The Focus List Turns 20

1/19/2015


Last month, our Focus List turned 20. This group of stocks — our 12 to 17 best ideas for the next 12 months — is fairly concentrated and can work especially well when bolted on to an existing portfolio.

Since its Dec. 23, 1994, launch, the Focus List has returned 559% on a fully invested basis and 612% including our recommended cash position, both comfortably ahead of the S&P 500 Index's 337%. The Focus List has topped the S&P 500 in eight of the past 11 calendar years on a fully invested basis. Returns exclude dividends and transaction fees.

Investors who cherry-pick from the Focus List could experience starkly different results.  Our 20-year winning percentage is not terribly impressive, with 57% of stocks posting gains and 46% outperforming the S&P 500. However, our strategy tends to deliver big winners, with 25 stocks outperforming the index by more than 50 percentage points.

As investors should expect, our performance relative to the index has improved over time, as we show in the tables at right and on below. Focus List stocks have outperformed the S&P 500 by an average of 5.5 percentage points in the past decade, compared to 3.4 percentage points in the first 10 years.

We have also done a better job of avoiding big mistakes. In the past decade, 11 stocks underperformed by more than 20 percentage points (and none lagged by more than 50 percentage points), compared to 36 stocks (six) in the first 10 years.

Historically, our best picks tend to offer some combination of the following: attractive valuation, strong growth prospects, and a potential catalyst that could catapult shares higher.

FOCUS LIST RETURNS
The Focus List's annualized return is roughly 10% since its inception in Dec. 23, 1994, topping the 7.6% return of the S&P 500 Index. As shown below, our outperformance has been fairly consistent in recent years.
Year
Fully
Invested
(%)
With
Cash/
Fund
Position
(%)
S&P 500
Index
(%)
Since inception *
Price return
559.3
611.5
337.4
Annual. return
9.9
10.3
7.6
First 10 years
 
Price Return
199.6
210.6
163.6
Annual. Return
11.6
12.0
10.1
Past 10 years *
 
Price Return
120.0
129.4
66.0
Annual. Return
8.4
8.6
5.2
2015 *
(5.5)
(4.9)
(2.3)
2014
22.6
20.6
11.4
2013
36.0
33.0
29.6
2012
14.2
13.3
13.4
2011
(4.8)
(3.9)
0.0
2010
19.5
16.0
12.8
2009
40.0
31.8
23.5
2008
(48.8)
(38.6)
(38.5)
2007
22.8
21.5
3.5
2006
12.9
12.5
13.6
2005
8.1
7.6
3.0
2004
17.5
16.1
9.0
2003
20.2
19.1
26.4
2002
(28.9)
(24.3)
(23.4)
2001
(16.0)
(11.2)
(13.0)
2000
14.0
12.9
(10.1)
1999
22.9
19.3
19.5
1998
23.2
20.6
26.7
1997
26.6
26.6
31.0
1996
23.9
23.9
20.3
1995
30.4
30.4
34.1
1994 †
0.7
0.7
(0.1)
† Inception on Dec. 23, 1994.   * Through Jan. 14.
TWP DECADES OF OUTPERFORMANCE
Our Focus List's winning percentage (the number of stocks outperforming the S&P 500 Index) dipped in the past 10 years, versus the the first 10 years. But the average outperformance of our stocks has improved by more than two percentage points, helped by our ability to avoid big laggards.
Entire 20 Years 
Percentage of stocks up 
57%
Winning percentage versus S&P 500 Index
46%
Avg. outperformance on list
4.5 percentage points
Avg. duration on list
451 days
No. that outperformed > 50 percentage points
25
No. that underperformed > 50 percentage points
6
No. that outperformed > 20 percentage points
52
No. that underperformed > 20 percentage points
47
First 10 Years 
Percentage of stocks up 
55%
Winning percentage versus S&P 500 Index
48%
Avg. outperformance on list
3.4 percentage points
Avg. duration on list
561 days
No. that outperformed > 50 percentage points
15
No. that underperformed > 50 percentage points
6
No. that outperformed > 20 percentage points
32
No. that underperformed > 20 percentage points
36
Past 10 Years 
Percentage of stocks up 
59%
Winning percentage versus S&P 500 Index
45%
Avg. outperformance on list
5.5 percentage points
Avg. duration on list
356 days
No. that outperformed > 50 percentage points
10
No. that underperformed > 50 percentage points
0
No. that outperformed > 20 percentage points
20
No. that underperformed > 20 percentage points
11

Below, we review two stocks that fit into each of these groups:

Value

Foot Locker ($53; FL) can be a jittery stock. Caught in the crosscurrents of mixed November-quarter results for rival Finish Line ($24; FINL) and major supplier Nike ($94; NKE), Foot Locker shares slumped 7% in a single day in December. After a partial recovery, the stock slumped again this month on a Goldman Sachs downgrade.

The stock should have more room to climb, given its reasonable valuation and robust growth outlook. At 16 times trailing earnings, Foot Locker shares trade at a 22% discount to the median S&P 1500 apparel retailer. Rising analyst estimates anticipate 12% higher per-share profits in the January quarter, followed by 11% growth in fiscal 2016 ending January. Foot Locker is a Focus List Buy and a Long-Term Buy.


United Rentals ($84; URI) is involved in construction projects that include water-treatment plants, bridges, a Google ($506; GOOGL) data center, and a new stadium for the Atlanta Falcons and Braves. Unfortunately, exposure to the energy sector has contributed to a 29% slide in the stock price since the end of August.

The severity of that decline seems unwarranted, considering the energy sector accounts for just 11% of United Rentals' sales. In our view, the dip gives investors an opportunity to scoop up shares of a company projected to grow per-share earnings more than 20% in 2015 as the construction market continues to recover. Shares trade at just 11 times estimated year-ahead earnings, a 36% discount to the median for S&P 1500 industrial stocks. United Rentals is a Focus List Buy and a Long-Term Buy.

Growth

Lam Research ($76; LRCX), an equipment supplier for the highly cyclical semiconductor industry, has churned out nine straight quarters of double-digit revenue growth. Operating earnings rose more than 33% in each of the past five quarters, helped by the steady expansion of operating profit margins. Cash from operations jumped 54% to $806 million in the 12 months ended September.

The company appears positioned to post a revenue gain of 6% to 10% in calendar year 2015. Despite its growth, the stock earns a Value rank of 66 — higher than all but two of the 16 semiconductor-equipment stocks in the S&P 1500 Index and well above its peer-group average of 44. Lam is a Focus List Buy and a Long-Term Buy.


Shire ($207; SHPG) earns a Momentum rank of 96. Both cash from operations and free cash flow jumped more than 35% in each of the past five quarters. Shire's sales growth has exceeded 9% in five straight quarters, a trend expected to continue into the March quarter.

The Irish drugmaker plans to augment its organic growth with the $5.2 billion cash acquisition of U.S.-based NPS Pharmaceuticals ($46; NPSP), announced earlier this month. NPS sells a treatment for short-bowel syndrome and is awaiting U.S. approval of an experimental drug for hypoparathyroidism, a hormonal condition. Shire is a Focus List Buy and a Long-Term Buy.

Catalysts

F5 Networks' ($126; FFIV) hardware and software help clients keep up with the crush of data flowing across corporate servers. The company's security services remain in high demand, as a rash of hacking attacks have stolen sensitive data. F5's market-share gains have contributed to sales and free cash flow rising more than 10% in eight of the past 10 years.

The shares have surged 33% in the past year, leaving the stock trading at a premium to many peers. Yet F5's growth prospects look bright, with per-share profits projected to rise 17% in the 12 months ending September, compared to its peer-group average of 10%. For the December quarter, F5 is expected to report per-share earnings of $1.48, up 21%, on revenue growth of 15%. F5, set to post results on Jan. 21, is a Focus List Buy and a Long-Term Buy.


Jones Lang LaSalle ($150; JLL), a provider of real-estate-related services, is benefiting from appreciating property values and improving occupancy rates. The environment for commercial real estate is improving in the company's key markets: the U.S., which represents about 42% of Jones Lang's revenue, and Europe, about 36%. Jones Lang is one of just nine S&P 1500 stocks to score above 95 for both Quadrix Momentum and Earnings Estimates.

Analyst per-share-profit estimates for 2015 have steadily risen over the past 90 days, with the consensus projecting 8% growth on 7% higher revenue. Jones Lang's stock has surged 21% in the past three months but still seems reasonably priced versus both historical and industry norms. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.

THE FOCUS LIST
Since Added
---- to List ----
12-Month
--- Growth ---
--- Trailing P/E Ratio ---
-- Forward P/E --
----- Quadrix Scores -----
Company (Price; Ticker)
Date
Price
Change
(%)
S&P 500
Change
(%)
EPS
(%)
Sales
(%)
Current
5-Year
Median
Industry
Median
Current
Industry
Median
Momen-
tum
Value
Overall
Aetna ($90; AET) NEW
1/15/15
NA
NA
19
28
13
9
19
13
17
61
80
95
Alaska Air ($62; ALK)
5/1/14
28
7
55
8
16
10
23
11
13
93
69
99
Ameriprise Fin'l
($125; AMP)
6/12/14
8
5
11
11
15
13
17
13
15
80
72
96
Apple ($110; AAPL)
8/21/14
9
2
13
7
17
15
14
14
13
88
71
99
F5 Networks
($126; FFIV)
12/4/14
(5)
(2)
16
17
23
31
19
20
15
85
50
95
Foot Locker ($53; FL)
5/1/14
14
7
24
9
16
16
20
14
17
86
67
97
Jones Lang LaSalle
($150; JLL)
11/6/14
7
0
37
24
19
18
20
17
17
98
56
97
Kroger ($66; KR)
5/16/13
87
23
10
7
20
13
26
18
22
82
52
90
Lam Research
($76; LRCX)
11/6/14
(4)
0
154
28
17
20
19
16
16
95
66
96
Lear ($95; LEA)
8/1/13
37
19
24
11
13
10
17
10
15
70
87
98
Magna Int'l
($97; MGA)
1/31/13
86
35
41
8
11
12
17
10
15
77
87
97
ManpowerGroup
($64; MAN)
6/16/14
(24)
4
38
3
12
18
20
12
17
53
94
85
Shire ($207; SHPG)
12/4/14
(4)
(2)
48
20
20
22
23
18
18
96
45
93
Union Pacific
($111; UNP)
2/13/14
25
11
19
9
21
18
20
17
17
87
41
90
United Rentals
($84; URI)
12/19/13
12
12
41
12
13
20
18
11
15
89
81
94
Average
20
8
37
13
16
16
14
83
68
95
Note: Quadrix scores are percentile ranks, with 100 the best.     NEW Added To Focus List in this issue.

Focus List facts

Here are a few historical observations about our Focus List:

• The average stock has stayed on the Focus List for 451 days (about 15 months). That duration declined to 356 days over the past 10 years and 277 days (about nine months) over the past five years.

• Dover ($69; DOV), Mylan ($55; MYL), Qualcomm ($72; QCOM), and Vishay Intertechnology ($13; VSH) each appeared on the Focus List at three separate times — more than any other stock.

• PepsiCo ($97; PEP) spent the longest uninterrupted period on Focus List: 2,282 days, a stretch lasting from Feb. 14, 2002, to May 15, 2008. PepsiCo also earns the dubious distinction for the shortest stay — just seven days in October 2008, when the company unexpectedly cut its guidance.

• Our best stock versus the S&P 500 was Southwest Airlines ($39; LUV), outperforming by 228 percentage points from Nov. 29, 1996, to Nov. 21, 2001.
As for today's Focus List:

• The average duration of stocks currently on the Focus List is 278 days (about nine months), excluding Aetna ($90; AET), which is being added this week (see Portfolio Review for details).

• Current stocks on the Focus List have outperformed the S&P 500 by an average of 11 percentage points since joining the list.

• Eleven of the 15 Focus List stocks are outperforming the S&P 500, seven by more than 10 percentage points, including Magna International ($97; MGA) and Kroger ($66; KR), both leading by more than 50 percentage points.


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