Only The Best Will Do

12/7/2009


Anticipation of the health-care reform inching through Congress has helped lift shares of health-care distributors by an average of 26% so far this year. One of the industry’s leaders is AmerisourceBergen ($25; ABC), up 39% this year and earning a Quadrix® Overall score of 96.

However, despite its collective strength, even the health-care distribution industry includes clunkers with inferior Quadrix scores and sluggish share prices. For this reason, we don’t recommend investing in an entire industry or sector, even one with superior fundamentals.

Instead, we prefer to target only the best stocks within each industry. To identify the best industries, as well as the best stocks in those industries, check out our Group Studies report at www.DowTheory.com/go/Groups.

Quadrix scores, returns, growth potential, and valuation can vary widely between different industries. While a software company with a P/E ratio of 15 may be cheap relative to its peers, that same P/E looks far less attractive on an insurance company. So we developed additional tools to help us measure how stocks stack up against their peers.

The Reranked Overall score uses the same six categories that generate the traditional Overall score but adjusts their weightings to
emphasize the categories that work best within a sector. The 12-Factor Sector score, as its name implies, considers 12 factors with strong predictive power for a given sector. To see sector scores for more than 1,500 stocks, visit www.DowTheory.com/go/Sectors.

The table below identifies some of our top picks from industries with the highest average Overall scores. Our screen considered four criteria:

Quadrix Overall score of at least 85.

Industry average Overall score of at least 60.

Overall score ranked in the top 10 for its industry.

Strong sector-specific scores.

Below, we profile three standouts in strong industries.

AmerisourceBergen’s ($25; ABC) Quadrix Overall score of 96 is second best among health-care distribution stocks, which average a score of 83. Amerisource has provided investors a 67% total return in the last 12 months. Yet the stock remains an appealing value play at 15 times trailing earnings, 7% below the five-year average.

Amerisource, a distributor of both brand-name and generic pharmaceuticals, delivered strong results in the fiscal year ended September. On 2% higher revenue, per-share earnings from continuing operations rose 17%. For all four quarters, per-share earnings exceeded the consensus estimate by at least 5%. Most of the company’s growth came from its specialty-drug segment (22% of fiscal 2009 revenue), which grew sales 7%.

Many industry watchers expect U.S. pharmaceutical sales to rise 3% to 5% over the next year, with biotech, specialty, and generic drugs posting better-than-average growth. With exposure to key industry niches, Amerisource expects revenue to climb 5% to 7% in fiscal 2010 and per-share profits to increase 8% to 14%. Amerisource is a Focus List Buy and a Long-Term Buy.


Hewitt Associates ($41; HEW) earns an Overall score of 98. But the Reranked Overall score, a statistic designed to rate technology stocks relative to other technology stocks, is even higher at 99.

Hewitt generates most of its revenue from managing employers’ health, welfare, and retirement plans. Many companies have outsourced these benefits as a cost-cutting measure in recent years. Sales have fallen 5% over the last year, but Hewitt has aggressively controlled its own expenses, generating 31% profit growth. Free cash flow has trended higher, and Hewitt’s cash position has climbed 19% over the past year to $643 million, or $6.78 per share.

Consensus estimates project Hewitt will grow per-share earnings 13% in fiscal 2010 ending September on 2% higher sales, and estimates are rising. Shares trade at 14 times estimated year-ahead profits, 17% below the three-year average forward
price/earnings ratio of 17. Hewitt Associates is a Buy.


It wasn’t Travelers’ ($53; TRV) red umbrella but its conservative investment portfolio that protected the property-casualty underwriter from the subprime storm. Rising free cash flow provided Travelers with the flexibility to trim its share count by 7% in the past 12 months and raise the quarterly dividend 10% in October. A sound balance sheet includes cash of $12.51 per share.

The stock has produced a 27% total return in the past six months, well ahead of the average of 12% for property and casualty insurers. Despite that surge, Travelers trades at nine times trailing earnings, 14% below its five-year average.

Wall Street expects Travelers’ per-share profits will rise 8% in 2009, despite 13% lower sales, with growth continuing at a 7% clip over the next five years. Earning Reranked Overall and 12-Factor Sector scores of at least 96, Travelers is a Buy and a Long-Term Buy.

TITANS OF THEIR INDUSTRY
The eight stocks listed below earn Quadrix Overall scores of at least 85 and hail from groups with average Overall scores of 60 and above. In addition, all of the stocks rank among the top 10 of their industry for Overall score. Finally, all 10 earn strong 12-Factor Sector and Reranked Overall scores.
— Sector Scores —
Quadrix Overall
—–— Scores —–—
Rank in
Industry on Overall Score (No. of Cos.)
Current-Year
———Estimate ———
Company (Price; Ticker)
12-Factor
Sector
Reranked
Overall
Company
Industry
Average
EPS
($)
%
Chg.
P/E
Industry
Advice
Accenture ($42; ACN)
90
93
90
67
9
(36)
2.7
0.8
15
Technology
Consult.
Buy †
AmerisourceBergen
($25; ABC)
95
94
96
83
2
(13)
1.9
12.6
13
Health-Care
Distrib.
Focus
Buy †
Cognizant Technol.
($45; CTSH)
100
99
97
67
3
(36)
1.8
21.9
26
Technology
Consult.
Focus
Buy †
Comcast ($15; CMCSA)
77
82
93
69
2
(16)
1.2
29.7
13
Cable &
Satellite
Focus
Buy †
GameStop ($22; GME)
65
79
91
74
3
(10)
2.5
5.2
9
Electronics
Retail
Buy
Hewitt Associates
($41; HEW)
82
99
98
75
2
(39)
2.9
9.6
14
Data
Processing
Buy †
NII Holdings ($31; NIHD)
71
82
91
66
4
(23)
2.5
14.6
13
Wireless
Telecom 
Focus
Buy
Travelers ($53; TRV)
98
96
96
65
9
(71)
5.7
7.6
9
Ppty. &
Casual. Ins.
Buy †
Note: Quadrix and sector scores are percentile ranks, with 100 the best. † Also qualifies as a Long-Term Buy.

 


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