The Focus List Has Everything

12/19/2016


Growth. Value. Rising analyst profit estimates. Share-price momentum. You can find it all among our Focus List stocks.


FOCUS LIST IS LONGTIME LEADER

 
-------- Portfolio Returns --------
------ Focus List ------
Year
Fully
Invested
(%)
With Cash
Position
(%)
S&P 500
Index
(%)
Since 2003 †
214.5
220.0
156.1
Annualized
9.0
9.4
7.5
2016 †
(1.3)
(0.5)
10.2
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
† Through Dec. 14. Returns exclude dividends and transaction costs.

At this time each year, the third issue in December, we publish our year-ahead outlook, including our favorite stocks for capital gains in the year ahead. This year we take an expansive approach, acknowledging that investors set very different goals for their portfolios, goals driven in part by their personal preferences. With those differences in mind, we've identified the top five Focus List stocks in each of four areas and profiled one from each group:

Growth

Alphabet's ($818; GOOGL) consensus profit targets have edged higher over the last 90 days and now project per-share growth of 11% for the December quarter and 19% next year. The company has enjoyed an impressive run of growth since its initial public offering in 2004, averaging quarterly growth of 25% in sales and 21% in per-share profits. Over the last 12 months, Alphabet grew sales 19% and profits 29%.

The question of whether Alphabet could adapt its core Google internet-search business to cope with the rise in mobile-device usage has been answered well. The company credited mobile search as the primary driver of its 23% revenue growth in the September quarter. Although mobile-search customers are more expensive to acquire and mobile ads are cheaper than traditional online ads, Google has managed to grow its operating profit margins by nearly two percentage points over the last year.

TOP 5 GROWERS
The five Focus List Buys below delivered at least 8% growth in the profit and cash-flow metrics we considered.
--- Growth, Last 12 Months ---
Expected EPS Growth
Company (Price; Ticker)
Sales
(%)
Per-
Share
Profits
(%)
Oper.
Cash
Flow
(%)
Next 12
Months
(%)
Next
5 Years
(Annual.)
(%)
Quadrix
Momentum
Score
Alphabet ($818; GOOGL)
19
29
27
17
17
93
CDW ($53; CDW)
10
23
27
8
8
59
Lam Research ($104; LRCX)
4
9
26
32
15
81
Mohawk Ind. ($200; MHK)
9
25
24
9
12
71
Zions Bancorp ($42; ZION)
11
63
NA
21
8
95
NA Not available because banks don't report cash flow.


Estimate revisions

Over the last 90 days, Lam Research's ($104; LRCX) consensus profit estimate for this year jumped 17%, with 95% of analysts raising their targets. The 2017 estimate rose 7% as 76% of analysts became more optimistic. The consensus projects profit growth of 32% over the next 12 months and 15% annually over the next five years. Lam's rank of 91 in Quadrix Earnings Estimates is tops among its six category scores, but the company has no glaring weaknesses, earning at least 65 in each category.

Lam Research is the only Focus List stock that qualified for the top five in all four of the areas we considered for this story — growth, estimate revisions, value, and price performance. The company's price/earnings ratio of 12 is 32% below its industry average. At its analyst day last month, Lam projected better-than-expected shipments for the March quarter and boosted its dividend 50%. Lam now yields 1.7%.

TOP 5 REVISION LEADERS
The five Focus List Buys below have all seen their profit estimates for this year and next year rise at least 1.5% over the last 90 days.
Current-Year
---- Profit Estimate ----
Next-Year
---- Profit Estimate ----
Company (Price; Ticker)
90-Day
Change
(%)
% Of
Analysts
Raising
Estimates
90-Day
Change
(%)
% Of
Analysts
Raising
Estimates
Quadrix
Earnings
Estimates
Score
Alphabet ($818; GOOGL)
1.6
86
2.0
77
86
F5 Networks ($144; FFIV)
4.3
97
4.3
41
92
Lam Research ($104; LRCX)
16.6
95
7.0
76
91
Lear ($134; LEA)
3.1
89
3.9
89
78
Zions Bancorp ($42; ZION)
3.2
82
4.1
82
91


Value

At nine times trailing earnings, Lear's ($134; LEA) P/E ratio is by far the lowest on our Focus List, among the lowest 9% in our Quadrix universe, and 33% below the average for auto-parts makers in the S&P 1500 Index. Lear ranks among the cheapest 20% in more than half of the metrics we used to calculate its Value score — no surprise the company earns a 97 in Value. Lear's Overall score of 99 is tops on the Focus List, and tied for highest in an industry averaging Overall scores of 75, among the strongest in our research universe.

While the 2017 consensus estimate has risen 4% over the last 90 days, the target still projects per-share-profit growth of just 7%. Lear has topped the consensus profit target by at least 10% in each of the last three quarters, and we see plenty of room for upside versus expectations. Operating profit margins have trended higher over the last three years, and continued efficiency improvements should keep profitability rising.

TOP 5 VALUES
The five Focus List Buys below rank among the nine cheapest from the list on P/E ratio, PEG ratio, and Quadrix Value score — and also trade at least 8% below their industry and historical averages on price/earnings. To calculate the PEG (price/earnings-to-growth) ratio, we divided the estimated year-ahead P/E by the estimated five-year profit-growth rate.
---------------- Price/Earnings Ratio ----------------
Company (Price; Ticker)
On
Trailing
Earnings
Discount
To 5-Yr.
Average
Discount
To Industry
Average
On Exp.
Next-Yr.
Earnings
PEG
Ratio
Quadrix
Value
Score
Centene ($56; CNC)
14
-46
-24
12
0.8
91
D.R. Horton ($28; DHI)
12
-40
-26
11
1.0
93
Lam Research
($104; LRCX)
16
-24
-32
12
0.8
72
Lear ($134; LEA)
10
-8
-33
9
0.8
97
Owens Corning
($54; OC)
15
-28
-35
15
1.3
93


Share-price performance

Shares of delivery giant FedEx ($198; FDX) have risen 7% over the last month and 24% over the last three months, riding a cyclical wave of confidence in both economic expansion and consumers' willingness to spend. The company also helped its cause by exceeding August-quarter profit targets and projecting another record for packages shipped this holiday season. So far this year, FedEx has rallied 34%, topping the S&P 500 Index's return by 22 percentage points.

The consensus projects growth of 19% in sales and 13% in per-share profits for fiscal 2017 ending May and growth of 5% and 12%, respectively, for fiscal 2018. Drivers of that growth include improving consumer purchasing power and a jump in e-commerce, while investments in efficiency improvements and aircraft fleet modernization should keep profit margins rising.

TOP 5 PERFORMERS
Each of the five Focus List Buys below has outperformed the S&P 500 Index by at least 15 percentage points so far this year. All are also among the top 10 performers on the list in each of the four holding periods we considered, earning them the top five Quadrix Performance scores on the list.
---------------------------- Total Returns ----------------------------
Quadrix
Perfor-
mance
Score
---- Year-To-Date ----
Company (Price; Ticker)
1
Month
(%)
3
Months
(%)
6
Months
(%)
Return
(%)
Excess
Return
(%)
CDW ($53; CDW)
9
21
26
28
15
79
F5 Networks
($144; FFIV)
2
22
21
49
36
74
FedEx ($198; FDX)
7
24
25
34
22
74
Lam Research
($104; LRCX)
6
15
28
34
21
72
Zions Bancorp
($42; ZION)
10
41
58
56
44
94

 

FOCUS LIST
Company (Price; Ticker)
Div.
Yield
(%)
Quadrix
Overall
Score
Alphabet ($818; GOOGL)
0.0
88
CDW ($53; CDW)
1.2
86
Centene ($56; CNC)
0.0
91
Citrix Systems ($90; CTXS)
0.0
91
Comcast ($70; CMCSa)
1.6
67
D.R. Horton ($28; DHI)
1.4
86
F5 Networks ($144; FFIV)
0.0
96
FedEx ($198; FDX)
0.8
85
LabCorp ($127; LH)
0.0
67
Lam Research ($104; LRCX)
1.7
96
Lear ($134; LEA)
0.9
99
Mohawk Ind. ($200; MHK)
0.0
94
Owens Corning ($54; OC)
1.5
97
Southwest Air. ($49; LUV)
0.8
91
Zions Bancorp ($42; ZION)
0.8
92

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