Stock-Hunting During A Sell-Off

10/20/2014


Strong autumn gusts have shaken the leaves from trees and knocked the S&P 500 Index down 7.4% from its all-time high set Sept. 18.

The Focus List — our top 12 to 18 picks for 12-month gains — has also taken its lumps in recent weeks. But it is still up 5.5% for the year, well ahead of the S&P 500's 1.6% gain, on track to outperform for the third straight year and the fifth time in the past six years.

The pullback gives investors the chance to scoop up high-quality companies at discounts from where they traded a month ago. With that in mind, we compiled four screens to identify Focus List standouts based on metrics that never go out of style:

• Favorable cash-flow trends.
• High returns on assets, equity, and investment.
• Fat profit margins.
• Strong growth in earnings per share and revenue.

CASH-FLOW STUDS
-- 12-Month Chg. --
3-Year Annualized
--- Growth Rate ---
No. Of Quarters
Of Growth In
--- Past 12 Qtrs. ---
Company (Price; Ticker)
Operating
Cash Flow
(%)
Free
Cash
Flo
(%)
Operating
Cash Flow
(%)
Free
Cash
Flow
(%)
Operating
Cash Flow
Free
Cash
Flow
Apple ($98; AAPL)
7
14
20
9
7
7
Foot Locker ($53; FL)
32
71
19
23
7
7
Magna Int'l ($85; MGA)
18
25
23
39
8
8
ManpowerGroup ($60; MAN)
51
101
101
NA
8
8
Schlumberger ($89; SLB)
22
95
26
151
10
9
NA Not available.

 

HIGH RETURNS
Company (Price; Ticker)
Return
On Assets
(%)
Quadrix
Rank
Return
On Equity
(%)
Quadrix
Rank
Return On
Investment
(%)
Quadrix
Rank
Alaska Air Group ($42; ALK)
10.5
89
32.1
94
23.1
94
Apple ($98; AAPL)
18.2
97
31.1
93
27.1
96
Foot Locker ($53; FL)
13.5
93
19.0
84
18.1
90
Kroger ($52; KR)
5.7
73
31.3
93
11.4
79
Union Pacific ($100; UNP)
9.4
87
22.3
88
15.5
87
Note: Quadrix scores are percentile ranks, with 100 the best.

 

WIDE PROFIT MARGINS
EBITDA
Margin
(%)
Net Profit
Margin
(%)
No. Of Quarters
Of Growth In
---- Past 12 Qtrs. ----
Company (Price; Ticker)
Quadrix
Rank
Quadrix
Rank
EBITDA
Margin
Quadrix
Rank
Apple ($98; AAPL)
33.2
75
21.6
88
7
7
SanDisk ($84; SNDK)
33.3
75
17.8
83
5
7
Union Pacific ($100; UNP)
43.0
84
20.6
87
11
10
United Rentals ($93; URI)
46.1
87
8.4
62
12
8
Wells Fargo ($48; WFC)
54.4
93
26.2
92
12
12
Notes: EBITDA, a proxy for operating income, stands for earnings before interest, taxes, depreciation, and amortization.

 

BIG GROWTH
-- 12-Month Chg. --
3-Year Annualized
--- Growth Rate ---
No. Of Quarters Of
Double-Digit Growth
-- In Past 12 Qtrs. --
Company (Price; Ticker)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
EPS
Sales
Ameriprise Fin'l ($109; AMP)
25
12
9
6
6
4
Google ($541; GOOGL)
13
17
10
24
7
12
Lear ($78; LEA)
20
12
9
9
6
7
Magna Int'l ($85; MGA)
39
10
22
10
8
5
United Rentals ($93; URI)
44
9
97
30
10
9

A few of our favorites are reviewed below:

Alaska Air Group ($42; ALK) is grappling with Delta Air Lines' ($32; DAL) aggressive push into key West Coast markets. Softness in airfares in July and August, along with questions over how the Ebola outbreak could affect flying habits, have stoked additional concerns.

While only two people are confirmed to have contracted Ebola while in the U.S., one of those patients flew to Dallas from Cleveland just two days before the diagnosis. Talk of travel bans and quarantines is premature, but the Centers for Disease Control said additional cases are "not unexpected." The S&P 500 Airline Industry Index has declined 11% since the first U.S. case was diagnosed Sept. 29, nearly twice the fall of the broader index. Alaska has outperformed its larger rivals by a wide margin since the Ebola scare began, likely because of its focus on domestic travel.

We still see plenty of upside for Alaska Air. Traffic surged 7.5% in the September quarter, accelerating from 4.6% growth in the first six months of the year. Full operating results for the quarter will be available Oct. 23.

The airline's returns on assets, investment, and equity have all risen in eight straight quarters. Returns on assets and investment stand at their highest levels since at least 1979, while return on equity hasn't been so high since 1981. Alaska Air is a Focus List Buy and a Long-Term Buy.


Ameriprise Financial's ($109; AMP) operating momentum accelerated in the six months ended June on strong growth from the advice and wealth-management unit and modest gains from annuities and insurance products. Assets under management and administration swelled 15% to $810 billion in the past year, largely because of the market's appreciation. The company's 12-month return on equity, currently 17.5%, has risen in six straight quarters, setting a new all-time high each time.

Analyst estimates retreated as Ameriprise entered earnings season, with the consensus now projecting 7% profit growth for the September quarter on 9% higher sales. Management has proved capable of managing expectations, topping the consensus profit estimate in each of the past nine quarters. The longer-term view looks brighter, with earnings projected to climb 12% in the 12 months ending June 2015, exceeding the average growth target of 9% for S&P 1500 asset managers.

Shares trade at 12 times estimated year-ahead earnings, a 14% discount to the average for S&P 1500 asset managers. Ameriprise, set to report results Oct. 28, is a Focus List Buy and a Long-Term Buy.


Apple ($98; AAPL) has rediscovered its growth groove in recent quarters and appears in three of our screens — cash flow, high returns, and profit margins. Over the past 12 months, Apple generated $37.61 billion in free cash flow, the most of any S&P 500 company and exceeding the sales of 86% of index companies. The stock also scores in the top 10% of our research universe for returns on assets, equity, and investment.

Apple's profit margins are positioned to rise further, considering the iPhone 6 Plus is priced $100 higher than the smaller model but reportedly costs just $16 more to manufacture. Chinese preorders of the new iPhone 6 and 6 Plus totaled about 20 million units, according to DigiTimes — roughly double the number of iPhones sold during the initial Sept. 19 weekend launch in 10 countries. Apple expects to introduce the smartphones in 69 countries by the end of October, which would be its fastest launch ever. In other news, Apple scheduled a media event for Oct. 16, after the Forecasts went to press. During that meeting, Apple was expected to show off its new iPad. Apple is a Focus List Buy and a Long-Term Buy.


Magna International ($85; MGA) shares offer a rare blend of operating growth and low price, scoring in the top 15% of our research universe for both Momentum and Value, a trait shared by less than 2% of S&P 1500 Index stocks. Aided by the revived auto industry, Magna has grown cash from operations and free cash flow in eight of the past 12 quarters. Sales are up in 19 straight quarters.

The shares have plunged 25% since the end of August, with Ford Motor's ($14; F) Sept. 29 profit warning responsible for some of that weakness. Yet Magna's profit estimates are holding up pretty well, with the consensus projecting 29% growth for the September quarter on 6% higher revenue. Plenty of pessimism already appears baked into the shares, trading at 10 times trailing earnings, 33% below the median for S&P 1500 auto-parts stocks. If Magna meets the current 2015 profit consensus of $9.95 per share and its P/E ratio remains at its current level, the shares will rebound 21% in less than 18 months. Magna is a Focus List Buy and a Long-Term Buy.


United Rentals ($93; URI) grew September-quarter earnings per share 35% to $2.20, topping the consensus estimate of $2.08. Management has now topped consensus profit estimates in 13 straight quarters. Sales, up 18% to $1.54 billion, also exceeded analysts' expectations. Cash from operations surged 74% to $412 million, marking the eighth consecutive quarter of at least 16% growth. Management reiterated its 2015 guidance, adding that "current uncertainty in the financial markets relates to global concerns, and not North America."

The stock scores in the top half of our research universe for five of six Quadrix categories, contributing to an Overall rank of 90. Three-year growth for sales, net income, and cash flow all rank in the top 25% of our research universe. The company also delivered above-average growth in each of the past two quarters for per-share profits, sales, and cash flow.

Spending on U.S. construction projects slipped 0.8% in August, well short of an expected 0.5% increase. July spending was also revised downward to 1.2% growth from the initially reported 1.8% gain. That weakness weighs on United Rentals, which relies on the U.S. for 86% of its sales. In recent months, the company has increased its exposure to U.S. shale oil, and weak oil prices could spark production cuts. United Rentals is a Focus List Buy and a Long-Term Buy.

FOCUS LIST
Price Change
Since Added
--- To List ---
Growth, Past
- 12 Months -
Est. Growth
Next 12 Mos.
--- Trailing P/E Ratio ---
------ Quadrix Scores ------
Company (Price; Ticker)
Date
Added
To List
Stock
(%)
S&P
500
(%)
EPS
(%)
Sales
(%)
EPS
(%)
Sales
(%)
Current
5-Year
Avg.
Sector
Median
Momen-
tum
Value
Overall
Alaska Air Group
($42; ALK)
5/1/14
(13)
(1)
33
8
20
8
12
10
17
95
89
99
Ameriprise Financial
($109; AMP)
6/12/14
(6)
(4)
20
12
11
2
14
13
15
81
68
90
Apple ($98; AAPL)
8/21/14
(3)
(7)
8
5
14
11
16
15
17
74
67
98
Foot Locker ($53; FL)
5/1/14
15
(1)
17
9
10
4
16
16
19
95
62
98
Google ($541; GOOGL)
11/7/13
17
7
12
17
20
(8)
23
23
17
73
36
83
Kroger ($52; KR)
5/16/13
49
13
8
5
11
7
17
13
19
61
60
86
Lear ($78; LEA)
8/1/13
13
9
17
12
22
6
11
10
19
73
81
91
Magna International
($85; MGA)
1/31/13
63
24
28
10
16
3
10
12
19
88
91
96
ManpowerGroup
($60; MAN)
6/16/14
(28)
(4)
32
2
11
5
12
18
17
93
93
91
SanDisk ($84; SNDK)
5/1/14
(1)
(1)
43
15
(6)
9
14
15
17
44
60
70
Schlumberger
($89; SLB)
10/24/13
(4)
6
20
8
17
11
17
21
16
66
69
76
Union Pacific
($100; UNP)
2/13/14
12
2
14
7
16
7
19
17
17
84
36
89
United Rentals
($93; URI)
12/19/13
25
3
30
9
28
12
16
20
17
92
62
90
Wells Fargo
($48; WFC)
6/14/12
49
40
6
(4)
4
(2)
12
11
15
39
73
82
Focus List average
20
8
14
5
15
15
17
76
68
89
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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