Focus List Widens Lead Versus S&P 500
The Focus List contains our best 12 to 20 ideas for year-ahead returns. Its very nature implies turnover, and so far this year we’ve added nine stocks to the list while dropping 10. Our active management of the list has produced favorable results.
Through Aug. 10, the Focus List has gained 6.2% this year on a fully invested basis, while the S&P 500 Index rose 0.5%. Recent performance is consistent with long-term trends. Going into 2010, our Focus List had outperformed the S&P 500 Index by at least five percentage points in four of the last six years.
Since the start of 2004, the Focus List is up 34.1%, versus the index’s 0.8% increase. These returns exclude dividends, taxes, and transaction costs.
• Aflac ($51; AFL).
• Comcast ($19; CMCSa).
• DirecTV ($39; DTV).
• Intel ($20; INTC).
• Lubrizol ($96; LZ).
• Newmont Mining ($57; NEM).
• Rogers Communications ($35; RCI).
In the following paragraphs, we review four of these stocks.
Uncertainty in Europe has taken shares of Aflac ($51; AFL) on a volatile ride, but investors still holding the stock have been rewarded with returns of 11% so far this year and 28% over the past 12 months. Aflac has posted revenue growth of at least 5% and wider profit margins in each of the last four quarters. In the June quarter, Aflac reported strong growth in Japan (13% higher sales as measured in yen). The smaller U.S. business continues to experience weakness, but management expects sales will begin to pick up in the December quarter.
Early this month, Aflac announced plans to issue $750 million in debt to refinance expiring bonds, repurchase stock, and boost liquidity. Aflac plans to resume a stock-buyback program suspended in late 2008. Under the program, 32.4 million shares are available for repurchase, or about 7% of shares outstanding. Aflac also raised its quarterly dividend 7% to $0.30 per share, payable Dec. 1, marking the 28th straight annual increase.
Aflac, which sells supplemental insurance, earns a Value score of 94 and Overall rank of 98, with all Quadrix category scores in the top 40% of stocks in our research universe. Aflac, yielding 2.2%, is a Focus List Buy and a Long-Term Buy.
Shares of DirecTV ($39; DTV) jumped on news that the satellite-TV company extended its robust operating momentum in the June quarter. DirecTV grew profits 50% to $0.60 per share, meeting the consensus estimate, while operating profit margins rose to 18.2% from 14.4%. Earnings excluded $160 million of Class A common stock given to former Chairman John Malone as compensation for relinquishing his Class B shares with super-voting privileges. Revenue rose 12% to $5.85 billion, lifted by a 26% surge at the Latin America unit (15% of sales in the quarter).
DirecTV topped expectations with 100,000 net subscriber additions in the U.S. The company also added 415,000 subscribers in Latin America, more than triple the rate of the year-ago quarter, driven by interest in the World Cup. In the U.S., average revenue per user increased 6% to $87.90. DirecTV has posted double-digit profit and sales growth in three consecutive quarters. Wall Street sees DirecTV growing profits 64% in 2010 and another 32% in 2011. DirecTV, which has already bought back nearly $2.2 billion in stock this year, announced an additional $2 billion share-repurchase program. DirecTV is a Focus List Buy and a Long-Term Buy.
In August, one industry tracker boosted its growth projection for 2010 global microchip sales to 35%, representing a record $310 billion. That’s good news for Intel ($20; INTC), projected to ship 81% of all microprocessors this year. Microprocessors are the electronic brains of computers. Intel also makes chips and other components for server computers, storage systems, mobile Internet devices, and consumer electronics.
Earlier this month, Intel settled U.S. allegations that it abused its market position to stifle competition. Although Intel must discontinue certain practices, the settlement doesn’t appear to crimp future growth.
Intel generates about 75% of its revenue from semiconductors for personal computers. However, the company continues working to diversify that revenue stream. This month, Intel and General Electric ($16; GE) announced plans to design a home health-care system that would reduce the need for costly hospital stays. To expand its exposure to wireless devices, Intel is reportedly discussing the purchase of Infineon Technologies’ ($2; IFX) wireless-microchip unit, potentially worth up to $2 billion. Recent reports of a slowdown in personal-computer orders could cause Intel shares to be volatile. But the stock, trading at just nine times projected 2011 earnings, discounts plenty of uncertainty and retains its Focus List Buy and Long-Term Buy ratings.
Rogers Communications ($35; RCI) controls 37% of Canada’s wireless market and 30% of the cable-TV market. It is also a media conglomerate that owns television and radio stations, consumer magazines, a home-shopping network, and the Toronto Blue Jays baseball team. The return on Roger’s sprawling collection of assets has nearly doubled to 10.2% over the last 12 months.
The cable industry is fairly mature, and wireless growth is decelerating. But new opportunities lie ahead. Rogers began selling data plans for Apple’s iPad in May and should see a lift from the new iPhone during the second half of 2010. The company also plans to launch a new wireless brand in major Canadian cities, experimenting with payment plans that feature unlimited local calling. Meanwhile, the media business stands to benefit from a recovering advertising market. Wall Street projects per-share-earnings growth of 17% this year and 9% next year, and the consensus estimate for both years has risen at least 5% over the last 30 days.
Over the last five years, free cash flow rose at an annualized rate of 10%. That free cash flow supports the dividend, which increased at an 11% clip over the same five-year period. Rogers is a Focus List Buy and a Long-Term Buy.