Three Stocks To Buy Now

10/13/2014


At Dow Theory Forecasts, we put a lot of weight on fundamentals. Our Quadrix stock-rating system, with nearly 100 statistics in six categories, is premised on the idea that companies with broad-based strength should outperform. In recent months, our approach has worked quite well.

In the 12 months ended September, the top quintile (one-fifth) of the S&P 1500 Index as measured by Overall score outperformed the average stock in the index by 2.3%. Top Overall scorers outperformed in each of the previous 12 rolling 12-month periods, by an average of 2.4%. 

Because the Overall score relies on so many statistics, when one set of metrics isn't working, another can take up the slack. At the moment, the Value category score is delivering excellent performance.

With recent performance in mind, we offer you three stocks to buy now. All boast Overall scores above 90 and Value scores above 80.

Aetna's ($80; AET) Value score of 84 is among the highest in the managed-care group, which has an impressive average of 72. The stock trades at 12 times the consensus 2014 profit estimate of $6.59 per share, a 34% discount to the median managed-care company.

In the 12 months ended June, Aetna increased sales 37% while operating cash flow nearly tripled, boosted by the acquisition of Coventry Health Care in May 2013. The consensus projects per-share-profit growth of 3% in the second half of 2014, accelerating to 9% next year. The acquisition boosted Aetna's share count by more than 10%, yet shares outstanding are still down 7% over the last three years and 20% over the last five. Given Aetna's solid cash flow and history of retiring shares, repurchases should continue.

Aetna's enrollment rose 4% to more than 23 million members in the first half of 2014. The company could gain about 500,000 new members from federal insurance exchanges this year despite limited participation. Aetna is a Buy and a Long-Term Buy. 


Alaska Air Group ($43; ALK) earns a 99 Overall score and at least 73 in five of the six category scores, including 89 for Value. At 11 times expected current-year earnings, the company trades at a 17% discount to the industry median. S&P 1500 airline stocks average an Overall score of 88.

Alaska has charted an impressive growth trajectory, with per-share profits rising at an annualized rate of 19% over the last three years while operating cash flow increased at a 20% annual clip. Stepped-up competition from Delta Air Lines ($35; DAL) in Seattle, coupled with concerns about Alaska's targeted 7% growth in capacity this year, have weighed on the shares since June. But the company grew traffic 9% year-over-year in September despite Delta's incursion, almost matching capacity expansion of 10% (see portfolio review for more). Profit estimates have edged higher, helped by falling fuel prices. We rank Alaska Air, which yields 1.2%, a Focus List Buy and a Long-Term Buy.


Magna International's ($94; MGA) Overall, Momentum, and Quality scores are within a couple points of their levels at the end of August, reflecting broad-based fundamental strength and excellent growth. However, the Performance score has been cut nearly in half, and a quick glance at the stock chart could tell you why.

The shares have fallen 17% since the end of August and 7% since Sept. 26, hurt by concerns about an antitrust probe in Brazil, potential sales slowdowns in overseas auto markets, and disappointing guidance from Ford Motor ($14; F), which provides 13% of Magna's sales. While all three concerns are real, global auto production continues to rise, and the company's consensus profit estimates for this year and next year have held up. Analysts expect per-share profits to rise 19% this year and 16% next year. Magna trades at 11 times current-year estimated earnings, 25% below the industry median. Magna, yielding 1.6%, is a Focus List Buy and a Long-Term Buy.


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