Focus List Rolls With Punches

6/20/2016


Admittedly, our Focus List has fared poorly in 2016, following a disappointing 2015. Recent weakness comes at the hands of a small group of stocks that includes Apple ($97; AAPL), Gilead Sciences ($83; GILD), and Jabil Circuit ($18; JBL).

Focus List outperforms S&P 500
------ Portfolio Returns ------
---- Focus List ----
Year
Fully
Invested
(%)
With Cash
Position
(%)
S&P 500
Index
(%)
2016 †
(8.6)
(6.6)
1.4
2015
(2.7)
(3.1)
(0.7)
2014
22.1
20.2
11.4
2013
36.0
33.0
29.6
2012
14.2
13.3
13.4
2011
(4.8)
(3.9)
0.0
2010
19.5
16.0
12.8
2009
40.0
31.8
23.5
2008
(48.8)
(38.6)
(38.5)
2007
22.8
21.5
3.5
2006
12.9
12.5
13.6
2005
8.1
7.6
3.0
2004
17.5
16.1
9.0
2003
20.2
19.1
26.4
2002
(28.9)
(24.3)
(23.4)
2001
(16.0)
(11.2)
(13.0)
2000
14.0
12.9
(10.1)
1999
22.9
19.3
19.5
1998
23.2
20.6
26.7
1997
26.6
26.6
31.0
1996
23.9
23.9
20.3
1995
30.4
30.4
34.1
1994 *
0.7
0.7
(0.1)
Since 12/23/94 *
518.4
572.2
350.5
Annualized
8.8
9.3
7.3
*Inception on Dec. 23.     † Through June 15. Returns exclude dividends and transaction costs.

All three companies missed consensus profit and sales estimates for the latest quarter, while also issuing disappointing guidance. All three stocks entered earnings season with strong Quadrix Overall scores. But in retrospect, we should have been more concerned about falling analyst estimates for Jabil and Apple, as well as Gilead's poor share-price action. Since then, we've sold Jabil and downgraded Apple and Gilead, which came off the Focus List but remain rated Buy and Long-Term Buy.

Veteran investors realize that not all stocks will win, and no investment portfolio goes up in a straight line. Although we have experienced frustrating years in the past, the Focus List's overall track record remains impressive. It has outperformed the S&P 500 Index in five of the past seven years on a fully invested basis, excluding dividends. Since we launched the Focus List in December 1994, it has risen 518%, or an annualized rate of 8.8%, versus the S&P 500's 351% gain, or 7.3% annualized.

Several stocks added to the Focus List in the past few months are performing well, including Amerco ($365; UHAL), Centene ($67; CNC), Citrix Systems ($84; CTXS), and Owens Corning ($48; OC). These stocks and two more Focus List picks are reviewed in the following paragraphs:

Amerco's ($365; UHAL) Overall rank has slipped to 81 from 93 at the end of April, hurt by lower scores for Momentum (to 78 from 96) and Earnings Estimates (14 from 78). The Momentum score has suffered from a 30% decline in operating cash flow for the March quarter, while unfavorable analyst-revision trends have torpedoed the Earnings Estimates score.

Keep in mind that Amerco's consensus estimates are comprised of just one analyst. Moreover, Amerco has grown operating cash flow 29% over the past 12 months. Sales growth has exceeded 5% in 13 straight quarters, and operating profit margins are also expanding. The shares have rallied 6% since we added the stock to our Focus List in March, ahead of the 4% gain for the S&P 500 Index. Amerco is a Focus List Buy and a Long-Term Buy.


Centene ($67; CNC) will owe much of its operating growth in the coming year to its $6 billion acquisition of HealthNet. But it is also improving its profitability, unusual for health-care companies these days. Although many insurers are experiencing higher medical-utilization rates, Centene said its health-benefits ratio, which measures the percentage of premiums paid out to cover medical costs, improved in the March quarter.

Centene's per-share profits are projected to grow 38% in 2016 and 18% in 2017. The company will face some integration risks as it digests recently acquired HealthNet. The shares trade at 16 times estimated 2016 earnings (10% below the median for S&P 1500 managed-care companies) and 14 times estimated 2017 earnings (a 6% discount). Centene, scoring above 90 for both sector-specific ranks, is a Focus List Buy and a Long-Term Buy.


Citrix Systems ($84; CTXS) designs desktop-virtualization products that let workers remotely connect to corporate data devices. While rising use of mobile devices could hurt demand for Citrix's traditional products, the company also offers software that lets workers access tools such as Microsoft Windows through applications on their mobile devices. Some of its partners, Microsoft ($50; MSFT) included, are developing their own products, which could eventually create direct competition. Encouragingly, Citrix and Microsoft announced collaborative projects in May that should strengthen their partnership.

Operating profit margin has expanded in the past year, a trend management expects to continue into 2017 as Citrix completes a restructuring initiative. Free cash flow surged 28% in 2015, followed by 20% growth in the March quarter. For now, Citrix seeks to deploy more than 50% of free cash flow for stock buybacks. It plans to unveil long-term plans for capital returns after the GetGo spinoff in the second half of the year. Citrix is a Focus List Buy and a Long-Term Buy.


Auto-parts supplier Lear ($114; LEA), a Quadrix stalwart, scores above 90 for both Momentum and Value, contributing to an Overall rank of 99. Both sector-specific scores exceed 95. Operating cash flow and free cash flow more than doubled in the 12 months ended March. Although the stock has slumped 7% this year, it's up 64% since joining the Focus List in August 2013, tripling the S&P 500 Index's 21% gain.

U.S. auto sales slipped 6% in May, partly due to two fewer selling days and one fewer weekend. But analyst profit estimates for Lear are climbing, with the consensus now projecting 17% growth for the June quarter and 19% for 2016. At nine times estimated 2016 earnings, Lear trades 33% below the median S&P 1500 auto-parts stock. Lear is a Focus List Buy and a Long-Term Buy.


Owens Corning ($48; OC) shares have returned 7% including dividends over the past three months. Yet the stock still looks cheap, earning a Value rank of 87 and trading at 16.5 times trailing earnings, a 21% discount to their three-year average and 30% below the median for S&P 1500 building-products stocks.

The company supplies insulation, roofing, and fiberglass composites for residential and commercial buildings. U.S. homebuilding remains strong, with housing starts up 10% in the first four months of 2016. A price hike that Owens pushed through in May appears to be sticking so far, partly helped by shortages for some products, including shingles. For the June quarter, the consensus expects 11% higher per-share profits on 3% revenue growth. Owens, yielding 1.5%, is a Focus List Buy and a Long-Term Buy.


Southwest Airlines' ($40; LUV) per-share profits jumped 33% in the March quarter, on top of at least 55% annual growth from 2012 to 2015. However, rising oil prices in recent months could slow airlines' profit growth. As a result, 2016 profit estimates have fallen across the airline industry, Southwest included. At 11 times trailing earnings, more than 40% off their five-year average, Southwest shares already reflect a heavy dose of pessimism.

Southwest has hedged up to 60% of expected fuel consumption for the last nine months of 2016. The airline is also enjoying strong pricing power, as fare hikes have been more successful this year. Finally, the opening up of Cuba's market should help support growth. Southwest was among six U.S. airlines awarded routes to smaller cities in Cuba, with service slated to begin within 90 days. Southwest Airlines is a Focus List Buy and a Long-Term Buy.

THE FOCUS LIST
The stocks currently on our Focus List tend to offer superior growth prospects and lower valuations than the average stock in the S&P 500 index. For each stock's initiation price, we use the closing price for the first full day of trading after the rank change, usually Thursday's close.
Since Added
--- To List ---
12-Mo. Chg.
Trailing
-- P/E Ratio --
Est. Next 12
--- Months ---
YTD
Total
Return
(%)
------ Quadrix Scores ------
Company
(Price; Ticker)
Date
Added
To List
Initial
Price
($)
Price
Chg.
(%)
S&P
500
Chg.
(%)
Per-
Share
Profits
(%)
Sales
(%)
Curr.
5-Year
Median
Profit
Growth
(%)
P/E
Ratio
Momen-
tum
Value
Overall
Alphabet
($732; GOOGL)
8/13/15
687
7
2
18
15
24
26
15
21
(6)
66
35
59
Amerco
($365; UHAL)
3/10/16
345
6
4
24
7
15
13
6
14
(6)
78
67
81
Biogen
($239; BIIB)
5/12/16
263
(9)
0
19
8
13
27
6
13
(21)
70
82
92
C.H. Robinson
($73; CHRW)
9/24/15
68
7
9
15
(3)
20
22
6
19
18
56
57
71
Centene
($67; CNC)
3/10/16
58
16
4
34
35
21
22
36
15
2
96
74
97
Citrix Systems
($84; CTXS)
5/19/16
82
3
1
NA
6
17
35
3
17
13
97
56
96
Comcast
($62; CMCSa)
6/25/15
61
2
(1)
(1)
9
19
18
9
17
12
48
70
76
Lear ($114; LEA)
8/1/13
69
64
13
21
3
9
10
9
9
(7)
93
97
99
LKQ ($32; LKQ)
5/19/16
31
3
1
12
7
22
22
30
17
8
82
54
89
Owens Corning
($48; OC)
3/10/16
46
6
4
57
4
16
20
5
16
4
87
87
97
Robert Half Int'l
($39; RHI)
3/24/16
44
(13)
1
15
8
14
23
9
13
(17)
54
87
88
Southwest Airlines
($40; LUV)
5/19/16
42
(5)
1
55
5
11
18
11
10
(7)
75
89
93
Focus List
average
7
3
24
9
17
21
12
15
(1)
75
71
87
S&P 500 average
3
1
21
20
6
19
6
52
53
59

 


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