Buy The Whole Focus List

5/18/2015


If you've followed our Focus List, buying and selling when we do, the last few years have been good to you.

We designed the Focus List as an all-weather portfolio. Since 2003, a period that included a frightening downward move as well as two long rallies, the list gained 243.8%, well above the S&P 500 Index's 138.5%.

Yes, if you followed our lead, your portfolio should be a lot bigger than it was five years ago. But we can't vouch for those who don't go all in, who take only part of our advice.

We hear from many investors who choose to buy just a few stocks from our recommended lists, and their returns vary widely. Let's illustrate with fictional subscribers Lucky Lucy and Hard-Times Harry. Both "follow" the Focus List to the extent that back in 2013 they each plunked $10,000 into three of our favorite stocks.

Lucy purchased Kroger ($71; KR), Lear ($114; LEA), and Magna International ($56; MGA), all of which joined the Focus List in the first half of 2013.

Harry bought new recommendations Express Scripts ($86; ESRX), Cisco Systems ($29; CSCO), and Dover ($76; DOV) between May and September 2013.

All three of Lucy's stocks are still on the Focus List, while Harry's three were sold in 2013 or 2014.

If Harry bought and sold when we recommended, he lost nearly 5%. In contrast, Lucy's investments in Kroger, Lear, and Magna have grown to a combined $58,147, up 94% from her initial $30,000. 

Both Lucy and Harry might claim to be Focus List investors, but they don't use the list the way we recommend. We advise readers not to try to pick which Focus Buys will perform the best because even we don't know that. Lucy guessed right, and Harry guessed wrong. Unless you're a really good guesser, picking a few favorites from the lists will leave your returns heavily dependent on luck. Not all of our selections make money, as the table below shows.


HISTORICAL BREAKDOWN

Our review of the performance of every Focus List selection since 1994 revealed some trends:

• In recent years, stocks have stayed on the list for shorter periods. That change reflects a shift in our selling philosophy, as we've become less willing to hold onto stocks when they drift below the ranks of our very favorites.

• The percentage of Focus List stocks that rose while on the list has been higher in the last five years than during the last 10 or 15. This shouldn't surprise us, given the strong returns of the broad stock market. The S&P 1500 Index has returned an annualized 14.3% over the last five years, versus a 0.6% annualized return during the previous 10.

• During the last five years, our Focus List stocks have averaged returns of 14.6% while on the list. That's 390 basis points, or 3.9%, higher than the S&P 500 Index's average return of 10.7% for the same holding periods. Only 42% of our picks have outperformed, down from 45% over the last 10 years and 46% since 2000. Stock-picking may have become harder in recent years, but Quadrix still gives us an edge.

Avg
Days
On List
Avg.
Focus
List
Return
(%)
%
Positive
Avg.
S&P
500
Return
(%)
Stock
Minus
Index
(%)
%
Positive
Bought since Focus List inception
(Dec. 23, 1994)
443
16.6
56
11.7
4.8
46
Bought since start of 2000
415
11.7
53
6.5
5.2
46
Bought in last 10 years
(May 2005-April 2015)
355
14.3
56
7.8
6.5
45
Bought in last 5 years
(May 2010-April 2015)
283
14.6
62
10.7
3.9
42

We're not ashamed to admit we make mistakes because the same is true for anyone who assembles a stock portfolio. Our goal is to create a basket of high-potential stocks in hopes that the winners will more than offset any losers. The returns presented above demonstrate that we meet that goal more often than we miss it.

We like to keep the Focus List at 13 to 17 stocks and the Buy List at 25 to 35 for diversification purposes. Those portfolio sizes keep us focused on our best ideas while allowing us to own stocks from different sectors — and also limit the likelihood that one or two big losers will torpedo our returns.

FOCUS LIST
Date
Added
To List
Price
Added
To List
(Split-
Adjusted)
($)
Price Return
---- On List ----
12-Month
---- Growth ----
------ Quadrix Scores * ------
Company (Price; Ticker)
Days
On List
Stock
(%)
Stock Minus
S&P 500
Index
(%)
Sales
(%)
Per-
Share
Profits
(%)
Overall
12-
Factor
Sector
Reranked
Overall
Sector
ADT ($38; ADT)
4/9/15
41.81
33
(9)
(9)
5
8
66
45
57
Industrials
Aetna ($110; AET)
1/15/15
90.50
117
21
16
14
6
83
72
88
Health care
Affilliated Mgrs.
($221; AMG)
5/7/15
221.54
5
0
(1)
12
22
84
83
76
Financials
Alaska Air Group
($65; ALK)
5/1/14
47.99
376
35
23
7
50
96
49
91
Industrials
Apple ($126; AAPL)
8/21/14
100.58
264
25
20
21
35
99
93
99
Technology
F5 Networks
($126; FFIV) 
16
29
95
99
94
Technology
Foot Locker ($61; FL)
5/1/14
46.53
376
32
20
10
25
91
83
88
Cons. discretion.
Jones Lang LaSalle
($164; JLL)
11/6/14
139.91
187
17
13
21
46
93
96
83
Financials
Kroger ($71; KR)
5/16/13
35.07
726
103
76
10
24
89
99
94
Cons. staples
Lam Research
($77; LRCX)
11/6/14
79.59
187
(3)
(7)
16
31
95
74
90
Technology
Lear ($114; LEA)
8/1/13
69.40
649
64
41
7
59
98
100
100
Cons. discretion.
Magna Int'l
($56; MGA)
1/31/13
26.13
831
114
74
2
25
93
97
79
Cons. discretion.
Shire ($243; SHPG)
12/4/14
216.01
159
13
11
20
35
95
94
89
Health care
United Rentals
($103; URI)
12/19/13
74.87
509
38
22
16
43
97
94
96
Industrials
Focus List average
340
35
23
13
31
91
84
87
* Percentile ranks, with 100 the best.      Visit www.DowTheory.com/go/Focus1 for a Focus List transaction history.   
NA Not available.

 


In search of geniune values

We like to feature a mix of stocks on the Focus List. Large and small, aggressive and conservative, growth and value. Today we're highlighting four of the most attractive values on the list.

FOUR OF THE FOCUS LIST'S BEST VALUES
Each of the four Focus List stocks below trades at a discount to its industry average on price/earnings and price/operating cash flow and at a discount to its history on at least one of those metrics.
---------P/E Ratio ---------
Price/Operating
----- Cash Flow Ratio -----
Company
(Price; Ticker)
Quadrix
Value
Score
Trailing
Vs. 5-
Yr. Avg.
Versus
Industry
Average
Trailing
Vs. 5-
Yr. Avg.
Versus
Industry
Average
Industry
Affil. Mgrs.
($221; AMG)
67
19
0.57
0.91
10.5
0.98
0.68
Asset
mgmt.
Apple
($126; AAPL)
77
16
1.03
0.80
9.6
0.87
0.91
Tech
hardwr.
Magna Int'l
($56; MGA)
92
12
0.89
0.66
8.9
1.20
0.51
Auto
parts
United Rentals
($103; URI)
83
14
0.73
0.72
5.2
1.08
0.34
Trading
cos.
Notes: Quadrix scores are percentile ranks, with 100 the best.

While the value picks may have more appeal to value investors than some of the growthier names on the list, the top story illustrates the dangers of just buying a few of the stocks. If you plan to follow our Focus List, we advise that you buy all 14 in equal-dollar amounts.

Affiliated Managers Group ($221; AMG) is the only stock on the Focus List with both trailing price/earnings and price/operating cash flow ratios below their five-year average. The asset manager is far from a deep value — it earns a good-but-not-great Quadrix Value score of 67 and trades at 19 times trailing earnings. However, we at the Forecasts take a growth-at-a-good-price approach to picking stocks rather than just buying everything with super-low P/E ratio.

Consider Affiliated Managers' PEG (price/earnings-to-growth) ratio. The stock trades at 16 times projected year-ahead earnings and is expected to grow profits at an annual rate of 15% over the next five years. Dividing the forward P/E by the growth rate yields a PEG of 1.0, well below the industry average of 1.4. The consensus projects per-share-profit growth of 20% this year and 14% next year, and estimates have been trending higher since the company boosted its profit guidance last month.


Apple ($126; AAPL) offers an appealing blend of growth and value. After delivering un-Apple-like growth from late 2012 through 2013, the maker of iPhones, iPads, and Macintosh computers has roared back. Over the last 12 months, sales rose 21%, per-share earnings 35%, and operating cash flow 41% — growth you wouldn't expect from a company earning a Value score of 77. Only 4% of stocks in the S&P 1500 exceeded Apple's sales and profit growth over the last year. Of those 21 high-growth stocks, only seven top Apple's Value score.

Apple generated operating cash flow of $76.31 billion over the last year. That's not only the largest cash flow of any U.S. company, but 68% more than the next-largest generator. Over the last three years, Apple spent $30 billion on dividends and $78 billion on stock buybacks, reducing its share count 12% during that period. Apple yields 1.7%.


Magna International ($56; MGA) earns a Quadrix Value score of 92, highest on our Focus List and higher than all but one of the auto-parts stocks in the S&P 1500 Index. At 12 times trailing earnings, Magna trades at a 38% discount to the industry average; the stock also sports a discount of at least 23% to the industry average for price/sales, price/book, and price/operating cash flow.

In the March quarter, Magna topped analyst expectations with profits of $1.12 per share, up 27%. Sales fell 7% to $8.33 billion, but the strong dollar reduced sales by $880 million; excluding currency exchange, sales would have risen 3%. Operating margins jumped to 7.6% in the quarter from 6.7% a year earlier. The Canadian firm lowered its sales guidance for the full year to reflect the planned sale of a car-interiors business, but at the same time boosted profit-margin targets.

Over the last year, Magna spent a net $1.51 billion buying back shares, reducing its share count by 7%. Given the more than $500 million in proceeds Magna will net later this year from the divestiture, aggressive buybacks should continue.


United Rentals ($103; URI) doesn't fit the profile of a value stock. It has put together 11 straight quarters of at least 19% growth in per-share profits. Analysts expect profits to grow 19% this year, 14% next year, and 18% annually over the next five years. Yet the stock's trailing P/E ratio of 14 is 27% below its own five-year average.

From late November through mid-January, United Rentals lost more than 30% of its value, at least in part because of its exposure to the energy sector. However, the shares have since rebounded 26% and still look cheap. At 12 times expected current-year earnings, United Rentals trades at a 33% discount to the average industrial stock. Its PEG ratio is just 0.8, versus a sector average of 1.6.

United Rentals' Overall score of 97 is supported by four category scores of at least 80, including 83 for Value.


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