Top Capital-Gains Picks For 2015

12/15/2014


We do it every year at this time — present our top picks for capital gains in the coming year.

The table below lists our six favorite stocks for 2015. It can be difficult to find companies that stand out in multiple areas, such as operating momentum, earnings estimates, valuation, and share-price action. These stocks come pretty close, with all but F5 Networks ($131; FFIV) earning above-average ranks in Quadrix for all four key categories.

TOP PICKS FOR 2015
------------------------------ Quadrix Scores ------------------------------
Company (Price; Ticker)
Momen-
tum
Value
Earns.
Ests.
Perfor-
mance
Overall
Alaska Air ($55; ALK)
92
72
62
90
98
Ameriprise Fin'l ($134; AMP)
74
67
88
78
94
Apple ($112; AAPL)
88
64
91
92
99
F5 Networks ($131; FFIV)
85
49
78
88
93
Jones Lang LaSalle ($143; JLL)
98
61
90
86
97
Magna Int'l ($106; MGA)
80
85
79
67
99
Note: Quadrix scores are percentile ranks, with 100 the best.

Past performance cannot guarantee how these picks will fare, but if you're curious . . . below we also present the performance of our top stocks for 2014. We recommended these stocks in the Dec. 16, 2013, issue.

2014 CAPITAL-GAINS PICKS REVISITED
We selected the following seven stocks as our top picks for 12-month capital gains in the Dec. 16, 2013, issue. Since then, five of the stocks have been sold from the Focus List. If investors sold the stocks when they were dropped from the Focus List, this portfolio would have gained 13%.
Date
Dropped
From
Focus List
Price
Change
Through
Dec. 10
(%)
Price Change Through
Dec. 10 Or Until
Dropped From
------ Focus List ------
Company (Price; Ticker)
Stock
(%)
S&P 500
(%)
Apple ($112; AAPL) *
1/30/14
40
(11)
1
Capital One Fin'l ($82; COF)
1/23/14
15
0
3
Helmerich & Payne ($62; HP)
6/12/14
(22)
40
9
Lear ($93; LEA)
14
14
14
Magna Int'l ($106; MGA)
37
37
14
Qualcomm ($72; QCOM)
5/1/14
(2)
9
6
Schlumberger ($83; SLB)
12/4/14
(4)
1
17
Top capital-gains picks average
13
9
Average S&P 500 Index stock
10
NM
NM
Capitalization-weighted S&P 500 Index
NM
NM
* After dropping Apple from the Focus List in January, we added it back in the Aug. 25 issue.     NM Not meaningful.

The average one-year price change for last year's seven picks is 11%, slightly above the 10% of the average S&P 500 stock and lagging the 14% of the capitalization-weighted index. However, five of these stocks did not stay on the Focus List for an entire year. If you sold those five stocks when we removed them from our Focus List, the average gain for all seven would have been 13%, versus a comparable gain of 9% for the S&P 500.

Using that same methodology, our year-end picks for capital gains have topped the S&P 500 Index in six straight years and in eight of the past 10. Of the 62 year-end capital-gains favorites we've selected over the past 10 years, 35 (56%) have outperformed the S&P 500 over the next year or until sold from the Focus List.

Admittedly, this is a somewhat artificial approach because an investor is likely to roll proceeds from sold stocks into other picks. But it does illustrate the value of following our downgrade advice. We may have gotten the timing wrong on Apple ($112; AAPL), but disciplined investors were rewarded for selling Helmerich & Payne ($62; HP) and Qualcomm ($72; QCOM) when we removed the stocks from our Focus List. 

Now, on to our top six picks for 2015.

Alaska Air Group ($55; ALK) enters 2015 with several tailwinds that could push shares higher: falling fuel prices, encouraging traffic trends, and decent pricing power. The consensus projects per-share profits will rise 17% in 2015 on 5% revenue growth. The 2015 estimate has jumped 15% over the last 60 days and could move higher if competition from Delta Air Lines ($46; DAL) proves less severe than what many analysts currently expect.

In Quadrix, Alaska scores above 70 for both Value and Performance, a combination managed by just 6% of S&P 1500 stocks. Alaska's shares, up 50% so far in 2014, trade at just 15 times trailing earnings, 40% below the median for S&P 1500 airline stocks. Alaska Air, earning a Quadrix rank of 98 for Overall and yielding 0.9%, is a Focus List Buy and a Long-Term Buy.


Ameriprise Financial's ($134; AMP) advice and wealth-management unit, (39% of operating revenue, 25% of operating earnings for the nine months ended September) is driving growth. The unit is benefiting from the swelling population of retirees, and is well-positioned should interest rates climb in the year ahead. Ameriprise is projected to grow earnings per share 14% in 2015.

Shares hover near their all-time high, though Ameriprise's Value score is still solid at 67. Management considers the stock's valuation attractive and plans to funnel excess cash into share repurchases and dividend growth. Buybacks have lowered the share count in 17 straight quarters since 2010 (at an average price of $67), resulting in a 27% reduction in outstanding shares. Ameriprise, yielding 1.7%, is a Focus List Buy and a Long-Term Buy.


Apple ($112; AAPL) has returned 39% in the past year, with its market value briefly eclipsing $700 billion in November and December, a first for a U.S. company. Shares rallied on a strong showing by the latest iPhone and optimism for the company's product roster for the coming year. Operating results regained their momentum in fiscal 2014 ended September, with per-share profits rising 14%, while sales increased 7% and operating cash flow 11%. With the iPhone representing a larger portion of the product mix, gross profit margins improved.

The stock seems capable of climbing further. It earns a Value score of 64 and ranks in the top half of our research universe for several key valuation metrics, including trailing P/E, forward P/E, price/operating cash flow, and price/free cash flow. Analyst profit estimates are trending higher. Apple, yielding 1.7%, is a Focus List Buy and a Long-Term Buy.


F5 Networks ($131; FFIV), a maker of equipment and software for computer networks, earns a Value rank of just 49. We are willing to overlook that middling valuation, given strong trends elsewhere. The Overall score, currently 93, has exceeded 90 for 12 straight months. For fiscal 2014 ended September, sales rose 17% and free cash flow 11%.

Management seeks to expand its modest market share in security products, which should drive growth in fiscal 2015. One or more security products were included in 36% of F5's product sales in fiscal 2014, up from 30% year earlier. The consensus projects 17% higher per-share profits for the year ahead, compared to the industry's median estimated growth of 8%. F5 is a Focus List Buy and a Long-Term Buy.


While the rental market can be quite competitive, Jones Lang LaSalle ($143; JLL) sets itself apart by offering additional services, such as supervising building workers, consulting on potential relocations, and managing real estate acquisitions and divestitures. Momentum for commercial real estate, already robust, could be accelerating in the U.S. Leasing has been surprisingly strong in Europe, which accounts for roughly 36% of company revenue.

Revenue growth has exceeded 20% in four straight quarters. Free cash flow more than tripled in the 12 months ended September. Management plans to spend roughly 50% of free cash flow on acquisitions, 40% on internal investments, and 10% on dividends, which could equate to more than 20% dividend growth in 2015. Analysts forecast double-digit profit growth in the December and March quarters. Jones Lang is a Focus List Buy and a Long-Term Buy.


Magna International ($106; MGA) shares have risen 103% since we added them to the Focus List in January 2013, compared to S&P 500's 35% advance. Yet the stock should still have legs. A Value score of 85 reflects above-average ranks for more than half of the factors that comprise the category score.

Magna's P/E ratio of 10 times estimated 2015 profits is 29% below the median for S&P 1500 auto parts and equipment stocks. Magna's growth outlook also stacks up favorably versus its peers, with per-share profits projected to rise 15% in fiscal 2015, versus median growth of 13% for its industry. Magna, yielding 1.4% and earning an Overall rank of 99, is a Focus List Buy and a Long-Term Buy.

FOCUS LIST
Date
Added
To List
Change
Since
Added
To List
(%)
12-Month Growth
Trailing P/E
Forward P/E
Est. EPS
-- Growth --
90-Day % Chg.,
-- EPS Est. --
Company (Price; Ticker)
1
Month
(%)
EPS
(%)
Sales
(%)
Oper.
Cash
Flow
(%)
Stock
Industry
Median
Stock
Industry
Median
Curr.
Qtr.
(%)
Fiscal
2015
(%)
Curr.
Qtr.
(%)
Fiscal
2015
(%)
Quadrix
Overall
Score
Alaska Air ($55; ALK)
5/1/14
15
(2)
55
8
12
15
23
12
14
55
17
18.0
15.0
98
Ameriprise Fin'l
($134; AMP)
6/12/14
15
3
11
11
30
17
18
14
15
18
14
0.9
1.4
94
Apple ($112; AAPL)
8/21/14
11
3
13
7
11
17
16
13
13
23
20
8.9
9.2
99
F5 Networks
($131; FFIV)
12/4/14
(1)
3
16
17
10
24
20
18
16
22
17
0.7
1.9
93
Foot Locker ($56; FL)
5/1/14
20
2
22
9
32
16
18
14
16
12
11
0.5
2.0
97
Jones Lang LaSalle
($143; JLL)
11/6/14
2
2
37
24
123
19
19
16
17
15
8
1.2
3.5
97
Kroger ($61; KR)
5/16/13
75
5
10
7
13
19
25
17
21
12
9
(0.2)
1.8
80
Lam Research
($80; LRCX)
11/6/14
0
0
154
28
54
17
21
15
16
3
7
(4.2)
0.7
95
Lear ($93; LEA)
8/1/13
34
0
24
11
0
13
18
10
15
35
17
0.1
0.1
94
Magna Int'l
($106; MGA)
1/31/13
103
13
41
8
27
12
18
10
15
(3)
15
(6.0)
1.7
99
ManpowerGroup
($67; MAN)
6/16/14
(20)
(1)
38
3
(15)
12
21
12
18
(3)
5
(5.6)
(6.6)
84
Shire ($208; SHPG)
12/4/14
(4)
3
48
20
87
20
21
18
18
18
7
0.3
5.5
91
Union Pacific
($114; UNP)
2/13/14
27
(6)
19
9
9
21
21
18
18
17
15
2.3
2.0
89
United Rentals
($108; URI)
12/19/13
45
(5)
41
12
42
17
19
13
15
31
26
(1.6)
(0.3)
92
Wells Fargo
($54; WFC)
6/14/12
69
1
5
(2)
NA
14
14
13
12
2
4
(1.3)
(0.7)
69
Focus List average
26
1
36
11
31
17
20
14
16
17
13
0.9
2.5
91
* We use fiscal 2016 estimates for Foot Locker and Kroger. Their current fiscal years end in January 2015.

 


How we do it

We view the returns of our buy lists (below) as the most important validation of our weekly routine of re-evaluating Quadrix scores, growth profiles, and valuations. But we're proud of the fact that our year-end favorites for capital gains have outperformed six straight years, and last year's picks illustrate key aspects of our approach.

• We do not stick with stocks for a predetermined time period. And we have no interest in going down with a sinking ship in the hopes it will recover and ultimately prove us correct. We sell a stock when it no longer ranks as a favorite, often because its story is starting to fall apart, as it did with Helmerich & Payne ($62; HP) and Qualcomm ($72; QCOM). 

• The Focus List is reserved for our very best ideas, and we are ruthless in keeping it that way. With that in mind, we are not afraid of changing our mind quickly. Case in point: Capital One Financial ($82; COF) was dropped from the Focus List a little more than a month after we named it a top pick for 2014. Although the stock eventually recovered, it ultimately trailed several others we liked better.

• We do not get every pick right, but we have outperformed over the long haul, in part because our top performers make up for the laggards. Investors who cherry-pick only their favorites from our recommended lists may generate returns substantially different from our portfolios.

• Magna International ($106; MGA) repeats as a capital-gains favorite for 2015, showing that we will stick with winners if their stories remain intact and valuations are still attractive.

OUR BUY LISTS VERSUS THE S&P 500

Year
Focus
List
(%)
Buy
List
(%)
L-T
Buy
List
(%)
S&P 500
Index
(%)
Since 2003 *
226.9
272.7
194.3
130.3
2014 *
21.9
19.1
18.2
9.6
2013
36.0
42.8
42.7
29.6
2012
14.2
16.0
15.8
13.4
2011
(4.8)
(9.1)
(4.2)
0.0
2010
19.5
12.7
10.3
12.8
2009
40.0
37.6
30.6
23.5
2008
(48.8)
(46.3)
(36.5)
(38.5)
2007
22.8
19.2
10.8
3.5
2006
12.9
16.9
9.7
13.6
2005
8.1
13.2
4.1
3.0
2004
17.5
22.4
9.0
9.0
2003
20.2
29.2
24.6
26.4

* As of Dec. 10. Returns assume fully invested portfolios, excluding dividends and transaction costs.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com