop DirecTV from our buy lists was an easy one. We aim to provide the best possible picks right now, and we will sell any name that no longer merits inclusion on one of our three lists:
• The Focus List, limited to our favorite 13 to 17 year-ahead picks, is best used as a bolt-on to an existing portfolio.
• The Buy List, limited to our favorite 25 to 35 year-ahead picks, is a fairly diversified portfolio.
• The Long-Term Buy List, limited to our best 35 to 40 picks for two- to four-year returns, emphasizes high-quality stocks. We have become more willing to include midcap stocks on the Long-Term Buy List.
Seven additions to these lists are reviewed below, while five deletions are covered here.
New Focus List Buys
Our upgrade of ManpowerGroup ($86; MAN), the employment-services company profiled in last week's Analysts' Choice, reflects our faith in the continued global recovery. Manpower's March-quarter results, along with recent economic indicators, signal improving labor demand in the U.S. and Europe, the latter accounting for 65% of the company's sales.
Ameriprise Financial ($117; AMP), on deck for our Analysts' Choice in the next issue, is positioned to benefit as baby boomers scramble to catch up on retirement savings. Net inflows for its wrap accounts rose 22% to $13.2 billion for the 12 months ended March. At 16 times trailing earnings, shares trade in line with their five-year average but offer a 12% discount to its S&P 1500 peer group.
EOG Resources ($109; EOG), a driller that operates primarily in North America, last month raised its 2014 target for production growth to 12%. Its per-share profits jumped 56% in the March quarter and are projected to surge 33% for the year. Unlike many peers in the North American oil patch, EOG has generated positive free cash flow in four straight quarters. The stock, up 8% since we first recommended EOG as a Long-Term Buy in April, still earns a Value score of 60.
Halliburton ($67; HAL) occupies attractive spots in North America (52% of 12-month sales) and the Middle East (17%), two regions poised to see higher demand for oilfield services. Operating cash flow has increased in four consecutive quarters. Halliburton has also churned out 16 straight quarters of higher sales, and growth seems likely to accelerate. At 17 times projected 2014 earnings, the stock trades 10% below the median for its peer group.
Shire ($181; SHPG) scores above 80 for five of six Quadrix categories. Rising analyst estimates anticipate 34% higher per-share profits in 2014 and annualized growth of 15% over the next five years. That growth profile could attract takeover interest. Even without a takeover, Shire will remain attractive in its own right, considering its niche in neurological and gastrointestinal drugs. The stock's biggest drawback is valuation. Still, the trailing P/E of 22 and forward P/E of 19 offer a slight discount to peers.
New Long-Term Buys
Aetna ($80; AET), a managed-care provider, raised its 2014 profit guidance in April, its midpoint of $5.45 per share calling for 10% growth. Aetna says enrollment from the Affordable Care Act has exceeded expectations, while noting robust gains from company-sponsored plans. The $7.3 billion acquisition of Coventry Health Care in May 2013 has also augmented recent growth. The deal may also be improving Aetna's efficiency, as operating profit margins rose in the past two quarters after seven straight quarters of declines.
Packaging Corp. ($70; PKG), one of the largest U.S. makers of containerboard and white paper, trades at a discount to industry peers. A big part of PCA's growth in the past two quarters comes from its $2.1 billion acquisition of Boise, completed in October.