The Tip Of The Top

10/18/2010


The motivation behind our Focus List is simple. It contains our favorite 11 to 20 stocks for year-ahead returns. So far, it has performed quite well.

Since its inception in 1994, the Focus List has gained 268%, versus 154% for the S&P 500 Index. So far this year, the Focus List is up 14.2%, versus 4.9% for the index. These returns assume fully invested portfolios and exclude dividends and transaction costs.

Below you’ll find a table listing all 12 stocks on the Focus List, our very top selections. If you don’t own a stock on that list, we recommend that you buy it immediately.

ANATOMY OF THE FOCUS LIST
Of the 12 stocks on our Focus List, 10 have outperformed the S&P 500 Index since their addition to the list.
—– % Change –—
Company (Price; Ticker)
Dated
Added to
Focus List
Price
When
Added
($)
Focus List
Stock,
Since
Added
(%)
Focus List
Stock Minus
S&P 500
Change
(%)
Div.
Yield
(%)
Trailing
P/E Ratio
Advance Auto Parts
($60; AAP)
9/9/10
56.04
6.8
0.9
0.4
17
Aflac ($55; AFL)
11/27/09
43.65
24.9
17.7
2.2
11
Apple ($299; AAPL)
9/9/10
263.07
13.5
7.5
0.0
24
CSX ($57; CSX)
9/9/10
53.97
6.1
0.2
1.8
15
DirecTV ($42; DTV)
10/9/08
20.09
110.0
81.4
0.0
21
IBM ($140; IBM)
5/15/08
128.46
8.9
26.7
1.9
13
Lubrizol ($112; LZ)
6/17/10
90.90
22.8
18.0
1.3
12
Newmont Mining
($62; NEM)
6/17/10
59.68
3.9
(0.9)
1.0
18
Rogers Commun.
($40; RCI) e
5/6/10
34.29
16.9
13.3
3.1
14
Ross Stores
($56; ROST)
2/18/10
47.10
19.3
13.6
1.1
13
Travelers ($53; TRV)
3/4/10
53.55
(1.4)
(5.5)
2.7
8
Varian Medical
($62; VAR)
3/25/10
55.81
10.5
10.2
0.0
21
Note: % change through Oct. 12.    e Yield estimated.

In the following paragraphs, we present some of our favorites among those favorites. If you want to add a stock or two, start your search with these names:

Advance Auto Parts ($60; AAP) sells auto parts and such accessories as wiper blades, automotive fluids, and car batteries to commercial garages, as well as to individuals who make their own repairs. Up 52% since January, the shares are not especially cheap at 16 times expected 2010 earnings. However, they still trade in line with the average automotive-retail stock in the S&P 1500 Index.

Several factors could extend the stock’s upward march. The do-it-yourself unit, Advance Auto’s core business, is benefiting from efforts to improve pricing, advertising, and customer service. Economic trends should help keep operating momentum in high gear. Americans are driving more miles, yet economic weakness has pushed them to keep their old cars longer, and the massive consolidation by U.S. automakers has left fewer dealerships to service those cars. Advance Auto’s per-share free cash flow has surged 51% in the past year, helped by expansion of operating profit margins in each of the last four quarters. Earning a Quadrix® Overall score of 94 and 91 in both of our sector-specific scores, Advance Auto Parts is a Focus List Buy and a Long-Term Buy.


An estimated 51% of the global insurance market resides in the U.S. and Japan, the only two markets where Aflac ($55; AFL) operates. Since entering Japan in the 1970s, Aflac has targeted an aging population, though some of its newer products are aimed at children. Introduced in March 2009, the child-endowment policy (about 20% of Aflac’s sales in Japan) has become a popular vehicle for parents to save for their children’s education. The child-endowment program serves as just one example of how Aflac has broadened its product portfolio in the past decade. Aflac is also benefiting from the strength of its bank-distribution channel in Japan.

Rising estimates for the September quarter now project earnings of $1.38 per share, implying 10% growth, on 15% higher revenue. Aflac will report quarterly results Oct. 25. The stock earns Quadrix scores of 93 in Value, 97 in Earnings Estimates, and 99 Overall. Aflac is a Focus List Buy and a Long-Term Buy.


Apple ($299; AAPL) continues its global rollout of the iPad tablet personal computer and the newest iPhone. With about 4.5 million units sold in the first three months after its launch, the iPad is on pace for the fastest adoption of any new consumer device, with initial sales exceeding those of the iPhone or the DVD player. One estimate sees the iPad reaching sales of $12 billion this year. Although the iPad has raced to a big lead, plenty of rivals will soon jostle for share as the market for tablets quickly becomes crowded.

As for the iPhone, Apple will reportedly make the device available to Verizon Communications’ ($33; VZ) customers in early 2011. There are also rumblings that Apple will expand its iPhone line to include both high- and low-end models, possibly in the first half of 2011. Such a launch could accompany the addition of even more wireless carriers.

September-quarter results are expected Oct. 18, and analysts are ratcheting profit estimates higher. The consensus profit estimate is $4.03 per share, implying growth of 45%. For the year ending June, Wall Street expects sales growth of 74% and profits up 60%. Apple is a Focus List Buy and a Long-Term Buy.


IBM’s ($140; IBM) growth strategy blends organic initiatives with acquisitions. Annual spending on research and development has accounted for 6% of revenue over the past five years, including $5.8 billion in 2009.

Given IBM’s steady rise in return on assets over that period, its strategy appears to be working. Abundant free cash flow — more than $13 billion generated in the past four quarters — funds the acquisitions.

IBM says it lured away 500 customers from Oracle ($28; ORCL) and Hewlett-Packard ($41; HPQ) in the first half of 2010. As part of its latest strategy, IBM is offering interest-free payments and no money down until 2011 for deals of $75,000 or more on servers, software, and storage to accommodate customers on tight budgets for the current year. Analysts see IBM’s profits jumping 15% to $2.45 per share in the September quarter, with growth of 13% for the year and 10% in 2011. IBM is slated to announce quarterly results Oct. 18. IBM is a Focus List Buy and a Long-Term Buy.


Shares of Rogers Communications ($40; RCI) have rallied 17% since March, while the S&P 500 Index has been flat. But Rogers’ Quadrix Value score still ranks among the top 20% of stocks in our research universe. At 14 times trailing earnings, Rogers shares trade at a 24% discount to their three-year average P/E ratio.

The media conglomerate is the largest player in Canada’s wireless-telephone market, with a 37% share. It has also captured about 30% of the country’s cable-TV market and owns multiple radio and TV stations, consumer magazines, and the Toronto Blue Jays baseball team. Rogers should get even bigger following its agreement to buy Atria Networks, one of Ontario’s largest fiber-optic networks, for $425 million in cash.

Rogers generated more than $1.4 billion in free cash flow over the last four quarters, up 228% from year-earlier levels. In the two years ended June, Rogers spent nearly $2 billion on stock buybacks, lowering its share count 9%. Rogers is a Focus List Buy and a Long-Term Buy.


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