Focus On The Focus List

8/17/2009


Since we initiated our Focus List in December 1994, subscribers have been asking about it. While we encourage you to keep sending us questions, several of those most frequently asked are addressed in the paragraphs below.

Q What is the purpose of the Focus List, and why does it hold only 14 stocks?
A The Focus List is designed to isolate our very favorite picks for 12-month returns, and right now those 14 stand out from the rest. The relatively small number of stocks makes it easier for investors to mimic the Focus List — and forces us to concentrate on our very best ideas.

We typically hold 12 to 20 stocks on the Focus List, though we may go lower or higher for short periods. Such a small list does not provide the diversification of the larger Buy List or Long-Term Buy List, and the Focus List is most appropriate as a subset of a broader portfolio. The Buy List contains all the stocks on the Focus List, plus others we find attractive for 12-month gains.

Q How has the Focus List performed?
A Since its inception in December 1994, the fully invested Focus List has gained 173.4% excluding dividends and transaction costs, versus 116.2% for the S&P 500 Index. Adjusting for the portion of the Focus List we have advised keeping in a money market or short-term bond fund, the Focus List has returned about 222.8%. The Focus List has also outperformed the S&P 500 by a wide margin since 2003, and so far this year.

Q What is the best way to mimic the Focus List?
A Step 1: Put 32.5% of the funds you wish to invest into the Vanguard Short-Term Investment-Grade ($10.39; VFSTX) short-term bond fund. This percentage will vary based on our interpretation of the Dow Theory and the opportunities available in individual stocks.

Step 2: Divide the remaining dollars by the number of stocks on the Focus List (currently 14), and invest an equal-dollar amount in each stock.

Step 3: Sell when we sell and buy when we buy. We list every upgrade and downgrade on page 6 of the Forecasts. Newsletters go to press the Wednesday before the issue date. You can find information on rank changes after the close of business on Wednesday if you don’t want to wait for the printed version.

Every Wednesday, usually between 4 p.m. and 5 p.m. Central time, we record a telephone hotline that will include any rank changes. The hotline phone number is (800) 931-2295, and the passcode needed to access the hotline changes every month. You can find the passcode in the Rank Changes box in Portfolio Review of the most recent issue of the Forecasts.

Alternatively, you can visit our Web site at www.DowTheory.com and download the newsletter, which is usually available in PDF format by 5 p.m. We also record a hotline around noon on Fridays and will occasionally make rank changes at that time.

Of course, the strategy discussed above will not mimic the list perfectly, because our returns assume we rebalance to an equal-weighted portfolio when a component changes. If we increase or decrease the number of stocks in the portfolio without a commensurate change in the cash position, you should consider selling from your larger positions or adding to your smaller positions to remain fairly close to equal weightings.

Q How much would it cost to mimic the Focus List?
A To establish a portfolio containing all 14 stocks on the Focus List as well as the Vanguard Short-Term Investment-Grade bond fund would cost $300 at $20 per trade. Once the portfolio is established, history suggests it would cost about $760 per year to follow the list, assuming $20 trades. Here is how we arrived at that figure:

From 2003 through 2008, we added 54 stocks to the Focus List and sold 58, for an average of about 19 trades a year. But, as we suggested in the previous question, some rebalancing is necessary. So we assumed one rebalancing trade for each rank change, for a total of 38 trades a year.

At $20 a trade, transaction costs would be $1,060 the first year, or 1.06% of a $100,000 portfolio, and average $760 per year, or 0.76%, thereafter. Considering that during the six-year period, the Focus List delivered an annualized price gain of 8.4% versus just 2.7% for the S&P 500 Index, the price seems reasonable. However, the price we calculated may overstate true transaction costs. In today’s market, investors can easily trade for $10 or less online. At $10 per trade, the costs are cut in half.

Q Nine of the 14 stocks on the Focus List pay no dividend. Why should I ever buy a stock that does not pay a dividend?
A The goal of every investor, regardless of age or situation, should be to maximize total return relative to risk. And the events of the last two years demonstrate that dividend-paying stocks are not necessarily better than nonpayers.

Over the last 24 rolling 12-month periods, the average S&P 1500 stock yielding 3% or higher delivered an average return of negative 21.6%. Stocks with no dividends averaged a return more than five percentage points better.

Conventional wisdom holds that dividend-paying stocks offer some protection against downside market moves. However, plenty of people who held high-yielding financials last year have reason to doubt conventional wisdom.

The trend is not just a recent phenomenon — in rolling 12-month periods since 1990, S&P 500 Index stocks that don’t pay a dividend averaged a return of 12.7%, versus 11.1% for stocks with a 3% yield or higher. Those returns assume reinvestment of dividends.

Shrewd investors do not select stocks just because they pay a dividend. Suppose you require a yield of 4% from your portfolio to fund your living expenses. Purchase stocks with high Quadrix® scores, reasonable valuations, and excellent growth potential — such as those on the Focus List — and along the way sell enough of your holdings to generate your own 4% yield. Our experience suggests such a strategy will leave you much wealthier than a strategy of creating a stock portfolio that yields 4%.

Q Why does the Focus List contain so many technology stocks?
A The technology sector contains a lot of companies with excellent growth, solid fundamentals, and stock-price momentum.

The technology sector is large and diversified, and investors can find an assortment of tech stocks earning high Quadrix scores. Moreover, the sector has paced the market in 2009, and plenty of companies enjoy both operating and share-price momentum. So far this year, the S&P 1500 Information Technology Sector Index is up 34.2%, more than triple the gain of the broader S&P 1500 Index.

Five of the Focus List’s 14 stocks are technology companies, equating to 36% of the list’s equity holdings and 24% of the list including the bond-fund position. The stocks come from various industries within the technology sector, and all five have superior profit-growth potential.

Focus List picks

This week, CA ($22; CA) is being added to the Focus List. We review CA in Analysts Choice. In the following paragraphs, we discuss two more top picks from the Focus List.

Dolby Laboratories ($39; DLB) has averaged per-share-earnings growth of 18% in the past four quarters, while sales rose at least 11% in each period. Dolby’s broad product line has proved fairly resilient in the face of weakness in the consumer-electronics market. The company generates revenue from computer and television audio systems, cinema technology, and encoding products for post-production filmmaking. Microsoft ($23; MSFT) accounts for more than 10% of total revenue.

Consensus estimates project per-share-profit growth of 16% in fiscal 2009 ending September, followed by a 1% decline in fiscal 2010. Dolby has exceeded Wall Street expectations by at least 17% in each of the past eight quarters. Ranking in the top 10% of stocks in our research universe based on Overall score and four of the six main Quadrix category scores, Dolby is a Focus List Buy.


Through the recession, Oceaneering International ($52; OII) has fared better than many of the giant energy producers it serves. Per-share profits were roughly flat in the six months ended June, and the stock has bounced 79% so far this year, the result of a strategy set in motion years ago.

Over the past five years, more than half of the Oceaneering’s capital spending has gone toward building remotely operated vehicles (ROVs), vessels that help energy companies extract oil and natural gas from the ocean’s deepest recesses. This niche has held up fairly well despite the recession, in part because deepwater projects take years to develop and tend to be tied to long-term expectations for energy prices rather than short-term moves.

Oceaneering has secured ROV contracts for 16 of the 19 new rigs expected to enter service this year. ROV sales rose 4% in the first half of 2009, and the vehicles contributed 36% of company revenue and 52% of operating income. Even after allowing for some cancelations, Oceaneering expects the industry’s global deepwater rig fleet to increase 30% by 2012. Oceaneering International is a Focus List Buy.

ANATOMY OF THE FOCUS LIST
Company (Price; Ticker)
Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Trailing
P/E
Ratio
Date
Added To
Focus List
Days
On
Focus
List
Price
Chg. On
Focus
List
(%)
Quadrix
Overall
Score *
Biogen Idec
($48; BIIB)
0.0
13.80
13
11/13/2008
271
2
94
BMC Software
($34; BMC)
0.0
6.30
14
4/2/2009
131
0
91
CA ($22; CA)
0.7
11.50
14
8/13/2009
 NM 
NM
98
Cognizant Tech.
($34; CTSH)
0.0
9.90
21
6/1/2009
71
27
98
Comcast
($15; CMCSA)
1.8
41.80
15
6/1/2009
71
2
93
CVS Caremark
($35; CVS)
0.9
50.00
14
6/1/2009
71
14
94
DirecTV Group
($24; DTV)
0.0
24.50
19
10/9/2008
306
21
88
Dolby Laboratories
($39; DLB)
0.0
2.10
18
3/5/2009
159
35
97
Hospira
($40; HSP)
0.0
6.40
14
7/2/2009
40
7
88
IBM ($118; IBM)
1.9
154.40
13
5/15/2008
453
(8)
96
Johnson & Johnson
($60; JNJ)
3.3
166.00
13
10/16/2008
299
(5)
85
NII Holdings
($23; NIHD)
0.0
3.90
13
10/9/2008
306
3
87
Oceaneering Int’l
($52; OII)
0.0
2.90
15
10/12/2006
1,034
55
94
Transocean
($74; RIG)
0.0
23.80
5
10/4/2007
677
(34)
92
Focus List Average
0.6
36.90
14
299
9
93
* Percentile ranks, with 100 the best.    NM Not Meaningful because CA is being added this week.

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