Focus On Our Focus List
The Forecasts’ Focus List, which contains our top selections for year-ahead gains, has a robust history of outperformance.
• Since its initiation in 1994, the Focus List is up 199.9% on a fully invested basis, versus 133.4% for the S&P 500 Index.
• Since 2000, a period that includes a couple of the ugliest market declines in decades, the Focus List is down 3.9%, 23 percentage points better than the S&P 500 Index’s 27.0% decline.
• Since 2003, the Focus List is up 41.2%, versus 22.0% for the S&P 500.
• And so far this year, the Focus List is up 30.3%, well above the S&P 500 Index’s 18.8% return.
We focus on stocks with appeal over the next 12 months and do not hesitate to move companies on and off the list if our opinion changes. The above returns assume fully invested portfolios and exclude dividends, taxes, and transaction costs. Of course, we can’t guarantee future returns. But we have confidence in our Focus List selections and expect the portfolio to substantially outperform the market over the next 12 months.
By design, the Focus List is fairly concentrated, never containing more than 20 stocks at any point in the last 10 years. Twenty stocks is not enough to gain the full benefits of diversification, and the Focus List is most appropriate as a portion of a larger portfolio, rather than as an investor’s entire portfolio. The Buy List, which currently contains 25 stocks versus the Focus List’s 14, is more diversified. But for investors looking to put some money into a focused basket of stocks with superior growth potential, the Focus List makes a lot of sense.
How we focus
We look at stocks from a variety of angles. And while no company excels in every respect, we generally bestow Buy ratings only on companies that stand out from the crowd in several ways. For the Focus List, which represents the best of the Buy List, we are even pickier. Below, read about four criteria we use to assess whether a stock is worthy of inclusion in the Focus List.
Quadrix scores: Our proprietary quantitative-analysis system has proved effective at identifying stocks that outperform. Quadrix considers dozens of statistics in ranking more than 4,000 U.S.-traded stocks from 0 to 100. We generally focus our attention on stocks with Quadrix Overall scores of 80 or more, as such stocks tend to outperform lower scorers. All of the stocks on the Focus List earn Overall scores of at least 85.
Valuation: We like companies with high Quadrix Value scores and low price/earnings ratios relative to historical and industry averages. But most of all, we like stocks that look cheap relative to their growth potential. Also, most of our Focus List selections trade at a discount to their industry average P/E ratios. The three that do not — Cognizant Technology Solutions ($40; CTSH), DirecTV ($27; DTV), and Oceaneering International ($59; OII) — all seem capable of growth superior to that of most stocks in their industry.
Growth: We always consider growth as well as value. Growth of sales, profits, and cash flow are of particular interest. We aren’t looking for the fastest-growing companies, which tend to be smaller and riskier than most Forecasts recommendations. Instead, we seek companies with solid operating momentum and the ability to outperform growth expectations. Solid long-term growth potential is another big plus.
Intangibles: A lot of companies earn high Quadrix scores — about 800 earn Overall scores over 80, for example. Of those, a fair amount meet our growth and value standards. At that point, we turn away from the statistics and look at other ways the companies stand out from the crowd — such as Transocean’s ($88; RIG) focus on the lucrative deepwater-drilling market and Hospira’s ($45; HSP) leadership in generic biotechnology drugs. Sometimes a stock that doesn’t post eye-popping numbers has something else going for it, an unerappreciated competitive advantage.
In the following paragraphs, we review three Focus List favorites.
AmerisourceBergen’s ($23; ABC) growth is driven by its exposure to high-margin generic and specialty drugs. Despite the loss of a key contract with Walgreen ($38; WAG) in 2008, the drug wholesaler’s per-share earnings have climbed 17% in the past year despite sales growth of just 1%. The stock has risen 38% from June lows and is bumping up against its 52-week high.
Two factors point toward a favorable near-term outlook. First, after renegotiating a $3.5 billion contract earlier this year, Amerisource won’t face another large renewal until the summer of 2010, when the pricing environment may be better. Second, generic launches should accelerate in the December quarter.
Amerisource expects per-share earnings for the September quarter to reach the upper end of its guidance range of $0.34 to $0.40. The
consensus calls for profits of $0.40 per share, implying 8% year-to-year growth, and Amerisource has topped expectations in each of the last four quarters. A robust balance sheet and reliable operating cash flow give Amerisource the flexibility to buy back plenty of shares. The share count has fallen 34% over the last five years. Amerisource, slated to report September-quarter profits Nov. 3, is a Focus List Buy and a Long-Term Buy.
BMC Software’s ($38; BMC) products help run data centers, the sleek and sterile rooms that house businesses’ computers. BMC counts Dell ($15; DELL) among the recent purchasers of its software, which analyzes server performance and automates tasks to boost efficiency. Although enterprise-technology spending is likely to fall this year, BMC’s long-term contracts should offer some protection against the contracting market.
BMC has recorded sales growth in each of the past 14 quarters. The company’s profit performance has not been that consistent, but Wall Street anticipates per-share profits will climb at least 3% in the September and December quarters and 12% in fiscal 2010 ending March. The stock is up 42% this year, well ahead of the 20% gain recorded by the S&P 1500 Index. Despite the share-price gains, BMC still trades at 16 times estimated year-ahead earnings, 16% below its five-year average forward price/earnings ratio. BMC Software is a Focus List Buy and a Long-Term Buy.
Hospira ($45; HSP) shares have more than doubled from the March low of $21. In the wake of that move, the shares trade at 16 times trailing earnings and are no longer particularly cheap. But Hospira’s leading position in biotech generic drugs could propel the stock higher, as support for such generics is building among U.S. legislators. At this time, there is no procedure in the U.S. for the approval of biotech generics, also known as biosimilars, though they are marketed overseas.
Management raised profit guidance in September, projecting better-than-expected growth from its pipeline of injectable generic drugs and medical devices. The company is also working on a deal to package the swine-flu vaccine into syringes. Wall Street now expects a 12% rise in per-share profits in 2009 and another 14% in 2010.
Hospira is not immune to the difficulties facing the health-care sector. The company does not expect the market for expensive equipment to improve before the end of 2010. But hospitals are still buying devices that can lower their insurance premiums or reduce the likelihood of lawsuits, such as Hospira’s medication pumps equipped with software to prevent overdoses. Hospira is a Focus List Buy and a Long-Term Buy.