In Search Of Industry Leaders

3/1/2010


Most experts recommend that investors who buy common stocks diversify by holding companies in different sectors and industries.

The Forecasts agrees with that advice, but we’re not satisfied with anything less than the best stocks in their industries. With that goal in mind, we present seven industry standouts in the table below. In search of the truly exceptional, we screened our A-rated stocks for the following key attributes:

Returns on equity and investment above industry averages. Return on equity reflects the profits a company generates relative to shareholder investments, while return on investment measures earnings against all the firm’s long-term capital, including debt. All else equal, high returns for both metrics indicate that management is running a business efficiently.

High Quadrix sector scores. All seven stocks rank among the top 20% of S&P 1500 stocks in 12-Factor Sector scores (12 factors that work particularly well within a sector) and Reranked Overall scores (reweighting of the six key Quadrix category scores based on what works best in a sector).

Strong Quadrix scores in attractive industries. All seven stocks hail from industry groups with Quadrix Overall scores of at least 50. In addition, all seven stocks rank among the top five of their industry group based on Overall scores and earn superior scores in Value — the most effective Quadrix category.

Energen ($45; EGN) more than holds its own among energy/utility hybrids. The company, which operates the largest natural-gas utility in Alabama, earns an Overall score of 83, the highest of any hybrid. It also earns an impressive 90 in Value and at least 90 in both sector-specific scores.

Energen’s nonregulated energy segment, which focuses on exploration and production, adds a growth kicker most traditional utilities lack. Over the last five years, Energen delivered annualized growth of 9% in sales and 15% in per-share profits. An active acquisition strategy also contributed to that growth. At 10 times projected year-ahead earnings, Energen trades at a discount to its three-year average forward P/E ratio of 12. Energen is a Long-Term Buy.


Travelers ($52; TRV) operates in a crowded industry, one of an estimated 2,400 property and casualty insurers in the U.S. But the venerable underwriter, with a history that dates back to 1853, stands out among peers based on its size, strong operating momentum, solid finances, and generous cash flow.

With an Overall score of 98, Travelers ranks No. 5 among the 70 property-casualty insurers in Quadrix. The group’s average Overall score is a solid 71. The company tallies at least 98 for both sector-specific scores, while a Value score of 95 ranks the stock among the cheapest 5% of U.S.-traded stocks. Travelers is rated Buy and Long-Term Buy.

INDUSTRY LEADERS
Below are seven industry standouts with strong positions in attractive markets. All seven passed a seven-part screen based on sector-specific rankings, traditional Quadrix scores, and returns on equity and investment. All seven are ranked A (above-average) in the Forecasts, with stocks rated Buy or Long-Term Buy in Bold.
Return on
—— Equity ——
Return on
— Investment —
— Sector Scores —
Quadrix
Overall
—— Score ——
Stock Rank
on Overall
in Industry
(No. of Cos.)
Quadrix
– Value Score –
Company
(Price; Ticker)
Co.
(%)
Indust.
Avg.
(%)
Co.
(%)
Indust.
Avg.
(%)
12-
Factor
Reranked
Overall
Co.
Indust.
Avg.
Co.
Indust.
Avg.
Industry
Apple
($197; AAPL)
33.7
20.4
33.7
24.7
98
99
99
51
1
14
64
48
Comp. Hardware
Energen
($45; EGN)
13.6
11.3
10.5
6.0
90
96
83
62
3
26
90
72
Utilities — Gas
General Dyn.
($72; GD)
21.8
15.6
16.7
12.4
91
98
96
64
4
59
92
68
Aerosp./Defense
National Oilwell
($43; NOV)
10.9
10.3
10.1
7.6
94
100
94
51
2
58
93
58
Oil & Gas — Equip. 
Ross Stores
($47; ROST)
38.3
12.4
33.5
14.2
86
98
99
61
2
44
81
54
Retail — Apparel
TJX ($39; TJX)
43.5
12.4
35.1
14.2
80
90
97
61
4
44
74
54
Retail — Apparel
Travelers
($52; TRV)
13.5
12.2
10.9
10.7
99
98
98
71
5
70
95
76
Ins. — Ppty. & Cas
Note: Quadrix and sector scores are percentile ranks, with 100 the best.

 


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