A Screen For Buy-And-Holders

1/18/2016


Stock-picking is far from an exact science. Intelligent, experienced investors use a variety of analysis methods, all with justification.

Some invest only in value stocks, while others focus on growth stocks or try to tap into price momentum. Properly executed, such strategies can work. However, investors who prefer a buy-and-hold style may be uncomfortable with the turnover needed to suit many investment strategies, even if the activity boosts returns. With such investors in mind, we've prepare a special screen designed to identify stocks of the highest quality.

Every company in the table below grew its return on assets (income as a percentage of assets) and return on equity (income as a percentage of equity) at least one percentage point over the last year while also managing at least 10% annualized growth in operating income, cash from operations, and free cash flow over the last three years.

To screen out stocks with low-quality growth, we also required Quadrix scores for Quality and Earnings Predictability in the top one-third of our research universe. The Quality and Earnings Predictability scores change more slowly than most other Quadrix scores because they rely heavily on long-term trends, which means that if you find a stock that earns high scores today, it will probably still earn high scores six months or a year from now; many stocks maintain strong Quality scores for years at a time.

Two of these buy-and-hold selections are reviewed below:

Don't be fooled by Apple's ($97; AAPL) recent weakness. Its size, growth history, and consistent product innovation suggest the tech giant can maintain industry leadership. Analyst profit targets for the years ending September 2016 and 2017 have declined over the last 30 days, hurt in part by concerns about weaker-than-expected iPhone sales and warnings from some suppliers that suggest Apple has cut back on its phone orders. However, Apple should be able to meet the consensus profit-growth targets of 4% for 2016 and 10% for 2017 without massive iPhone growth.

While size is no guarantee of safety in the stock market, it does matter. Don't overlook Apple's massive installed base of customers and ability to create ancillary revenue streams. Sales of $234 billion over the last year rank Apple tops among U.S. tech stocks, while its app store generated more than $20 billion in sales last year, which would rank it in the top 10 among publicly traded U.S. retailers. And at 10.6 times trailing earnings, Apple trades 26% below its five-year average and 37% below its sector median, a valuation that reflects plenty of bad news. Apple is a Focus List Buy and a Long-Term Buy.


Southwest Airlines ($40; LUV) isn't the largest U.S. airline, but it's probably the most influential. When Delta Air Lines ($45; DAL) raised its fares across the board earlier this month, investors waited to see whether Southwest would do the same. Old-line carriers may try to boost fares, but the increases often don't stick unless Southwest gets in on the action, as it did this month.

In the 12 months ended September, Southwest's return on equity rose to 26.2% from 15.8% a year earlier, while return on equity reached 8.8%, up from 5.8%. Both return ratios and profit margins have trended higher for the last two years, helped by low fuel prices. At some point fuel prices will rise, and airline profitability will suffer. But Southwest has a history of successfully navigating such stretches, offsetting negative costs trend at least in part by improving efficiency. The consensus profit estimate for 2016 has risen 8% in the last 90 days and now calls for 18% growth. At just 10 times that 2016 estimate, investors need not pay up for that growth. Southwest is a Buy and a Long-Term Buy.

STOCKS WITH BUY-AND-HOLD APPEAL
All 13 of the A-rated stocks below earn solid Quadrix Quality and Earnings Predictability scores, and have grown their return on equity (ROE) and return on assets (ROA) at least a full percentage point over the last year. All have also delivered at least 10% annualized growth in earnings, operating cash flow, and free cash flow over the last three years. Those in bold are recommended for purchase.
Return On
---- Equity ----
Return On
---- Assets ----
Earnings
----- Growth -----
Operating-Cash-
-- Flow Growth --
Free-Cash-
--- Flow Growth ---
------- Quadrix Scores -------
Company
(Price; Ticker)
Last 12
Months
(%)
1 Yr.
Ago
(%)
Last 12
Months
(%)
1 Yr.
Ago
(%)
12
Months
(%)
3 Years
(Annual.)
(%)
12
Months
(%)
3 Years
(Annual.)
(%)
12
Months
(%)
3 Years
(Annual.)
(%)
Quality
Earnings
Predict-
ability
Overall
Amgen
($145; AMGN)
24.2
21.1
9.2
7.3
24
14
19
12
20
11
88
97
85
Apple
($97; AAPL)
43.3
32.4
20.2
18.1
43
13
36
17
50
13
99
95
97
Biogen
($267; BIIB)
31.6
27.4
22.7
20.3
43
38
25
25
16
24
99
97
91
CBRE Group
($29; CBG)
24.5
19.8
7.3
5.6
16
20
27
75
40
423
95
99
94
F5 Networks
($94; FFIV)
27.3
21.7
16.3
14.2
23
13
25
11
19
10
97
96
81
Gilead Sciences
($93; GILD)
105.1
70.9
44.5
35.0
94
84
76
75
64
71
99
86
99
Home Depot
($121; HD)
76.8
49.5
16.4
14.1
22
23
19
14
23
14
96
100
81
Lear ($108; LEA)
26.5
15.7
8.2
5.5
56
30
50
24
100
49
92
68
99
Robert Half Int'l
($42; RHI)
35.1
30.7
20.9
18.8
23
21
13
12
11
13
97
94
85
Shire
($180; SHPG)
34.9
32.8
19.3
18.2
3
22
81
43
89
49
99
96
74
Skyworks Sol.
($62; SWKS)
27.9
19.9
23.9
17.8
71
54
29
52
(16)
32
100
97
95
Southwest Air
($40; LUV)
26.2
15.8
8.8
5.8
62
52
4
12
23
16
98
90
97
Starbucks
($58; SBUX)
47.6
41.8
22.5
19.8
21
22
517
29
NA
58
98
100
67
Note: Quadrix scores are percentile ranks, with 100 the best.   NA Not available because free cash flow was negative a year ago.

 


Assessing our style

There are nearly as many types of investing styles as there are types of stocks. They run the gamut from strategies that require second-to-second tracking in an effort to profit from small price movements to long-term buy approaches that hold stocks for years at a time.

Our fundamentals-driven approach falls between those two extremes. We start with high Quadrix scorers and follow up with individual company analysis to weed out stocks for which scores don't tell the whole story.

Our system often delivers market-beating returns, as you can see at www.DowTheory.com/Go/Returns. Since 2003, our Focus, Buy, and Long-Term Buy lists have all topped the S&P 500 Index's return by at least 47 percentage points. However, to achieve those returns, we must be willing to sell stocks when they no longer meet our criteria.

Sometimes we stand pat for weeks, as happened in December. We added stocks to our Buy and Focus lists in the Dec. 2 hotline, then left the lists untouched until the Jan. 6 hotline. We last added to the Long-Term Buy List in early November. However, from Aug. 17 through Aug. 24 of last year, we made nine rank changes.

Subscribers with a buy-and-hold bent might prefer the Long-Term Buy List. It has lagged the Buy and Focus lists over time, but makes fewer buys and sells.


Current Hotline

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