Always Aim High

4/6/2009


There is no such thing as the perfect stock. But that doesn’t mean we should stop searching for it.

Selecting stocks is a difficult task at the best of times, as even companies of high quality and reasonable valuation can disappoint. However, the Forecasts keeps working to cut through the fog.

We prefer stocks with high Quadrix® Overall scores because they tend to outperform stocks with lower scores. Why does Quadrix work? It sifts through dozens of statistics that measure growth, valuation, financial strength, price action, and other characteristics, rewarding stocks with appeal on several measures. Quadrix weeds out the poor, average, and even above-average stocks, leaving only the best.

A pool of high-potential stocks is the best place to start looking for your next Buy. As C.S. Lewis wrote, “Aim at heaven, and you will get earth thrown in. Aim at earth, and you get neither.”

Two additional tools we use to aim for the heavens are our sector-specific Quadrix scores. The Sector score considers 12 statistics that work particularly well for stocks within a particular sector. The Reranked Overall score uses the same metrics that derive the traditional Overall score but weights them differently, giving extra weight to scores that work well in a sector.

In the table below, we present 18 Forecasts recommendations that earn solid Overall scores as well as above-average ranks in both sector-specific scores. Four of those stocks are reviewed in the following paragraphs.

Insurer Aflac ($19; AFL) earns a Reranked Overall score of 97 and a 12-factor Sector score of 83. At just four times the 2009 consensus profit estimate, 73% below the three-year average forward P/E ratio, the stock represents an excellent value. Aflac shares have recovered 21% in the past month, though jitters could persist as long as the European Union considers nationalization an option for solving the banking crisis.

Aflac holds roughly $8 billion in troubled hybrid securities, mostly in European banks. Unrealized investment losses reached $1 billion in the December quarter, and Aflac could be forced to raise more capital if those losses materialize. Nevertheless, the consensus expects per-share profits to surge 17% in the March quarter and 19% for the year. Aflac expects flat to 5% higher sales in both Japan and the U.S. this year.

Aflac’s strength lies in its position as a low-cost insurer, especially in Japan. The Japan unit, accounting for 72% of sales, provides coverage for medical costs not reimbursed under the country’s national health-insurance system. In recent years, Aflac has expanded through nontraditional outlets. In the second half of 2008, Aflac added 88 banks to a growing roster of partners selling its cancer and medical insurance. Aflac is a Long-Term Buy.


Consulting could be one of the first segments of the economy to recover from the recession, and Cognizant Technology Solutions ($21; CTSH) believes it can outpace the industry’s growth. Higher consulting spending from health-care and retail companies suggests Cognizant can do well even in an environment of shrinking technology budgets. Moreover, Cognizant is already established in India, positioning it to benefit from the global consulting industry’s continuing shift to the East.

Pricing held up in 2008, though Cognizant is now experiencing some softness. A flexible business model helps Cognizant control price erosion while working within a client’s budget constraints. Cognizant offers clients cheaper offshore services, in exchange receiving earlier payments and higher-volume contracts. The strategy seems to be working, as Cognizant increased its client book by 17 to 567 in the December quarter.

About 46% of revenue comes from companies in the financial sector, and recent consolidation could cost Cognizant business. Despite those worrisome trends in financial services, management sees revenue rising at least 10% in 2009 and per-share profits up 7% to $1.54. Cognizant earns a 99 in both the Sector and Reranked Overall score, complementing a 97 in the traditional Overall score. Cognizant is a Buy and a Long-Term Buy.


Lockheed Martin ($69; LMT) earns Sector and Reranked Overall scores of more than 70, along with a traditional Overall score of 82. The company boasts a stable growth history, with revenue up at least 2% and per-share profits and cash flow up at least 10% in each of the past five years.

To combat the swelling budget deficit, the U.S. government could cut spending on big defense programs, putting Lockheed’s VH-71 helicopter and F-22 and F-35 fighter programs at risk. However, Lockheed’s exposure to a sweeping range of defense programs could soothe some of the pain that comes from canceling or scaling back one or two programs. In March, Lockheed picked up a new contract, a 10-year deal worth up to $5 billion to repair and maintain aircraft, weaponry, and electronic equipment for the U.S. Special Operations Command.

In January, Lockheed raised its 2009 revenue guidance but lowered per-share-earnings projections to reflect significantly higher pension expense. The consensus expects per-share earnings to fall 2% in 2009 but rebound 12% in 2010. Lockheed is a Long-Term Buy.


Offering exceptional value and quality, National Oilwell Varco ($29; NOV) earns a traditional Overall score of 98 and a Reranked Overall score of 96. Shares trade at less than eight times the 2009 consensus profit estimate. As one of the biggest players in equipment for drilling rigs, National Oilwell seems poised to capitalize on the global industry’s efforts to upgrade aging rigs.

In the December quarter, backlog fell to $11.1 billion, down 6% from the September quarter, the first sequential dip in five years. However, the backlog still represents nearly a year’s worth of total sales and includes contracts stretching through 2012. The recession has caused few cracks in the backlog, of which the company estimates 97% remains secure.

Management expects $3 billion to $4 billion in new orders this year. National Oilwell could secure a majority of equipment contracts on 12 rigs planned for construction by Brazil oil giant Petrobras ($30; PBR). Outfitting a new rig typically costs $250 million, and the Petrobras expansion promises opportunities for aftermarket support that could boost National Oilwell’s cash flow. National Oilwell is a Buy and a Long-Term Buy.

SECTOR STANDOUTS
P/E Ratio
12-Month
Change
Quadrix Scores
Company (Price; Ticker)
Trailing
Trail.
Over
5-Yr.
Avg.
Sales
(%)
EPS
(%)
12-Mo.
Total
Return
(%)
Overall
12-
Factor
Sector
Re-
ranked
Overall
Industry
Advice
DirecTV ($23; DTV)
17
NM
14
14
(11)
90
71
84
Cable & Satellite
Focus
Buy †
Consumer Discretionary Average
13
0.66
1
(11)
(39)
53
50
50
Chevron ($67; CVX)
6
0.62
24
36
(20)
91
71
61
Integrated
Oil & Gas
Buy †
National Oilwell Varco
($29; NOV)
6
0.23
37
35
(52)
98
64
96
Oil & Gas
Equipment
Buy †
Transocean ($59; RIG)
4
NM
99
6
(57)
97
94
98
Oil & Gas
Drilling
Focus
Buy †
Energy Average
6
0.37
28
7
(56)
72
50
50
Aflac ($19; AFL)
5
0.28
8
(21)
(70)
74
83
97
Life & Health
Insurance
LT Buy
Financials Average
13
0.68
(3)
(23)
(47)
39
50
50
Lockheed Martin
($69; LMT)
9
0.51
2
10
(30)
82
71
76
Aerospace &
Defense
LT Buy
Precision Castparts
($60; PCP)
8
0.39
8
18
(44)
98
94
98
Aerospace &
Defense
LT Buy
Industrials Average
11
0.52
9
4
(42)
63
50
50
Airgas ($34; ARG)
11
0.53
17
27
(28)
86
86
75
Industrial
Gases
Focus
Buy
Sigma-Aldrich
($38; SIAL)
14
0.74
8
14
(38)
73
94
74
Specialty
Chemicals
LT Buy
Materials Average
11
0.60
9
(10)
(46)
52
50
50
Accenture ($27; ACN)
10
0.55
9
21
(22)
96
69
97
IT Consulting
Buy †
BMC Software
($33; BMC)
15
0.44
10
9
1
88
50
86
Systems
Software
Focus
Buy †
Cognizant Technology
($21; CTSH)
14
0.34
32
27
(31)
97
99
99
IT Consulting
Buy †
Dolby Laboratories
($34; DLB)
17
NM
27
33
(6)
96
70
96
Elect.
Components
Focus
Buy
Harris ($29; HRS)
8
0.37
17
21
(41)
86
76
67
Commun.
Equipment
Focus
Buy †
Qualcomm
($39; QCOM)
19
0.65
21
(8)
(6)
73
68
71
Commun.
Equipment
LT Buy
Western Digital
($19; WDC)
5
0.53
19
5
(31)
95
98
100
Computer
Storage
Buy
Technology Average
13
0.52
7
(2)
(35)
55
50
50
Energen ($29; EGN)
7
0.45
9
4
(53)
89
73
62
Energy/Utility
Hybrids
LT Buy
Questar ($29; STR)
7
0.42
27
35
(48)
90
98
95
Energy/Utility
Hybrids
LT Buy
Utilities Average
13
0.73
10
0
(23)
58
50
50
Average S&P 1500 Stock
12
0.59
7
(3)
(39)
56
50
50
Notes: Quadrix scores are percentile ranks, with 100 the best. Sector averages exclude P/E ratios below 0 or over 75 and growth rates or returns over 100 .      † Also qualifies as a Long-Term Buy.

 


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