Our Favorites For 2016 Returns

12/21/2015


Invest long enough, and you'll hear some pundit equate the stock market to war, an obvious and somewhat appropriate metaphor. Way too many investors jump into the fray armed with little more than enthusiasm and a stock tip from CNBC. Sometimes they win, and sometimes they lose.

But any military strategist can attest that armies using superior weapons and tactics generally win the battle.

Skilled generals never engage the enemy until they've stacked the odds in their favor, a strategy that in the financial arena equates to comprehensive research and discipline. We take this approach to heart and never pull the trigger until we're confident we can hit the target.

To expand on that strategy, let's look at our Focus List from four angles, profiling at least one stock in each section.

Value

We don't look for the cheapest stocks, because such stocks tend to trade at a discount for a reason. But if we can find high-quality stocks with decent growth that happen to sell for an attractive price, we're all in.

VALUE
The five stocks below trade at a discount to the average stock in the S&P 500 Index based on the three featured valuation ratios. All five also earn Quadrix Value scores of at least 70.
------ Trailing Ratios ------
Company (Price; Ticker)
Price/
Earnings
Price/
Sales
Price/
Earnings-
To-Growth
Quadrix
Value
Score
Alaska Air ($83; ALK)
14
1.9
0.7
73
C.H. Robinson ($64; CHRW)
19
0.7
1.6
72
Comcast ($59; CMCSa)
18
2.0
1.3
70
Jabil Circuit ($24; JBL)
12
0.3
0.8
91
Lear ($125; LEA)
13
0.5
0.7
85
S&P 500 average
20
2.8
1.8
55

Alaska Air Group's ($83; ALK) stock has returned 50% in the past year, yet its per-share profits have grown even faster, up 56% for the 12 months ended September. As a result, its trailing P/E ratio has dropped to 13.8 from where it stood a year ago, 14.4. The stock's prospects for the year ahead still look bright. The consensus expects per-share profits to rise 9% to $7.01 in 2016. Shares trade at just 12 times that estimate, a 23% discount to the median S&P 1500 industrial stock.

Analyst estimates for Alaska Air are steadily rising, even as other airlines have hit a patch of turbulence. Earlier this month, Southwest Airlines ($45; LUV) cut its December-quarter outlook for revenue per available seat mile, blaming the warning on unusually aggressive discounting by larger U.S. airlines in November, due to softer bookings in the days leading up to Thanksgiving. Alaska Air is a Focus List Buy and a Long-Term Buy.

 

Operating momentum

Profit growth seems to be the preferred metric of every financial writer out there, to the point that many of them talk about little else. While we put stock in profit growth, we also like to see growth in other metrics, such as sales and cash flow, to confirm the trend.

OPERATING MOMENTUM
Each of the five stocks below grew sales and profits faster over the last 12 months than the average S&P 500 stock. Analysts project superior profit growth over the next year.
---- 12-Month Growth ----
Company (Price; Ticker)
Sales
(%)
Per-Share
Profits
(%)
Expected
Year-Ahead
Profit Growth
(%)
Quadrix
Momentum
Score
Alaska Air ($83; ALK)
5
56
16
90
Apple ($111; AAPL)
28
43
7
91
CBRE Group ($36; CBG)
17
16
16
85
Foot Locker ($65; FL)
4
22
11
81
Jabil Circuit ($24; JBL)
14
326
26
98
S&P 500 average
2
5
4
50

Apple's ($111; AAPL) per-share profits, revenue, and cash from operations all rose more than 25% in fiscal 2015 ended September. Instrumental to that growth was the iPhone, which generated 52% higher sales in fiscal 2015 and represented 66% of the company's total revenue. However, in November multiple components suppliers signaled soft results, leading some analysts to lower their iPhone targets for the year ahead.

The recent pessimism has caused short interest in the stock to rise. Shares have shed 4% in the past month and now trade at just 12 times estimated fiscal 2016 earnings. But Apple's roster of new devices could help offset temporary iPhone softness. For instance, one analyst expects the company to sell 21 million Apple Watches during the device's first year, implying revenue of $8.4 billion, or 4% of Apple's sales. That's three times the total number of smartwatches sold industrywide in 2014 and also compares favorably to 5.4 million iPhones and 19.5 million iPads sold in those devices' initial years. Apple is a Focus List Buy and a Long-Term Buy.

Quality

Our Quadrix Quality score considers growth rates for periods of up to five years and returns on assets, investment, and equity — not to mention earnings predictability. In our view, a history of growth and strong profitability provides the base of quality needed to support future success.

QUALITY
The five stocks below exceed the typical S&P 500 Index stock in return on equity and five-year sales and profit growth.
-- 5-Year Annual. Growth --
Company (Price; Ticker)
Return On
Equity
(%)
Sales
(%)
Per-Share
Profits
(%)
Quadrix
Quality
Score
Alaska Air ($83; ALK)
37
8
32
98
Apple ($111; AAPL)
43
29
34
99
CBRE Group ($36; CBG)
25
16
25
95
Foot Locker ($65; FL)
21
8
37
95
Gilead Sciences ($103; GILD)
84
32
45
99
S&P 500 average
19
6
9
67

Gilead Sciences ($103; GILD) ranks in the top 15% of our research universe for 19 of 24 Quadrix factors that comprise the Quality score. Over the past five years, Gilead's annualized growth exceeds 30% for per-share profits, sales, and cash from operations. That growth trajectory has continued into 2015, with all three metrics rising by more than 35% for the first nine months of the year.

Sales growth for Gilead's hepatitis C drugs has begun to slow, leading some analysts to speculate the company may pursue a major acquisition. But expectations for 2016 appear modest, with both per-share profits and revenue projected to slip 2% — and the stock price already appears to reflect the looming slowdown.

At less than nine times estimated 2016 earnings, Gilead shares trade more than 50% below the median for the S&P 1500 biotechnology industry and broader health-care sector. Encouragingly, Gilead has topped the consensus profit estimate in nine consecutive quarters. Gilead is a Focus List Buy and a Long-Term Buy.

Quadrix

Our Quadrix stock-rating system uses nearly 100 statistics in six categories to compute percentile rankings for roughly 5,000 stocks. In aggregate, those statistics give us the Overall score, which compares stocks to the rest of our research universe. We also calculate two sector-specific scores (12-Factor Sector and Reranked Overall) to measure stocks relative to others in their sectors.

Because we use Quadrix to select stocks, our selections should earn higher scores than the typical stock. The stocks in the nearby table are exceptional even among Quadrix picks, as each ranks above 80 in Overall and both sector scores.

HIGH QUADRIX SCORES
All five of the stocks below earn scores above 80 in Quadrix Overall, as well as both of our sector-specific scores.
------------------ Quadrix Scores ------------------
Company (Price; Ticker)
Overall
12-Factor
Sector
Reranked
Overall
Apple ($111; AAPL)
99
82
100
CBRE Group ($36; CBG)
95
98
85
Comcast ($59; CMCSa)
90
90
85
Jones Lang LaSalle ($165; JLL)
95
93
86
Lear ($125; LEA)
99
100
100
S&P 500 average
60
48
52

Lear ($125; LEA) scores 65 or higher for five of six Quadrix categories, contributing to an Overall rank of 99. It also looks attractive relative to peers, earning maximum scores of 100 for both sector-specific ranks. Lear's stock has returned 29% so far in 2015, while the median S&P 1500 auto-parts stock has lost 3%. Yet Lear trades more than 25% below industry medians for trailing P/E, price/sales, and price/free cash flow — it also ranks among the cheapest one-third of stocks in our research universe for all three metrics.

Looking ahead, the company is projected to grow earnings per share 14% in the 12 months ending September, versus its peer-group median of 11% growth. Shares trade at 11 times estimated earnings, a 25% discount to the auto-parts industry median. Lear is a Focus List Buy and a Long-Term Buy.

FOCUS LIST
--------- Value ---------
-- Oper. Momentum --
------- Quality -------
Trailing Ratios
12-Mo. Gro.
5-Yr. Ann.
-- Growth --
---- Quadrix Scores ----
Company
(Price; Ticker)
Date
Added
To Focus
List
Price
Added
To Focus
List
($)
Return
On
Focus
List
(%)
Price/
Earnings
Price/
Sales
Price/
Earnings-
To-Growth
Sales
(%)
Per-
Share
Profits
(%)
Est.
Year-
Ahead
Profit
Growth
(%)
Return
On
Equity
(%)
Sales
(%)
Per-
Share
Profits
(%)
Overall
12-
Factor
Sector
Reranked
Overall
Sector
Alaska Air
($83; ALK)
5/1/14
47.99
72
14
1.9
0.7
5
56
16
37
8
32
99
65
94
Industrials
Alphabet
($777; GOOGL)
8/13/15
686.51
13
28
7.5
1.4
13
3
17
14
21
12
72
70
73
Technology
Apple
($111; AAPL)
8/21/14
100.58
11
12
2.7
0.8
28
43
7
43
29
34
99
82
100
Technology
C.H. Robinson
($64; CHRW)
9/24/15
67.53
(5)
19
0.7
1.6
3
17
9
46
9
9
87
13
82
Industrials
CBRE Group
($36; CBG)
11/12/15
35.10
3
19
1.2
1.3
17
16
16
25
16
25
95
98
85
Financials
CDW
($44; CDW)
8/13/15
38.82
13
16
0.6
1.7
8
19
14
38
8
NA
91
16
94
Technology
Comcast
($59; CMCSa)
6/25/15
60.88
(4)
18
2.0
1.3
7
4
10
15
14
20
90
90
85
Discretion.
Foot Locker
($65; FL)
5/1/14
46.53
40
16
1.3
1.2
4
22
11
21
8
37
94
70
97
Discretion.
Gilead Scien.
($103; GILD)
6/25/15
120.23
(14)
9
4.9
1.1
52
94
(2)
105
32
45
99
61
100
Health care
Jabil Circuit
($24; JBL)
11/27/15
25.48
(6)
12
0.3
0.8
14
326
26
13
6
12
98
69
99
Technology
Jones Lang
($165; JLL)
11/6/14
139.91
18
17
1.3
1.2
12
28
4
18
16
26
95
93
86
Financials
Lear
($125; LEA)
8/1/13
69.40
80
13
0.5
0.7
3
56
14
27
9
1
99
100
100
Discretion.
Note: Quadrix scores are percentile ranks, with 100 the best.  NA Not available.

 


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