No Such Thing As A Flawless Pick

11/16/2015


No stock is perfect, but that doesn't mean we should avoid investing in stocks.

AN UNEVEN BOUNCEBACK
The S&P 1500 Index has rebounded in the past month, though the recovery has been uneven, as shown in the top table. At bottom, we show average returns for four key industries that contain struggling recommended stocks. For example, the 11 stocks in the managed-care industry, home of Centene ($59; CNC), have risen by 2% on average since the end of September, which ranks them 115th out of the 149 industries we track. Apparel retailers, Foot Locker's ($62; FL) home, also rank in the bottom quintile for stock performance since the end of September.
------------- Average Price Change -------------
S&P 1500 Sector
Year-To-Date
(%)
Since End
Of June
(%)
Since End
Of Sept.
(%)
Consumer Discretionary
(4)
(7)
3
Consumer Staples
4
2
4
Energy
(23)
(20)
19
Financials
3
1
7
Health Care
11
(4)
8
Industrials
(3)
(4)
9
Information Technology
2
0
10
Materials
(13)
(13)
8
Telecommunication Services
0
1
13
Utilities
(7)
4
1
S&P 1500 Index Average
(1)
(4)
8
---------- Average % Price Change (Rank Among Industries) ----------
S&P 1500 Industry
(Number Of Companies)
Year-To-Date
Since End
Of June
Since End
Of Sept.
Apparel Retail (23)
(14)
(116)
(13)
(123)
(2)
(133)
Diversified Banks (6)
1
(61)
(1)
(58)
11
(31)
Managed Health Care (11)
17
(16)
(9)
(106)
2
(115)
Semiconductors (35)
4
(54)
(1)
(54)
11
(35)

Below we profile four stocks with issues. Despite their problems, all four seem capable of generating superior total returns over the next year.

Centene ($59; CNC) lacks the share-price action and near-term profit outlook we typically demand from our recommended stocks, though its long-term prospects look bright. Shares have shed 26% of their value since the end of June, more than double the average decline for managed-care stocks in the S&P 1500. Its earnings per share are projected to decline 9% in the December quarter.

Sales have advanced by double-digits in 19 consecutive quarters, a trend likely to continue into 2016. Centene's operating profit margin expanded in the September quarter, helped by an improving medical benefits ratio, the percentage of collected premiums paid out to cover medical costs. Centene says medical costs are remaining stable, while its membership base expanded 24% during the quarter.

Management will outline its 2016 outlook during its analyst day on Dec. 18. For now, the consensus projects per-share profits of $3.35, up 17%, on revenue growth of 15%. Centene's pending $6.3 billion acquisition of Health Net ($64; HNT), slated for completion in early 2016, should help boost growth. Encouragingly, analyst estimates have drifted higher over the past 60 days. Centene, earning a Value rank of 76, is a Buy and a Long-Term Buy.


Foot Locker ($62; FL) shares have declined 14% since the end of September, amid reports that the U.S. retail industry experienced anemic traffic in September and October. In the past few weeks, key players in and around the retail industry have given disappointing results, including apparel manufacturer VF ($66; VFC), which noted weakness in sportswear, and footwear maker Skechers U.S.A. ($26; SKX), which described a sluggish environment.

Broad retail weakness coincides with concerns more specific to Foot Locker. There is some evidence that consumers are beginning to shift away from Foot Locker's strength — premium athletic shoes — and toward casual footwear. Moreover, rival Finish Line ($18; FINL) reported in September its worst same-store sales for the back-to-school season since 2009, while growth also slowed sharply at Nike ($127; NKE) stores.

Despite these risks, we remain confident in Foot Locker for several reasons.  Over the years, Foot Locker's fortunes have often diverged from those of Finish Line — and it has repeatedly capitalized on its rival's self-inflicted missteps to take market share. Additionally, Nike said in September that global futures orders — products scheduled for delivery over the next five months — increased 17% at constant currency. True, Foot Locker's stock doesn't represent a great value at 16 times trailing earnings, in line with the median S&P 1500 apparel retailer. But given its growth profile, with per-share profits projected to increase by double-digits in the second half of fiscal 2016 ending January, the stock remains a Focus List Buy and a Long-Term Buy.


Since the financial crisis, fines paid by J.P. Morgan Chase ($67; JPM) and other U.S. banks have exceeded $200 billion, reported CNBC. But perhaps more damaging for banks is the abnormally low interest-rate environment, which has sapped profitability. J.P. Morgan's operating profit margin has declined in six of the past seven quarters. Its net interest margin, the spread between interest paid on deposits and charged for loans, has declined in 18 of the past 19 quarters. Making matters worse, J.P. Morgan's revenue has declined in seven of the past nine quarters.

Investors have bid up shares of J.P. Morgan and other banks in the past six weeks in anticipation the Federal Reserve may raise rates this year. Yet a single, nominal bump in interest rates is unlikely to materially improve operating results. The trajectory of subsequent rate hikes will be far more important for banks.

Despite the uncertainty, J.P. Morgan shares look unduly cheap. They earn a Value rank of 84 and trade at just 12 times trailing earnings, a 28% discount to the S&P 1500 bank industry's median. J.P. Morgan, yielding 2.6%, is a Buy and a Long-Term Buy.


Skyworks Solutions' ($79; SWKS) stock tumbled in August on fears that China's slowing economy would crimp the company's growth. Even an appearance by CEO David Aldrich on Jim Cramer's television show Mad Money failed to calm investors.

Skyworks put some of those concerns to bed with its solid September-quarter report and encouraging outlook for the current quarter. The company grew per-share profits 36% to $1.52 excluding special items to match the consensus. Revenue, up 23%, topped analysts' expectations. The stock's near-term fate is closely tied to the success of the iPhone 6S, and Credit Suisse analysts said Apple ($116; AAPL) has cut orders by 10% due to soft demand. Yet Skyworks insists sales for connected devices remain strong due to rising consumer demand for streaming services. And while peers have warned of pricing pressure next year, Skyworks expects fatter gross margins as it takes a bigger share of the components that go into its customers' smartphones.

For the December quarter, Skyworks expects earnings per share to climb 27% to $1.60 on revenue growth of 15%; both targets topped the consensus at the time of the announcement. Although Skyworks appears to be separating itself from other smartphone-components makers, its trailing P/E ratio of 15 is below the median of 20 for S&P 1500 semiconductor stocks. Skyworks is a Buy and a Long-Term Buy.

DOWN BUT NOT OUT
We stand by the following recommended stocks that have either sold off or posted weak operating momentum.
12-Month Change
------- Price Change -------
--------------- Quadrix Scores ---------------
Company (Price; Ticker)
Est. EPS
Change.
Current
Quarter
(%()
EPS
(%)
Sales
(%)
Trailing
P/E Ratio
YTD
(%)
Since End
Of June
(%)
Since End
Of Sept.
(%)
Momen-
tum
Value
Perfor-
mance
Overall
Centene ($59; CNC)
(9)
67
43
20
14
(26)
9
89
76
47
97
Foot Locker ($62; FL)
13
22
5
16
11
(7)
(14)
86
59
66
94
J.P. Morgan Chase
($67; JPM)
12
(6)
(3)
12
8
(1)
10
43
84
63
76
Skyworks Solutions
($79; SWKS)
27
121
42
15
9
(24)
(6)
94
56
37
92
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