Let Our Favorites Be Your Favorites
Twice a year, in the midyear (June) and year-ahead (December) Outlook issues, we identify our top handful of picks for the year ahead. If you bought those stocks when we pitched them in the newsletter, then sold them when we dropped them from the Buy List or after 12 months, whichever came first, you would have earned market-beating returns.
FOCUS LIST OFF TO A GREAT START
While our capital-gains favorites have performed well in recent years, the Focus List has also delivered the goods.
Excluding dividends and transaction costs, the Focus List has outperformed the S&P 500 Index in seven of the last 11 calendar years (2003 through 2013), averaging annual outperformance of 3.8%. In contrast, our capital-gains favorites have outperformed the index by an average of 3.3% during the year after we touted them (or a shorter period if we sold the stocks in less than 12 months).
Our Focus List seems well on the way to another year of outperformance; it is up 17.3% as of June 10, versus 5.5% for the S&P 500. Since the start of 2003, the Focus List has gained 214.6%, almost 93 percentage points above the index's 121.7%.
From 2005 through 2012, we recommended 107 capital-gains favorites, of which 56% outperformed the S&P 500 Index. Our selections averaged returns of 9.0% over the next year (or until we sold them from the Buy List) and outperformed the index by an average of 3.3% during those periods.
You might ask why we present these capital-gains favorites, considering that we already have three recommended lists — the 15-stock Focus List, the 30-stock Buy List, and the 39-stock Long-Term Buy List. While in our view the lists represent the best way to take advantage of a Dow Theory Forecasts subscription, we know that sometimes you aren't looking for a whole new portfolio, but rather a few of our very favorites.
Here are our five midyear capital-gains favorites for 2014, all Focus List Buys and Long-Term Buys:
Alaska Air Group ($99; ALK) earns a Quadrix Overall score of 99. Four of the six category scores that derive the Overall score also top 90, as do both of our sector-specific scores that compare Alaska Air to other industrial stocks. Over the last two months, consensus 2014 and 2015 profit targets for Alaska Air have risen 3%, helped by a 26% positive surprise in the March quarter and optimistic guidance from the company. Analysts expect per-share profits to grow 32% this year and 13% next year.
The airline, which is expanding its selection of flights from Seattle to points east, plans to continue growing its fleet of planes from the 127 it operated at the end of May. Alaska Air has submitted orders for 65 new planes.
Dow Chemical ($53; DOW), which generates nearly two-thirds of its sales outside North America, stands to benefit from the recovering global economy. International Monetary Fund projections call for world gross-domestic-product growth of 3.6% this year and 3.9% next year — not great but more than enough to drive the 3% to 5% annual sales growth analysts expect from Dow for the next two years.
Analysts expect at least 20% growth in per-share profits this year and next year as Dow slashes its expenses. In case that growth is not enough, investors can also collect a dividend yield of 2.8% while they wait for price appreciation.
Shares of Foot Locker ($50; FL) have sprinted up 36% from February lows but still seem poised for a longer run. The shoe-store chain trades at just 15 times expected earnings for the current fiscal year, an 11% discount to the median apparel retailer in the S&P 1500 Index and 15% below the median for the broad retail group.
In the April quarter, Foot Locker grew profits per share 22% on 14% revenue growth and 7.6% higher same-store sales. The company's remodeled stores are outperforming expectations, and Foot Locker intends to continues its remodeling program, including some international stores.
Magna International ($107; MGA) boosted its operating cash flow and free cash flow in eight of the last nine quarters, the product of solid revenue growth and firm cost controls. The maker of automobile parts and systems has returned 32% so far this year and 60% over the last year, yet remains attractively valued.
At 14 times trailing earnings, Magna trades at a 26% discount to the industry median and 8% below its own five-year average. The stock looks similarly cheap based on price/sales, price/operating cash flow, and other valuation ratios. The consensus projects per-share-profit growth of 14% this year and 16% next year, with profit targets for both years up 2% or 3% over the last 30 days.
Schlumberger's ($107; SLB) profit growth has accelerated in recent quarters, powered in part by market-share gains and technology-driven efficiency improvements. The company's massive scale — $45 billion in revenue over the last 12 months and operations in 85 countries — and technological superiority should provide a competitive advantage going forward as energy producers worldwide invest in new and existing wells.
Schlumberger generated $688 million in free cash flow in the March quarter and announced plans to execute its $10 billion stock-buyback program (enough to repurchase 7% of its shares) in two-and-a-half years instead of the original plan, which called for five years.