Strong Stocks In Six Different Flavors

7/5/2010


Spring showers washed away some of the market’s gains from the past year. Not since mid-April has the S&P 500 Index risen three consecutive days, something it did eight times in the first three-and-a-half months of this year.

Where there has been no shortage of grim headlines, we are still finding plenty of appealing opportunities. Today we serve up six flavors of stocks for investors looking to plug a hole or realign their portfolio. All of the featured stocks earn ratings of A, or above average, and many are among our top picks.

Dividend growth

As of June 29, 134 companies in the S&P 500 Index have raised or initiated their dividends this year, compared with only 87 in the same period last year. Standard & Poor’s expects the S&P 500 Index’s dividends to rise 5.6% this year. The nearby table lists stocks that have raised their per-share dividend in each of the last 20 years. All five delivered robust dividend growth over the last five years and offer yields above their industry averages.

Aflac ($42; AFL) yields a solid 2.6%, higher than about 81% of the 4,381 stocks in our Quadrix universe. Although the dividend has nearly tripled since 2005, management is far from reckless when it comes to increasing the payout. Aflac plans to take stock of its financial position later this year before deciding to raise the dividend for a 28th consecutive year. Given the insurer’s exposure to Europe’s debt markets, a cautious approach seems likely. Aflac sold its Greek sovereign debt but still holds nearly $4 billion in bonds from heavily indebted European nations, and concerns about Aflac’s investment portfolio could linger.

Aflac should generate the profit growth needed to support dividend growth — Wall Street analysts project per-share profits will rise 12% to $5.42 in 2010, followed by another 9% in 2011. Aflac is a Focus List Buy and a Long-Term Buy.

DIVIDEND GROWTH
————–— Dividend —–————
Company (Price; Ticker)
Div.
($)
Yield
(%)
Industry
Average
Yield
(%)
5-Year
Annual.
Growth
(%)
Abbott Laboratories ($47; ABT)
1.76
3.8
1.9
9
Aflac ($42; AFL)
1.12
2.6
1.8
23
Johnson & Johnson ($59; JNJ)
2.16
3.6
1.9
11
McDonald’s ($66; MCD)
2.20
3.3
0.7
31
PepsiCo ($61; PEP)
1.92
3.1
2.1
14

Attractive valuation

The Value score has been the most effective Quadrix category over the last 20 years — and also over the last 12 months. All five stocks in the nearby table rank in the top one-fourth of our research universe based on Value score and have trailing P/E ratios below their three- , five- , and 10-year averages.

Feeding Americans’ seemingly unquenchable appetite for pay television, Comcast ($18; CMCSa) offers investors a nice blend of value and growth. At less than 14 times trailing earnings, the shares trade at a 61% discount to their five-year average P/E ratio. The stock also trades at a substantial discount to five-year averages for price/sales and price/operating cash flow. Per-share earnings have advanced at 31% annual clip over the last five years. Though Wall Street anticipates flat profits this year, Comcast seems capable of double-digit annual profit growth over the next five years. Comcast, yielding 2.1%, is a Focus List Buy and a Long-Term Buy.

ATTRACTIVE VALUATION
—— Average P/E Ratio ——
Company (Price; Ticker)
Quadrix
Value
Score
Trailing
P/E
Ratio
3
Yrs.
5
Yrs.
10
Yrs.
Abbott Labs ($47; ABT)
85
12
17
18
21
Baxter Int’l ($41; BAX)
87
11
18
19
21
Comcast ($18; CMCSa)
89
14
21
35
38
CVS Caremark ($30; CVS)
88
11
17
19
20
Newmont Mining ($61; NEM)
76
19
28
34
37

Profit-estimate momentum

Rising profit estimates suggest Wall Street’s confidence in a company’s prospects is increasing. We screened for stocks with above-average Earnings Estimates scores, indicative of solid revision trends. All five of the stocks in the nearby table are expected to grow per-share profits at least 15% this year and have seen profit estimates rise over the last three months. The five stocks also enjoy share-price momentum, earning Performance scores above 60.

The consensus 2010 profit forecast for Advance Auto Parts ($50; AAP) has risen 8% in the last two months to $3.57 per share, implying 19% growth. Advance Auto’s core business, the sale of parts to do-it-yourselfers, is gaining traction through internal initiatives that include targeted advertising, improved customer service, and more competitive pricing. Share-buyback activity should support per-share growth, and the next few quarters feature easier same-store-sales comparisons. With an Earnings Estimates score of 67 and Overall Quadrix score of 93, Advance Auto Parts is a Long-Term Buy.

PROFIT-ESTIMATE MOMENTUM
– Estimated Current-Year Earnings –
Quadrix
Earnings
Estimates
Score
Company (Price; Ticker)
Per
Share
($)
3-Month
Revision
(%)
Growth
(%)
Advance Auto ($50; AAP)
3.57
10
19
67
Apple ($256; AAPL)
13.68
17
51
95
DirecTV ($34; DTV)
2.38
8
64
56
Lubrizol ($79; LZ)
8.70
9
15
89
Target ($49; TGT)
3.89
7
18
82

Cash-flow growth

Over the past 12 months, the five stocks in the nearby table grew cash flow provided by operations (CPO) and free cash flow (FCF). Free cash flow equals CPO minus capital spending and dividends. Rising CPO and FCF signal financial health, often preceding dividend growth and share repurchases. A steady infusion of cash each quarter gives companies financial flexibility, helpful during periods of tight credit.

In the past four quarters, Ross Stores’ ($53; ROST) operating cash flow jumped 26%, with free cash flow up 56%. Operating cash flow per share has risen by at least 19% in each of the last three years. In that time, revenue has climbed at a fairly steady annualized rate of 9% and operating profit margins have widened. The strong results have helped lift the company’s cash position to $676 million net of debt, up 118% from a year ago and enough to fund dividends and capital expenditures for three years at current levels. Reasonably valued at 13 times trailing earnings, Ross is a Focus List Buy and a Long-Term Buy.

CASH-FLOW GROWTH
Cash Provided
—– By Operations —–
—– Free Cash Flow —–
Company (Price; Ticker)
Last 12
Months
($)
1-Year
Increase
(%)
Last 12
Months
($)
1-Year
Increase
(%)
Apple ($256; AAPL)
13,491
30
12,136
31
General Mills ($37; GIS)
2,181
19
888
29
Ross Stores ($53; ROST)
837
26
616
56
Sigma-Aldrich ($50; SIAL)
553
29
370
40
Stryker ($50; SYK)
1,463
16
1,232
30

Sector leaders

All five stocks in the nearby table earn Overall scores that exceed the averages for their industry groups. They also have strong 12-Factor Sector and Reranked Overall scores, both of which rank stocks relative to those in the same sector. As its name suggests, the 12-Factor score considers 12 factors that work particularly well within a given sector. The Reranked Overall score uses the same six category scores that comprise the Overall score but reweights them to favor scores that work best in a sector.

Consumers have flocked to buy Apple’s ($256; AAPL) iPad tablet computer and iPhone — advance sales for the latest version of the smart phone topped 1.7 million units in its first weekend on the market. The stock has attracted a similar following among investors who admire Apple’s operating momentum (sales have jumped 41% over the last four quarters) and favorable trends in earnings estimates (in the last 90 days, the consensus per-share-profit target for fiscal 2010 ending September rose 17%). Free cash flow for the last two quarters rose 72% from the year-earlier period, as operating margins widened. Apple earns an Overall score of 98 and at least 98 in both sector-specific scores. Apple is a Long-Term Buy.

SECTOR LEADERS
Quadrix Overall
——–— Score —–——
—— Sector Scores ——
Company (Price; Ticker)
Company
Industry
Average
12-
Factor
Sector
Reranked
Overall
Amerisource ($32; ABC)
95
72
98
91
Apple ($256; AAPL)
98
48
98
99
Lubrizol ($79; LZ)
99
62
95
100
Newmont Mining ($61; NEM)
99
35
100
98
Ross Stores ($53; ROST)
99
70
97
98

Rising Quadrix scores

The nearby table lists five stocks that have seen an increase in their Quadrix Overall score over the past three months. All five earn Overall scores of at least 87, well above the average for their respective industries.

GameStop’s ($18; GME) Overall score has risen five points over the last three months, propelled by improved operating momentum and rising profit estimates. Electronics retailer Best Buy ($34; BBY) said it will start accepting used video games as trade-ins this summer, but this is not its first attempt to enter the market. Competitors have yet to crack GameStop’s winning code in the used-game business.

A jittery stock prone to sharp swings, GameStop currently offers an attractive valuation. The shares trade at seven times estimated earnings for the year ahead, just half of the three-year average forward P/E ratio. Earning a Value score of 100 and Overall rank of 87, GameStop is a Buy.

RISING QUADRIX SCORES
Quadrix Overall
———– Score ———–
— Avg. Overall Score —
Company (Price; Ticker)
Company
3-Month
Increase
Last 24
Months
Industry
Advance Auto ($50; AAP)
93
9
85
66
DirecTV ($34; DTV)
91
15
87
68
GameStop ($18; GME)
87
5
89
76
IBM ($125; IBM)
95
5
90
54
Intel ($20; INTC)
94
5
70
61
Note: Quadrix scores are percentile ranks, with 100 the best.

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