The Long And Winding Road

4/17/2017


The Focus List, our top 12 to 17 picks for year-ahead gains, has jumped out ahead of the S&P 500 Index in the opening months of 2017. On a fully invested basis, the Focus List has climbed 6.5% through April 12, while the S&P 500 has advanced 4.7%.

The strong start hardly takes the sting out of a difficult 2016, when the Focus List fell 2.2%, missing out on the S&P 500's 9.5% gain. It was the worst year for the Focus List relative to the S&P 500 since its inception on Dec. 23, 1994. See the table below for more details.

FOCUS LIST RETURNS
------ Returns ------
Fully
Invested
Out (Under)
Perfor-
mance
(%)
Year
Fully
Invested
Focus
List
(%)
S&P
500
Index
(%)
1994*
0.7
(0.1)
0.8
1995
30.4
34.1
(3.7)
1996
23.9
20.3
3.7
1997
26.6
31.0
(4.4)
1998
23.2
26.7
(3.4)
1999
22.9
19.5
3.4
2000
14.0
(10.1)
24.1
2001
(16.0)
(13.0)
(3.0)
2002
(28.9)
(23.4)
(5.6)
2003
20.2
26.4
(6.2)
2004
17.5
9.0
8.5
2005
8.1
3.0
5.1
2006
12.9
13.6
(0.8)
2007
22.8
3.5
19.3
2008
(48.8)
(38.5)
(10.3)
2009
40.0
23.5
16.6
2010
19.5
12.8
6.8
2011
(4.8)
0.0
(4.8)
2012
14.2
13.4
0.8
2013
36.0
29.6
6.4
2014
22.1
11.4
10.7
2015
(2.7)
(0.7)
(2.0)
2016
(2.2)
9.5
(11.7)
2017 †
6.5
4.7
1.8
1994-present
604.5
409.9
194.6
Annualized
9.1
7.6
1.6
* Inception on Dec. 23, 1994.
† Through April 12.

In the first half of 2016, energy stocks, along with defensive sectors such as utilities and telecom services, performed unexpectedly well. We had mostly avoided these areas because at the time they suffered from some combination of poor Quadrix scores, high valuations, and subpar fundamentals. In the final three months of the year, our exposure to the surging financials and industrials sectors improved our performance — but not enough to dig out of the first-half hole.

The Focus List has shown it can bounce back from rocky years, as it did in 2009 after the financial meltdown of 2008. More importantly, it has outperformed over the long haul. Since its launch, the Focus List has delivered a cumulative return of 604.5%, excluding dividends and transaction costs, topping the S&P 500's 409.9% return. That translates to an annualized return of 9.1%, versus the S&P 500's 7.6% return.

Investors mimicking the Focus List should put an equal-dollar position in each stock, then roughly rebalance when changes are made. If you're tempted to cherry-pick, realize that a minority of Focus List picks have driven much of the outperformance. The Focus List has contained a total of 260 stocks since December 1994, a number inflated by some appearing multiple times. Just 42% of those stocks topped the S&P 500 during their time of the list. Like all stock portfolios, much of the Focus List's performance reflects big winners.

HISTORICAL PERSPECTIVE
A total of 260 stocks have appeared on Our Focus List since its inception in December 1994. About 55% of stocks rose while on the Focus List, though just 42% outperformed the S&P 500 Index. But Focus List stocks outperformed the index by an average of 1.4%, revealing our success picking big winners and mostly avoiding big laggards. A total of 25 Focus List stocks outperformed by more than 50%, while six stocks lagged by more than 50%.
Winning percentage
55%
Winning pct. vs. S&P 500 Index
42
Avg. outperformance
1.4 pct. points
Avg. stay on Focus List
430 days
Number outperforming by more than 50 pct. points
25
Number underperforming by more than 50 pct. points
6
Number outperforming by more than 25 pct. points
47
Number underperforming by more than 25 pct. points
51

 We suggest that investors buy all 14 stocks currently on the Focus List, but the four reviewed below are among our very favorites.

Alphabet ($841; GOOGL) grew per-share profits, revenue, operating cash flow, and free cash flow at least 20% last year, one of just 13 companies in the S&P 500 Index to do so. Investors will be looking for Alphabet to maintain that momentum when it announces March-quarter results on April 27.

Management will also likely provide clarity on the scope of the advertiser backlash over YouTube ads accidently placed next to offensive videos.

Admittedly, management has a spotty track record for meeting quarterly expectations. But investors have been known to overlook shortfalls in the past and remain focused on Alphabet's long-term growth prospects. Alphabet shares have a PEG ratio (P/E ratio divided by projected long-term growth) of 1.14, to rank among the cheapest 25% of stocks in our research universe. Alphabet is a Focus List Buy and a Long-Term Buy.


Centene ($71; CNC) earns a Quadrix Overall score of 97, benefiting from rising analyst estimates, which target 6% higher per-share profits this year on 9% revenue growth. As the largest Medicaid insurer, Centene carries some risk if lawmakers impose work requirements for Medicaid recipients or entirely roll back coverage that was expanded under the Affordable Care Act.

But Republicans have yet to make much headway on advancing a replacement plan, helping Centene shares to surge 25% in 2017, outpacing the 5% advance for the S&P 500 Index. Despite the recent share-price momentum, Centene earns a Value rank of 93, while no other S&P 500 health insurer scores above 80. At 16 times trailing earnings, the stock trades below its five-year median P/E ratio of 22 and its industry median of 18. Centene is a Focus List Buy and a Long-Term Buy.


Mohawk Industries ($230; MHK) entered 2017 with strong momentum. Revenue growth of 11% and record-high operating profit margins contributed to earnings per share surging 23% last year. Organic sales growth accelerated to 7% in the second half of 2016 from 3% in the first half. Mohawk makes carpet, rugs, ceramic tile, stone, and hardwood flooring. It claims to control about 25% share of the U.S. flooring market.

Mohawk expects operating margins to expand further this year, despite rising inflation and the expiration of patents covering Uniclic, a tongue-and-groove interlocking flooring system. To combat rising costs, Mohawk hiked prices 3% to 5% in the March quarter. Management targets per-share profits of $2.64 to $2.73, implying growth of 11% to 15%. The consensus stands at $2.71. Mohawk has topped the consensus profit estimate by at least $0.04 in each of the past five quarters. The stock is a Focus List Buy and a Long-Term Buy.


VMware ($91; VMW) shares have surged 16% in 2017, ranking in the top quintile of stocks in our research universe. Yet they remain attractively valued at 18 times trailing earnings, below medians of 22 for the S&P 1500 technology sector and 24 for the systems-software industry. At 17 times estimated year-ahead earnings, the stock trades below its industry median of 20.

The company makes software to help clients manage their own personal data centers, as well as migrate to the public cloud. The company has seen early success from its partnership with Amazon Web Services, by far the leading player in the public-cloud market. Management expects industrywide spending on technology to outpace the U.S. economy by one to three percentage points this year.

Consensus estimates call for VMware's earnings per share to slip 2% in the April quarter but grow 11% in fiscal 2018. VMware recently shifted its fiscal year, now ending in January rather than December. That adjustment created a one-month transition period that will be reported with April-quarter results. VMware is a Focus List Buy and a Long-Term Buy.

THE FOCUS LIST
Date
Added
To List
Initial
Price
($)
Price
Change
Since
Added
To List
(%)
S&P
500
Change
Since
Added
To List
(%)
------------------- P/E Ratio -------------------
Trailing 12-
Mo. Growth
--- Trailing ---
-- Forward --
----- Quadrix Scores -----
Company
(Price; Ticker)
EPS
(%)
Sales
(%)
Current
5-Year
Median
Industry
Median
Stock
Industry
Median
Momen-
tum
Value
Overall
Alphabet
($841; GOOGL)
8/11/16
808.20
4
4
22
20
25
28
25
17
20
90
48
84
CBS ($67; CBS)
12/22/16
66.07
2
7
12
(5)
16
18
14
13
12
27
64
69
CDW ($57; CDW)
8/11/16
45.52
25
7
24
8
17
20
14
13
12
92
69
94
Centene
($71; CNC)
2/16/17
59.00
20
0
28
78
16
22
18
13
14
88
93
97
Citizens Financial
($34; CFG)
12/22/16
36.00
(6)
4
22
9
17
17
19
12
15
93
78
98
FedEx ($186; FDX)
11/17/16
185.08
1
7
39
16
17
21
20
14
17
59
66
82
LabCorp of
Amer. ($143; LH)
7/7/16
131.97
8
37
10
11
16
16
19
14
17
52
77
76
Lam Research ($126; LRCX)
8/11/16
88.89
42
12
15
8
18
19
21
14
16
91
60
97
Lear ($133; LEA)
8/1/13
69.40
91
7
29
2
9
10
14
8
11
82
96
99
Mohawk Industries
($230; MHK)
6/23/16
197.85
16
15
23
11
18
21
17
16
15
78
68
92
Owens Corning
($61; OC)
3/10/16
45.80
32
11
31
6
17
19
22
14
18
55
85
93
Southwest Airlines
($56; LUV)
5/19/16
42.17
32
18
5
4
15
17
9
12
9
56
85
91
VMware
($91; VMW)
2/2/17
88.00
4
3
8
7
18
37
24
17
20
67
57
89
Zions Bancorp
($40; ZION)
10/6/16
31.68
27
9
65
13
20
20
19
14
15
91
71
93
Focus List avg.
21
10
24
13
17
14
73
74
90
S&P 500 avg.
5
4
21
20
52
55
61
Note: Quadrix scores are percentile ranks, with 100 the best.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com