Any Style You Like

7/3/2017


If the Dow Jones Industrial Average, launched in 1896, is the grandfather of U.S. stock indexes, then the S&P 500 Index, first appearing in 1957, is the dutiful son, serving as a reliable benchmark for investors to gauge the state of the market.

Through that lens, the Russell 1000 Index is a relative upstart. Introduced in 1984, it consists of the largest 1,000 U.S. stocks, capturing more than 90% of the market value of publicly traded U.S. companies. Stocks are reranked once a year, at the end of May, to determine membership for the next 12 months.

Like a millennial hipster, the Russell brings an abundance of style to an otherwise stodgy family of indexes. It offers the growth and value style indexes also available with S&P. But it also groups stocks in other novel ways.

For instance, the Russell 1000 Defensive Index contains companies less sensitive to economic cycles, credit cycles, and market volatility. Alternatively, the Russell 10000 Dynamic Index focuses on stocks more sensitive to market cycles. To separate stocks into these two indexes, Russell looks at return on assets, debt/equity ratio, earnings variability over the past five years, and total return volatility over the past one and five years. Both indexes were introduced in 2007.

Not surprisingly, the Defensive Index held up better during the market's 2008 rout, while the Dynamic Index surged ahead when the market rebounded in 2009 and 2010. In a departure from historical norms, both indexes are trading in line with each other this year.

Meanwhile, the Russell 1000 Growth Index has jumped out ahead of the Russell 1000 Value Index this year after lagging in 2016. Sector exposures largely explain the flip-flop. Technology and consumer-discretionary stocks represent more than 50% of the Growth Index's market value. The Value Index tilts toward financial and energy stocks but takes a more balanced approach among the 11 sectors.

In the table below, we provide our top sector picks for both the growth and value styles. Not all of these stocks rank among our favorite 30 to 35 stocks on our buy lists. But investors seeking to broaden their portfolios can use this table as a shopping list.

TOP STOCKS FOR EACH SECTOR AND STYLE
We present below a top growth and value pick for all 11 sectors, based on stocks from the Russell 1000 Growth and Value indexes. In some cases, the pickings can be slim, evident by the growth index containing just one utility stock. And we don't recommend all of these stocks; we like at least a dozen technology companies better than the top energy stocks. But we realize the value in offering a shopping list for investors trying to plug holes in their portfolio. Stocks recommended for purchase are in bold, including UGI, a member of our Top 15 Utilities portfolio.
Div.
Yield
(%)
3-Yr.
Ann.
Div.
Growth
(%)
12-Month
--- Change ---
Est.
EPS
Chg.,
Curr.
Year
(%)
P/E Ratio
Quadrix
Overall
Score
Company
(Price; Ticker)
EPS
(%)
Revenue
(%)
Trailing
Curr.
Year
Consumer discretionary
Growth
Lowe's
($77; LOW)
2.1
24
12
11
16
19
17
80
Value
Carnival
($66; CCL)
2.4
12
29
5
8
19
18
98
Consumer staples
Growth
CVS Health
($81; CVS)
2.5
23
11
12
1
14
14
86
Value
Tyson Foods
($62; TSN)
1.5
44
23
(5)
13
13
12
89
Energy
Growth
ONEOK ($51; OKE)
4.8
17
4
28
30
30
24
51
Value
Marathon
($53; MPC)
2.7
20
(33)
(1)
24
25
18
79
Financials
Growth
Citizens Fin'l
($35; CFG)
1.6
104
31
12
26
17
15
98
Value
J.P. Morgan
($90; JPM)
2.2
9
4
8
9
14
14
75
Health care
Growth
Celgene
($134; CELG)
0.0
NA
80
21
23
21
18
89
Value
Centene
($81; CNC)
0.0
NA
31
84
8
17
17
100
Industrials
Growth
Southwest Air.
($62; LUV)
0.8
36
(6)
2
3
18
16
97
Value
Owens Corning
($67; OC)
1.2
NA
29
10
10
17
17
94
Materials
Growth
Steel Dynamics
($35; STLD)
1.8
8
249
15
48
14
12
93
Value
Westlake Chem.
($65; WLK)
1.2
NA
(8)
39
NA
15
14
92
Real estate
Growth
CBRE Group
($37; CBG)
0.0
NA
20
13
5
16
15
90
Value
Realogy Hldgs.
($32; RLGY)
1.1
NA
20
2
3
20
19
92
Technology
Growth
Alphabet
($961; GOOGL)
0.0
NA
24
22
(1)
26
28
65
Value
VMware
($90; VMW)
0.0
NA
 NA 
8
12
18
18
95
Telecommunication services
Growth
T-Mobile US
($61; TMUS)
0.0
NA
(1)
16
90
45
30
76
Value
Level 3 Comm.
($61; LVLT)
0.0
NA
13
(1)
(24)
30
40
54
Utilities
Growth
Dominion Energy
($77; D)
3.9
8
12
9
(4)
20
21
67
Value
UGI ($49; UGI)
2.0
8
57
3
14
20
21
67
Russell 1000 Growth median
1.0
10.0
10
6
9
22
20
65
Russell 1000 Value median
1.8
8.0
6
3
7
19
18
56
Russell 1000 Index median
1.4
9.0
8
4
8
20
19
55
Notes: Index medians exclude P/E ratios above 75 and below zero, as well as growth rates above 75% and below -75%. Quadrix scores are percentile ranks, with 100 the best. NA means not available.

Four of our favorite picks are reviewed below.

Celgene's ($134; CELG) heavy investment over the years to develop a portfolio of oncology and psoriasis drugs has paved the path toward robust operating growth. For the 12 months ended March, Celgene grew per-share profits 80% and revenue 21%; the average health-care stock in the Russell 1000 Growth Index reported 11% higher profits on 13% higher sales. Celgene should continue to outgrow peers, with its 2017 profits projected to climb 23%, versus its sector average of 8% growth.

Celgene's stock has been hobbled over the past year by investor fears that the government will limit drugmakers' pricing power. However, a draft of the White House plan to curb drug prices surfaced in late June and reportedly focuses on easing regulations, an approach favored by drugmakers that would cut their costs. Pharmaceutical stocks have rallied on that news, with Celgene surging 14% since May 31.

Not that Celgene has relied on price hikes to drive growth. Last year, 18% of the company's 22% sales growth came from higher drug volumes. Volume growth represented 15% of Celgene's 18% sales gain in the March quarter. Celgene is a Focus List Buy and a Long-Term Buy.


Lowe's ($77; LOW) is one of few bright spots in the retail industry. Its shares have returned 11% including dividends in 2017, while S&P 1500 retailers have averaged a 10% loss. Its full-year earnings per share are projected to climb 16%, versus retailers' average growth of 4%. The stock trades at 17 times estimated earnings, 9% below the retail group average. The broad consumer-discretionary sector averages a forward P/E ratio of 19. Lowe's earns a Quadrix Value score of 74.

For now, Lowe's appears protected from Amazon.com's ($990; AMZN) tentacles that seem to smother every pocket of the retail industry. True, Amazon is renewing its push into furniture and appliances, bulky products that are expensive to ship — two traits common to many products sold at Lowe's. But the established furniture and appliance companies have struggled for years to perfect their online business models, and similar challenges could await Amazon. Additionally, consumers still tend to prefer to check out big-ticket purchases and home-improvement products in person. Lowe's, yielding 2.1%, is a Focus List Buy and a Long-Term Buy.


Owens Corning ($67; OC) offers a rare blend of strong share-price action and attractive valuation. The shares have generated a total return of 30.7% this year, easily outpacing the 4.1% return for the Russell 1000 Value Index and 9.0% return for the broader Russell 1000 Index. Yet the stock trades at just 17 times trailing earnings, below its five-year average of 21. Owens earns Quadrix scores of 80 or higher for both Value and Performance, a characteristic shared by just 10 other stocks in the Russell 1000 Value Index.

Owens, a maker of insulation and roofing products, continues to benefit from the improving housing market. June-quarter operating momentum will likely be sluggish, though Owens' full-year growth prospects remain intact. The consensus expects per-share profits to contract 18% in the June quarter on 5% lower revenue. However, the company's price hikes on insulation in June appear to be gaining traction. That development should help Owens recoup rising costs and could offer upside to June-quarter estimates. For the year, analysts anticipate 10% higher earnings per share on 5% revenue growth. Owens is a Focus List Buy and a Long-Term Buy.


With the S&P 1500 technology sector up 15% this year, VMware ($90; VMW) is one of few tech stocks that look genuinely cheap. It trades at 14 times trailing earnings, below medians of 27 for S&P 1500 systems-software stocks and 20 for the broad sector. Backing out net cash of $17 per share pushes VMware's P/E ratio down to 15. The stock also looks cheap versus peers based on price/sales, price/operating cash flow, and price/free cash flow.

VMware is more than just a pure value play. The stock earns an Overall rank of 95, supported by scores above 60 for all six Quadrix categories. Management's impressive July-quarter guidance has caused analysts to raise their estimates in recent weeks. But the current consensus targets still leave some room for upside. Earlier this year, VMware altered its quarterly reporting periods, making year-over-year comparisons difficult. But its cloud partnership with Amazon Web Services bodes well for VMware's growth prospects. VMware, up 14% in 2017, is a Focus List Buy and a Long-Term Buy.


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