Top Picks Feature Both Value And Growth

6/15/2015


When subscribers ask whether we're growth or value investors, our answer is "yes." We use a growth-at-a-good-price approach that puts us into growth stocks, value stocks, and stocks that don't fall neatly into either category.

For the 2015 Midyear Outlook issue, we divided our Focus List into growth, value, and neutral categories using a modified version of the criteria used for the broad Dow Jones U.S. Index. To classify stocks, Dow Jones relies on six statistics — two based on projections, two based on current statistics, and two based on trailing 12-month growth:

• Projected price/earnings ratio.
• Projected earnings growth.
• Price/book ratio.
• Dividend yield.
• Trailing revenue growth.
• Trailing earnings growth.

As the table below illustrates, value stocks average the lowest price/earnings and price/book ratios, while growth stocks have managed greater historical sales, profit, and operating-cash-flow growth, as well as superior projected profit growth. Our Quadrix stock-rating system isn't playing favorites, with all three groups averaging Overall scores of 57 to 59.

GROWTH, VALUE ANALYSIS
All numbers except for the company count are averages for components of the Dow Jones U.S. Indexes for growth, value, and neutral stocks. Averages exclude some outliers.
Classification
--------- (Number Of Companies) ---------
Growth
(502)
Neutral
(168)
Value
(573)
Stock-Market Value ($ Billions)
16.5
17.3
19.3
Dividend Yield (%)
0.8
1.2
2.9
P/E Ratio
  On Trailing Earnings
25
21
19
  On Est. Next-Year Earnings
22
18
17
Trailing Price/ Book Ratio
4.8
3.8
2.4
12-Month Growth
  Sales (%)
13
8
4
  Per-Share Profits (%)
10
10
5
  Operating Cash Flow (%)
10
2
2
Estimated EPS Growth
  Current Year (%)
5
5
1
  Next Year (%)
18
14
11
  Next 5 Years (Annualized) (%)
14
9
8
Quadrix Scores
  Momentum
53
53
49
  Value
47
53
62
  Quality
74
65
54
  Financial Strength
59
54
56
  Earnings Estimates
51
49
51
  Performance
53
55
48
  Overall
59
58
57
Note: Quadrix scores are percentile ranks, with 100 the best.

Twelve of the 14 stocks on our Focus List are already part of the Dow Jones U.S. Index, and we slotted the other two — Magna International ($59; MGA) and Shire ($247; SHPG) — into the growth, value, or neutral camps based on the six key statistics. As the table below illustrates, our top picks include names from all three groups — just two from the tiny neutral group (which accounts for less than 14% of the Dow Jones U.S. Index), with five from value and seven from growth.

In the following paragraphs, we review one neutral stock, as well as five appealing names from the two other groups, growth and value.

Aetna ($118; AET) shares trade within 2% of their 52-week high, pushing the stock's P/E ratio to 17. But the stock looks cheap relative to S&P 1500 health-care stocks, which have a median P/E of 23, and managed-care stocks, which have a median P/E of 21. The industry looks positioned for decent growth, as Aetna and other health insurers appear positioned to push through big rate hikes for 2016. U.S. payments for Medicare Advantage, representing about 5% of Aetna's medical members, will also increase next year.

Speculation swirls that Humana ($214; HUM) may be close to selling itself after pulling out of a major health-care conference. Aetna is on the short list of potential suitors. Aetna CEO Mark Bertolini has predicted the managed-care industry could become concentrated like the telecommunications industry, adding that Aetna would not shy away from participating in the consolidation. Aetna is a Focus List Buy and a Long-Term Buy.


Apple ($129; AAPL) scores above 70 for all six categories in Quadrix, contributing to its Overall rank of 99. Perhaps most impressive is Apple's operating momentum, especially for a company of its size. For the 12 months ending March, Apple grew per-share profits 35%, revenue 21%, and cash from operations 41%.

Apple introduced several new products at its June developers conference, most notably a service for streaming music called Apple Music, priced at $9.99 a month. Separately, its mobile payment service Apple Pay will launch in the U.K. in July. Apple Pay will soon accept branded cards from some U.S. retailers and also those from Discover Financial Services ($59; DFS). There was no mention of its anticipated new Apple TV set-top box and bundle of TV stations. Apple, trading at just 13 times estimated year-ahead earnings, is a Focus List Buy and a Long-Term Buy.


Jones Lang LaSalle's ($169; JLL) per-share profits have risen by more than 20% in each of the past eight quarters, while sales growth has topped 15% in seven straight quarters. Jones Lang partly owes that growth to the improving market for commercial real estate, supported by rising asset prices and rental rates.

Management typically funnels 30% to 35% of excess cash flow into technology to improve productivity and 55% into niche acquisitions. Jones Lang completed two deals in the March quarter and has announced two more deals since then. Most recently, it agreed to purchase an agency that leases retail space in shopping centers and a consulting firm that improves energy efficiency in buildings. Jones Lang LaSalle, with an Overall score of 92, is a Focus List Buy and a Long-Term Buy.


Lear ($116; LEA) offers an unusual blend of robust share-price action, cheap valuation, and improving profit estimates. The shares have generated an 18% total return in 2015 yet earn a Value rank of 85. Rising analyst estimates project that Lear will grow per-share profits 18% in both the June quarter and for the full year.

Just 20 stocks in the S&P 1500 have returned more than 15% this year and score above 80 for Value — and just 12 stocks have also seen their profit estimates for the current fiscal year rise over the past 90 days. Lear also receives scores of 75 or higher for price/sales, enterprise ratio, and price/cash flow — three of the most effective Quadrix factors for S&P 1500 stocks over the past decade. Lear is a Focus List Buy and a Long-Term Buy.


Magna International ($59; MGA) consistently delivers higher returns on assets, equity, and investment. It also has a penchant for producing strong profit growth (per-share earnings are up at least 12% in each of the past six quarters), despite sluggish sales due to foreign currency. Operating profit margins have expanded in 14 consecutive quarters, most recently benefiting from a favorable product mix and efficiency gains. Management sees more opportunities to expand profit margins, raising its 2015 guidance in February.

Earning a Value rank of 83, the stock trades at 12 times trailing earnings, roughly in line with its five-year average and 31% below the median for S&P 1500 auto-parts stocks. Magna also offers a double-digit discount relative to peers based on price/sales, price/book, price/operating cash flow, and enterprise ratio. Magna is a Focus List Buy and a Long-Term Buy.


Shire's ($247; SHPG) growth over each of the past two quarters ranks in the top half of our research universe for per-share profits, revenue, and cash flow. The company supplements organic growth with a steady stream of acquisitions. Shire has already completed two acquisitions this year, totaling roughly $5.3 billion.

Shire is reportedly seeking to purchase Actelion in a deal potentially worth close to $19 billion. Actelion, a biotechnology company based in Switzerland, generated revenue of $1.96 billion in 2014, primarily from rare diseases. It would represent Shire's biggest acquisition yet. Shire's balance sheet (net debt totals just $2.65 billion) and recent free cash flow (tripling to $4.34 billion in 12 months ended March) should make a deal of this scale manageable. Shire is a Focus List Buy and a Long-Term Buy.

FOCUS LIST
12-Month Growth
Est. EPS Growth
Company (Price; Ticker)
Dividend
Yield
(%)
P/E On
Est. Next-
Year
Earnings
Trailing
Price/Book
Ratio
Sales
(%)
Per-Share
Profits
(%)
Next
Year
(%)
Next
5 Years
(Annual.)
(%)
Quadrix
Overall
Growth
Affiliated Managers ($224; AMG)
0.0
14
4.7
12
22
13
15
86
Apple ($129; AAPL)
1.6
13
5.7
21
35
7
14
99
F5 Networks ($127; FFIV)
0.0
17
6.8
16
29
13
16
92
Jones Lang LaSalle ($169; JLL)
0.3
17
3.2
21
46
8
12
92
Lam Research ($83; LRCX)
1.5
14
2.5
16
31
16
10
93
Shire ($247; SHPG)
0.3
19
5.3
20
35
17
14
92
United Rentals ($90; URI)
0.0
9
5.8
16
43
14
14
97
Neutral
Alaska Air Group ($61; ALK)
1.3
10
3.7
7
50
4
15
96
Magna International ($59; MGA)
1.5
10
2.8
2
25
21
15
80
Value
ADT ($37; ADT)
2.3
17
2.1
5
8
8
7
68
Aetna ($118; AET)
0.8
14
2.7
14
6
11
11
81
Foot Locker ($63; FL)
1.6
14
3.4
7
23
11
11
96
Kroger ($71; KR)
1.0
17
6.4
10
24
10
9
89
Lear ($116; LEA)
0.9
11
3.2
7
59
15
14
98
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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