Where To Go When Bullets Fly

10/3/2016


We all know someone uncannily lucky. Nothing sticks to her.

When she's running late, every light turns green. When she attends a seminar, she always heads home with the door prize. When she shops, everything goes on sale. She seems bulletproof.

Of course, none of us are truly bulletproof, but it's an encouraging image — one we'd love to see reflected in our stocks. History teaches that when the stock market's boat takes on water, just about everyone gets wet. But you can take some steps to keep your portfolio dryer than most.

In our search for bulletproof stocks, we focused on three characteristics likely to insulate a stock from trouble:

1) Dividend payers. As a group, stocks that pay dividends offer less-volatile returns than those that pay no dividend. We looked at five years of monthly returns for stocks currently in the S&P 500 Index. Both payers and nonpayers averaged monthly returns of 1.3%, but the nonpayers' returns were 16% more volatile, as measured by standard deviation.

2) Track records. Past performance is no guarantee of future returns. However, a consistent growth history often reflects a reliable business model, solid management, or both. Those traits should offer some protection against market storms. Over the last 40 quarters, S&P 500 stocks that had delivered 12 consecutive quarters of profit growth averaged returns of 4.4% in the following quarter. In contrast, stocks with six or fewer quarters of growth averaged 3.8% returns with 32% higher volatility.

3) Quadrix Overall scores. Stocks earning high Overall scores tend to outperform the average stock. They also deliver better risk-adjusted returns. Over the last 21 calendar years, S&P 1500 Index stocks with Overall scores above 80 averaged 16.7% returns, versus 14.3% for the average stock. Factor in standard deviation, and the return/risk ratio is 0.87 for high Overall scorers, versus 0.77 for the average stock.

While no stock can fully immunize you against market downturns, the six presented in the table below have impressive bullet-resistant characteristics. We would expect those stocks to hold up better than most in tough times and also bounce back more quickly. Five of those stocks are reviewed below:

Amgen ($170; AMGN) is a model of consistency. Sales have increased in each of the past 27 quarters. Cash from operations, up 11% in the first half of 2016, is on pace for its fifth consecutive year of growth.

The emergence of biosimilar drugs could shift the biotech landscape in ways difficult to predict. Amgen won U.S. approval to sell Amjevita, a biosimilar version of AbbVie's ($64; ABBV) Humira, used to treat Crohn's disease and multiple forms of arthritis. Yet AbbVie has sued to Amgen in the hope of preserving exclusivity for Humira, which generated $15.09 billion in sales during the 12 months ended June. Damages from an adverse court ruling could triple if Amgen launches the drug before resolving the patent dispute.

Amgen finds itself on both ends of these patent skirmishes. In August, the U.S. cleared Novartis ($81; NVS) to market a biosimilar copy of Amgen's rheumatoid-arthritis drug Enbrel. Amgen is suing Novartis to protect its top-selling drug ($5.77 billion in revenue for the 12 months ended June, 26% of total company revenue). Novartis also launched a biosimilar version of Amgen's Neupogen ($956 million, 4%), used to boost white blood cells.

The depth of Amgen's drug portfolio should help blunt the impact of biosimilar competition. Amgen has seven different drugs with 12-month sales exceeding $1.4 billion. Moreover, cholesterol drug Repatha, launched in the U.S. in August, is projected to eventually exceed $5 billion in annual revenue. Amgen is a Buy and a Long-Term Buy.


At first blush, D.R. Horton ($30; DHI), the largest player in the highly cyclical homebuilding industry, may seem like an unlikely candidate to promote as a bullet-resistant stock. D.R. Horton posted losses during the financial crisis. But during the recessions that occurred in the early 1990s and early 2000s, its per-share profits were not only positive, but grew by double-digits. The Overall score has surpassed 90 in each of the past 13 quarters, supported by Momentum, Value, and Quality ranks consistently above 75.

The U.S. housing recovery appears to be chugging along. Although housing starts fell a disappointing 6% in August, permits to build single-family homes rose 4%. So far this year, housing starts have risen nearly 7% from the same period a year ago. New home sales fell 8% in August but remain up 13% for the year. For the September quarter, D.R. Horton is expected to report earnings per share of $0.77, up 26% on 20% higher sales, and estimates have risen in the past month. For fiscal 2017 ending September, management expects sales to grow 10% to 15% and operating cash flow to remain positive for a third consecutive year. D.R. Horton is a Focus List Buy and a Long-Term Buy.


Yielding 1.5%, Disney ($92; DIS) has raised its dividend at least 14% in each of the past six years. Recent dividend growth coincides with steady operating momentum, with annual per-share profits, revenue, and operating cash flow advancing in six straight years. The company's operating profit margin and return on assets have also grown during that stretch. Disney will report results for fiscal 2016 ended September on Nov. 10.

Yet the shares have slipped 7% over the past 12 months, missing out the S&P 500's 15% rally. Investor questions center on whether Disney can continue its string of box-office hits and reverse recent subscriber losses at ESPN. Those doubts, and the resulting market weakness, have made the stock look unusually cheap. Its Quadrix Value score has risen to 74 from 36 a year ago. And its trailing P/E ratio has slipped to 16, near the lowest level in the past four years. The stock is rated Long-Term Buy.


Foot Locker ($68; FL) shares have rallied 10% since the retailer posted upbeat July-quarter results, while the S&P 1500 Index has held flat. The company also reiterated that per-share profits for fiscal 2017 ending January should rise by double-digits, dispelling some concerns that growth may be slowing. 

Foot Locker's operating momentum has advanced at a steady clip, with per-share profits rising in each of the past 23 quarters and sales up in 24 straight quarters. For the 12 months ended July, Foot Locker's cash from operations rose 14% to a record $780 million. The retailer has also grown its quarterly dividend at least 9% in six straight years.

The stock still looks cheap at 15 times trailing earnings, a 3% discount to its three-year average and 14% below the median S&P 1500 apparel retailer. Excluding net cash of $6 per share, Foot Locker's trailing P/E ratio drops below 14. Foot Locker is a Buy and a Long-Term Buy.


A drug supplier of massive proportions, McKesson ($167; MCK) produced $193.07 billion in sales for 12 months ended June — that's nearly the annual gross domestic product of Greece and more than all but four companies in the S&P 500 Index.

McKesson and smaller rivals AmerisourceBergen ($83; ABC) and Cardinal Health ($78; CAH) control more than 90% of the U.S. drug-distribution market. That scale gives them a competitive advantage for obtaining deep price discounts from drugmakers that customers couldn't get on their own. Consolidation among retail pharmacies could potentially lead to clients changing which drug suppliers they use. However, aging baby boomers and better access to health care through the Affordable Care Act should increase the overall size of the market.

McKesson has increased per-share profits in 24 straight quarters and sales in 13 consecutive quarters. Although McKesson is expected to report 7% lower earnings per share for the September quarter, the consensus anticipates 7% growth in the December quarter. The company has topped the consensus profit estimate in eight of the past nine quarters. McKesson is a Buy and a Long-Term Buy.

BULLET-RESISTANT STOCKS
To find stocks likely to be safer than the rest, we screened our buy lists for dividend payers with at least 12 consecutive quarters of sales and profit growth. We also required Quadrix Quality and Overall scores above 80.
3-Year
Annualized
Dividend
Growth
(%)
----- Profit Growth -----
------ Sales Growth ------
----- Quadrix Scores -----
Company (Price; Ticker)
Dividend
($)
Yield
(%)
Average,
Last 12
Quarters
(%)
No. Of
Quarters
Of Growth
Average,
Last 12
Quarters
(%)
No. Of
Quarters
Of Growth
Quality
Overall
Amgen ($170; AMGN)
4.00
2.4
28
17
23
8
12
92
89
CVS Health ($90; CVS)
1.70
1.9
24
12
20
11
12
85
90
D.R. Horton ($30; DHI)
0.32
1.1
21
26
18
27
12
96
94
Disney ($92; DIS)
1.42
1.5
19
22
14
8
23
95
84
Foot Locker ($68; FL)
1.10
1.6
11
19
23
6
24
94
96
McKesson ($167; MCK)
1.12
0.7
13
15
24
17
13
88
86
Notes: Quadrix scores are percentile ranks, with 100 the best.

 


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