Variety Is The Spice Of Portfolios

5/30/2011


The Forecasts aims to recommend the best large and midsized stocks. Generally that means we focus on reasonably valued growers supported by strong Quadrix® scores and solid finances. Occasionally, however, subscribers crave something different.

With that in mind, we ran seven specialty screens and found several attractive picks. Note that many of the stocks are not Buy recommendations in the Forecasts or our sister newsletter, Upside. Only Buy-rated stocks followed in those publications have been researched enough to recommend for immediate purchase, but all seven screens present a variety of interesting names.

Low-priced stocks. In our view, a stock's share price is only marginally important and takes a distant back seat to a company's underlying fundamentals in the analysis process. Still, many investors have a fondness for stocks trading no higher than, say, $15. Low-priced stocks are disproportionately small-cap companies, providing diversification for a portfolio heavy on large-caps.

LOW-PRICED STOCKS
Market
Cap.
($Mil.)
Quadrix Scores
Company (Price; Ticker)
Value
Quality
Overall
Applied Materials ($14; AMAT)
18,275
88
83
97
Calamos Asset ($14; CLMS)
290
86
70
87
Entegris ($8; ENTG)
1,140
83
86
100
Five Star Quality Care ($8; FVE)
295
84
68
95
Hackett Group ($4; HCKT)
181
83
85
97
LTX-Credence ($8; LTXC)
390
94
88
99
Metropolitan Health ($5; MDF)
189
91
96
98
Vaalco Energy ($7; EGY)
396
83
84
98
Upside picks in bold. Applied Materials is rated A.

Outstanding values. Quadrix is highly effective at uncovering genuine bargains, with the Value score a consistent predictor of future returns in back-tests. We looked for stocks with Value scores above 85, ranking them among the cheapest 15% of U.S. stocks. To make the cut, a stock also needed a P/E ratio below peer-group averages based on trailing earnings and estimated current-year and next-year profits. In addition, the stocks were cheaper than peer averages based on price/sales and price/cash flow ratios.

OUTSTANDING VALUES
Est.
Curr-
Yr. P/E
Price/
Sales
Price/
Cash
Flow
Quadrix Scores
Company (Price; Ticker)
Value
Overall
Ameriprise Fin'l ($60; AMP)
10.7
1.4
8.1
87
90
Capital One Fin'l ($53; COF)
8.0
1.3
3.1
89
95
Dell ($15; DELL)
8.2
0.5
7.1
93
90
Freeport-McMoRan ($49; FCX)
8.0
2.3
6.8
94
98
Hewlett-Packard ($36; HPQ)
7.2
0.6
5.8
99
64
Intel ($23; INTC)
9.9
2.6
7.6
90
100
Microsoft ($24; MSFT)
9.4
3.0
7.7
94
92
NASDAQ OMX ($25; NDAQ)
10.2
1.4
7.2
94
94
All eight stocks are A-rated.

NASDAQ OMX Group's ($25; NDAQ) abrupt end to its awkward courtship of NYSE Euronext ($35; NXY) prompted concerns that NASDAQ could miss out on cost savings from the consolidation. NASDAQ could make a play for the London Stock Exchange or the Chicago Board Options Exchange. But NASDAQ's smallish market capitalization of $4.5 billion and cheap valuation could make it an attractive takeover target in its own right.

Wall Street expects NASDAQ to grow per-share profits 23% this year on 10% higher revenue. Yet the shares trade at just 10 times 2011 projected earnings, 34% below the average for specialized-finance companies in the S&P 1500 Index. Relative to NASDAQ's five-year average valuations, its shares currently trade at discounts of 45% based on earnings, 23% on sales, 39% on cash flow, and 50% on book value. NASDAQ is a Buy and a Long-Term Buy.


Fast-growing markets. Companies operating in fast-growing markets with accelerating profit growth can surprise Wall Street, leading to higher earnings estimates and potentially higher price/earnings multiples. To find high-potential growers, we looked for stocks with exposure to attractive markets, including alternative energy and consumer electronics (smartphones and tablet computers). All eight stocks earn Overall scores above 90 and are expected to post double-digit profit growth this year.

FAST-GROWING MARKETS
Company (Price; Ticker)
Quadrix
Overall
Score
Est.
Curr.-Yr.
EPS
Growth
(%)
Market Exposure
Amtech Sys. ($20; ASYS)
99
135
Alt. energy/solar cells
Apple ($332; AAPL)
99
63
Tablets/smartphones
BlackRock ($193; BLK)
93
19
Exch.-traded funds
DG FastChannel ($32; DGIT)
99
31
H-D Internet content
IBM ($168; IBM)
93
15
Cloud computing
MetroPCS Comm. ($18; PCS)
94
42
Prepaid wireless
Newport ($17; NEWP)
97
37
Lasers
Veeco Instr. ($53; VECO)
100
16
Light-emitting diodes
All eight are suitable for immediate purchase.

Commodity plays. For investors seeking commodity-related stocks, the names listed at the top of page 5 may be worth a closer look. Commodities have appeal for three reasons. First, they offer diversification because they don't always move in concert with other stocks. Second, commodities can provide a hedge against inflation. Finally, increased global demand and favorable pricing have generated strong profits and fueled robust gains in commodity-related stocks.

COMMODITY PLAYS
----- Quadrix Scores -----
Company (Price; Ticker)
Momen-
tum
Overall
Industry
Apache ($122; APA)
88
93
Oil & Gas Explor.
CF Industries ($147; CF)
97
98
Chemicals
CSX ($76; CSX)
83
92
Railroads
Deere ($83; DE)
77
79
Constr. & Farm Eq.
Exxon Mobil ($81; XOM)
94
97
Integrated Oil & Gas
Freeport-McMoRan ($49; FCX)
87
98
Copper
Newmont Mining ($55; NEM)
36
84
Gold
Walter Energy ($116; WLT)
98
99
Coal Mining
A-rated stocks in bold.

Walter Energy ($116; WLT) feeds the global steel industry with some of the highest grades of metallurgical coal in the world. The appetite for Walter's coal should increase, considering steel production is expected to hit 2 billion tons in 2013, reflecting annualized growth of 14% from 2010 levels.

Walter's sales have grown at least 10% in five consecutive quarters, and operating profit margins continue to expand. Free cash flow more than doubled to a record $385 million last year and rose another 82% in the March quarter. Rising analyst estimates project both revenue and per-share profits will more than double this year. The $3.4 billion acquisition of Western Coal, completed in April, will contribute to Walter's growth. Wall Street sees per-share earnings rising 100% to $14.93 this year and 8% to $16.10 in 2012. The 2012 target sounds unduly conservative. Walter is a Focus List Buy.


Emerging markets. The outsized gains of many emerging markets have stoked investor interest. Faster economic growth tends to drive stronger profit growth, which many investors associate with outsized stock performance. For subscribers who want emerging-markets exposure, the table at right lists eight companies that hail from Brazil, Russia, or China. All eight earn Overall scores of at least 80. Stocks from emerging markets tend to be more volatile than those in developed countries. Moreover, strong economic growth does not necessarily translate to superior stock returns.

EMERGING MARKETS
Company (Price; Ticker)
Mkt.
Cap.
($Bil.)
Quadrix
Overall
Score
Group
Country
Baidu ($129; BIDU)
45.2
86
Software
China
China Mobile ($44; CHL)
180.7
90
Telecom Svcs.
China
Itau Unibanco ($22; ITUB)
49.2
97
Banking
Brazil
Lukoil ($61; LUKOY)
47.6
93
Energy
Russia
Pao de Acucar ($41; CBD)
3.2
95
Food retailing
Brazil
PetroChina ($132; PTR)
245.2
87
Energy
China
TAM ($21; TAM)
2.2
91
Transportation
Brazil
Trina Solar ($21; TSL)
1.7
95
Semiconductors
China
These are not recommended in the Forecasts or Upside.

High income. Attractive high-income picks among traditional common stocks are fairly scarce, as less than 7% of S&P 500 stocks yield more than 4.5%. However, we found eight names with decent finances, solid Quadrix underpinnings (Overall scores above 80), and yields of at least 4.5%. None of the eight names has cut their dividend in recent years, while one-half have increased their payouts over the last 12 months.

HIGH INCOME
Quadrix Scores
Company (Price; Ticker)
Div.
($)
Yield
(%)
Quality
Overall
Bristol-Myers ($28; BMY)
1.32
4.7
75
82
Eli Lilly ($39; LLY)
1.96
5.1
82
94
Lorillard ($114; LO)
5.20
4.6
83
85
NTELOS ($19; NTLS)
1.12
5.9
75
80
People's United ($13; PBCT)
0.63
4.7
44
80
PPL ($28; PPL)
1.40
5.0
57
85
Royal Dutch Shell ($69; RDSa)
3.36
4.9
65
95
Tal Int'l ($33; TAL)
2.00
6.1
81
98
Only Bristol-Myers Squibb (A) and Eli Lilly (B) are rated.

Specialty income. The highest-yielding stocks in our 4,500-stock Quadrix universe often come from niche groups. Master limited partnerships (MLPs) and real estate investment trust (REITs) are fertile ground for income. MLPs are partnerships that typically operate natural-gas or oil pipelines, pay out most of their cash in distributions, and have quirky tax implications. REITs offer sizable dividends because the law requires them to pay out 90% of taxable income. While most stocks in both groups score poorly in Quadrix, we found a few with decent scores and high yields.

SPECIALTY INCOME
Company (Price; Ticker)
Div.
($)
Yield
(%)
Quadrix
Overall
Score
Sector
Alliance Hldgs. LP ($46; AHGP)
2.22
4.8
93
Coal
Alliance Res. LP ($71; ARLP)
3.56
5.0
99
Coal
American Capital ($30; AGNC)
5.60
18.6
85
Mtg. REIT
Crexus Investment ($11; CXS)
0.92
8.3
87
Mtg. REIT
Dynex Capital ($10; DX)
1.08
11.1
84
Mtg. REIT
PennyMac Mortgage ($17; PMT)
1.68
9.7
96
Mtg. REIT
Pioneer SW Energy LP ($30; PSE)
2.04
6.8
66
Oil & Gas
Targa Resources LP ($33; NGLS)
2.23
6.7
63
Gas
These are not recommended in the Forecasts or Upside.

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