Follow The Sector Leaders
S&P 1500 Index consumer-discretionary stocks have averaged a loss of 15% over the past 12 months. Among the index's 10 sectors, only the energy sector has fared worse. Yet consumer-discretionary member Comcast ($60; CMCSa) has returned 6% including dividends during that span, while Lear ($114; LEA) has declined less than 2%.
Such outliers are one reason we avoid making all-or-nothing sector bets. Using Quadrix as a starting point, we try to find winners even within struggling sectors.
Among the virtues that attracted us to Comcast and Lear a year ago were their high scores for Quadrix Overall and both sector-specific ranks, all exceeding 80 at the time. We rely on two sector scores, Reranked Overall and 12-Factor Sector, to augment the traditional Overall score and rate stocks relative to others in the same sector. Reranked Overall uses the usual six Quadrix categories but weights them according to their effectiveness for each sector. The 12-Factor Sector score employs a dozen statistics that work especially well for each sector.
The 12-Factor Sector score can be volatile and will sometimes deviate sharply from the Quadrix Overall and Reranked Overall scores. For instance, CDW ($42; CDW) and Alaska Air Group ($66; ALK) receive ranks of 85 or higher for both Overall and Reranked Overall. Yet their 12-Factor Sector scores languish below 25.
Of course, anyone can cherry-pick results to prove a point. One year ago, Apple ($95; AAPL) also earned high ranks for Overall and the sector-specific scores, only to go on to lose 26%. But the body of evidence supports this strategy.
Stocks with scores above 80 for Overall and both sector scores have outperformed other stocks that only earn high Overall scores, based on rolling 12-month returns since 1994. The strategy has worked for stocks big and small across all 10 sectors.
Not surprisingly, stocks with high scores in all three metrics are in short supply. Just 125 companies in the S&P 1500 Index earn ranks above 80 for Overall and both sector scores. The table below lists 10 stocks that score above 80 for all three ranks. Among them are CBRE Group ($28; CBG), profiled in Analysts' Choice, and four reviewed in the following paragraphs.
Amerco ($363; UHAL) has increased per-share profits 25% and sales 7% over the past 12 months, well above growth generated by the average S&P 1500 industrial stock. The single-analyst consensus projects 24% higher earnings per share in 2016, as the improving labor market seems likely to lure more Americans into moving. The stock receives a Quadrix Overall rank of 90, while both sector-specific scores exceed 85.
While new competition has rushed into the self-storage market, this business accounted for just 7% of Amerco's revenue in the nine months ended December. Recent growth has been driven by Amerco's most important unit: self-moving equipment rentals (71% of revenue). Amerco will declare March-quarter results on May 25. The consensus anticipates earnings per share of $2.70, up 11%. Amerco is a Focus List Buy and a Long-Term Buy.
Centene ($57; CNC) offers a compelling combination of robust growth and low valuation. The recently completed Health Net deal figures to drive operating momentum in the coming year, though Centene also seems capable of organic growth. Rising health-care utilization and fears about pressure on Medicaid rates have pressured S&P 1500 managed-care stocks, which have lost an average of 5% in the past month.
Centene's stock looks unusually cheap relative to its pricey sector. The stock trades at 14 times estimated year-ahead earnings, 20% below its industry average and 30% below the sector average. Just one S&P 1500 managed-care company, Anthem ($136; ANTM), has a lower forward P/E ratio. At less than 18 times trailing earnings, Centene shares trade 31% below their five-year average. Centene is a Focus List Buy and a Long-Term Buy.
Kroger ($34; KR) shares have shed 18% of their value in 2016, missing out on the 6% average return for S&P 1500 consumer-staples stocks. Earlier this month, Kroger reaffirmed its full-year guidance in an attempt to soothe concerns about price deflation. Yet encouraging comments from management may not be enough to stabilize the stock until Kroger posts April-quarter results in mid-June.
The stock's valuation still looks elevated relative to its own five-year norms. But it looks cheap versus its sector and other food retailers for trailing P/E, forward P/E, price/sales, and price/operating cash flow — despite Kroger offering a superior growth profile. Even the most pessimistic analyst expects Kroger to grow per-share profits 4% in the year ending January 2017 — twice the consensus of 2% growth for the average S&P 1500 food retailer. Kroger is a Buy and a Long-Term Buy.
Lam Research's ($74; LRCX) high exposure to 3D NAND memory, a budding technology, has helped it grow faster than other semiconductor-equipment suppliers — and the overall technology sector. Its Quadrix scores reflect recent operating momentum, as Lam scores higher than any other S&P 1500 semiconductor-equipment stock for Overall (94), 12-Factor Sector (92), and Reranked Overall (95). Last month, Lam said it was on track to complete its $10.6 billion acquisition of KLA-Tencor ($68; KLAC) by the middle of the year. But in May, U.S. regulators requested more information on the proposed deal, increasing the risk that it may be delayed or require concessions. The deal combines the second- and third-largest players in the S&P 1500 semiconductor-equipment industry by sales and stock-market value. Lam has argued that the lack of product overlap between the two companies reduces the likelihood that the deal will run afoul with regulators. With the deal, Lam will control a 27% share of the wafer-fabrication-equipment market, and it will offer products that address 42% of that market. Lam, also reviewed in Portfolio Review, is being dropped from the Focus List. The stock remains a Buy and a Long-Term Buy.