Any Style You Like
The Dow Jones U.S. Index contains 1,250 stocks that combine to account for 95% of the market value of all U.S. stocks. To appeal to investors with different appetites, Dow Jones slots these stocks into growth, value, and neutral styles.
Any system that separates value from growth has limitations, as plenty of stocks exhibit a mix of growth and value characteristics — thus, the need for a neutral classification. Dow Jones uses six criteria, described below, including both value and growth metrics.
Growth and value styles
The Dow Jones U.S. Index contains 1,250 companies that reflect 95% of the total market capitalization of U.S. stocks. From there, Dow Jones designates each stock as growth, value, or neutral.
A stock's investment style is based on the following six criteria: trailing earnings growth, projected earnings growth, trailing P/E ratio, forward P/E ratio, price/book ratio, and dividend yield.
Academic studies and our own research show that buying stocks with low valuations tends to be a winning strategy over the long haul. Value's short-term performance can be more volatile. So far in 2015, Dow Jones growth stocks have averaged total returns of 5%, versus 0% for value stocks.
Based on rolling 12-month returns, the Quadrix Overall score has worked for all three investment styles over the past five years and since January 1992. See the chart at right for details. The Value score also tends to be effective regardless of style. Earnings Estimates and Performance have worked for growth and neutral stocks over the past five years.
As shown in the table below, our growth stocks tend to offer a better growth profile and lower valuation than the average Dow Jones growth stock. The same relationship holds true for our value and neutral stocks, relative to the Dow Jones benchmarks. A top pick from each of the three investment styles is reviewed below.
Affiliated Managers Group ($220; AMG) scores above 80 for two key Quadrix ranks for growth stocks: Earnings Estimates (82) and Overall (89). Affiliated Managers' business model — it takes ownership stakes in boutique investment-management firms — lends itself to steady growth. Indeed, it has produced 11 consecutive quarters of at least 7% growth in per-share profits and sales.
The current consensus calls for 15% higher per-share profits for the June quarter and 19% growth in the year ahead. That compares favorably to other S&P 1500 asset managers, projected to show median earnings growth of 9% for the quarter and 15% over the next year. Despite its superior growth profile, the stock trades at 16 times estimated earnings, a 13% discount to its peer-group average. Affiliated Managers is a Focus List Buy and a Long-Term Buy.
CBRE ($38; CBG), the self-proclaimed largest real estate-services firm in the world, offers an enticing blend of growth and value. For the 12 months ended March, CBRE grew per-share profits 15%, revenue 22%, and cash from operations 35%. Returns on assets and investment are also steadily marching higher. Looking ahead, CBRE seems capable of maintaining double-digit profit growth into 2016.
Shares have advanced 10% so far in 2015 and trade within 6% of their all-time high, set in April. Yet the stock trades below its own five- and 10-year norms for trailing price/earnings, price/cash flow, and price/book ratios. CBRE is a Buy and a Long-Term Buy.
Foot Locker ($68; FL) shares have generated a 22% total return in 2015, well ahead of the 1% average return for S&P 1500 apparel retailers. Despite the rally, the stock still looks cheap at 18 times trailing earnings (a 9% discount to its peer-group average) and 16 times estimated year-ahead earnings (a 10% discount).
The stock most recently rallied on a strong earnings report by key supplier Nike ($109; NKE), which accounts for about 65% of Foot Locker's sales. Nike's orders for delivery from June to November were unexpectedly strong, up 13% at constant currency. Nike has been increasing investment in its direct-to-consumer business, which merits watching for Foot Locker investors, though the footwear maker would probably prefer not to alienate a crucial retailer. Nike also sold more high-margin footwear, which should filter through to Foot Locker's gross profit margins, up in each of the past five quarters. Foot Locker is a Focus List Buy and a Long-Term Buy.