List Focuses On Returns More Than Diversification

10/17/2011


With our Focus List, the name says it all. By design, the portfolio is focused on our best ideas. Historically, that focus has paid off.

Since the list's inception in December 1994, it has gained 256.2% on a fully invested basis excluding dividends and transaction costs, versus 160.0% for the S&P 500 Index. Since the beginning of 2003, the Focus List has gained 67.8%, topping the index's gain by nearly 32 percentage points. Including the effect of our recommended short-term bond fund position (currently at 24.9%), the Focus List has gained 305.7% since inception and 80.5% since the beginning of 2003.

While the Forecasts endorses the Focus List for any subscriber, we have generally pitched it as an attractive piece of a larger stock portfolio rather than as the best option for an entire equity portfolio. Why? Because the very focus that allows the list to isolate the best stocks limits its diversification.

Our Focus List currently contains stocks from six of the 10 market sectors. You won't find any consumer-staples, financial, telecommunications, or utility stocks. And some of the Focus List's other sector weightings differ substantially from the S&P 500, an index often used as a proxy for the broader stock market. The Focus List sets itself apart in at least four ways:

Big tech. Even allowing for the Focus List's 24.9% position in Vanguard Short-Term Investment-Grade ($10.62; VFSTX), its technology weighting of 31% is well above the S&P 500's 20% tech weighting. We did not set out to overweight technology, but our analysis has unearthed a lot of intriguing technology stocks. The sector averages an Overall score of 63, and 31% of tech stocks in the S&P 1500 Index score above 80, a percentage no other sector can match.

No banking on finance. Financials account for 14% of the S&P 500's market capitalization, the index's second-largest sector weighting. But the sector as a whole doesn't score well in Quadrix, and many segments of the sector still look quite risky. Our Buy List contains a couple of financial stocks, but none of them rank among our favorite 10 or 15.

Hot commodities. The Focus List features two materials stocks, equating to 13% of the portfolio, more than triple the S&P 500's 3% weighting.

Focus on growth. The S&P 500 consumer staples and utility sectors managed profit growth in the single digits in the year ended June, while telecom saw profits fall. All other sectors delivered double-digit gains. Few of the companies in the three slow-growing sectors offer the mix of growth and value we seek in Buy-rated stocks, and nothing from those sectors makes the Focus List.

The table at the bottom of the page lists all 12 of the stocks on our Focus List. Three are reviewed below.

Apple's ($400; AAPL) new CEO Tim Cook is now charged with charting the company's course, following the death of founder Steve Jobs. A 12-year veteran at Apple and its former operating chief, Cook plans to continue Apple's expansion into Asia and its emphasis on cloud computing. It is less clear whether he will deviate from Apple's practices of shunning dividends, buybacks, stock splits, and big acquisitions.

Ultimately, the stock's returns will be driven by Apple's ability to continue designing wildly popular electronic devices. At the moment, the company's hottest products are the iPhone and iPad tablet computer. While some investors were disappointed over a perceived lack of innovation in Apple's new iPhone 4S, Apple received more than 1 million orders in the first 24 hours after the phone's introduction, breaking the iPhone 4's record of 600,000. Meanwhile, Apple's share of tablet shipments exceeded 65% in the first half of 2011, though that slice could narrow to 50% by the end of the year as the playing field absorbs new entrants.

Wall Street projects 55% higher per-share earnings on a 44% surge in revenue in the September quarter, and Apple has consistently topped the consensus in recent quarters. For all that growth, shares trade at 16 times trailing earnings, a 39% discount to the five-year average. Apple, with a net cash and securities position of $81 per share, is a Focus List Buy and a Long-Term Buy.


DirecTV ($46; DTV) shares have risen 15% in 2011, while the S&P 1500 Index has slid 5%. Yet the stock still looks cheap considering the company's operating momentum. The satellite-TV provider has reeled off seven straight quarters of double-digit sales growth. A steady stream of bond offerings and 19% annualized growth in operating cash flow over the last five years have funded DirecTV's 39% reduction in the share count during that five-year period.

Wall Street targets 35% higher earnings per share in the September quarter on 12% revenue growth. CEO Mike White spoke bullishly about the quarter in late September in terms of subscriber additions and churn.

DirecTV shares trade at just 15 times trailing earnings, 24% below the five-year average. For 2012, per-share profits are projected to reach $4.24, up 26%. The stock trades at 11 times the 2012 profit consensus, an 8% discount to its peer group in the S&P 1500 index. DirecTV is a Focus List Buy and a Long-Term Buy.


Intel ($23; INTC) earns scores of 75 or better in all six Quadrix categories, while its Overall and sector-specific scores are 95 or higher. The shares are cheap, yielding 3.7% and trading at 10 times trailing earnings — 42% below their five-year average and 19% below the median for semiconductor stocks in the S&P 1500 Index. And the company has impressive operating momentum, with operating cash flow rising in seven of the last nine quarters.

About 80% of the world's personal computers use Intel semiconductors, and the health of the PC market is a major concern for the company. Global outlooks are eroding for both semiconductors (Gartner now sees sales flat for the year versus its previous 5% growth projection) and personal computers (Gartner slashed its 2011 growth target to 3% from 10%). Looking further out, Intel hopes to expand its influence with mobile devices. In the past month, Intel has signed mobile partnerships with Google ($543; GOOG) and Samsung. The first Android-based smartphones running on Intel processors are due out in the first half of 2012.

For the September quarter, Intel is expected to report per-share earnings of $0.61, up 17% on 25% sales growth.  Set to announce September-quarter results Oct. 18, Intel is a Focus List Buy and a Long-Term Buy.

COMPONENTS OF OUR FOCUS LIST
12-Month
---- Growth ----
Est. EPS
--- Growth ---
Company (Price; Ticker)
Trailing
P/E
Ratio
Earnings
(%)
Oper.
Cash
Flow
(%)
Curr.
Year
(%)
Next
Year
(%)
Quadrix
Overall
Score *
Sector
Agilent Technologies
($34; A)
12
107
101
46
9
95
Health Care
Alliance Data Systems
($97; ADS)
14
39
46
23
13
88
Technology
Apple ($400; AAPL)
16
91
105
83
18
99
Technology
Bed Bath & Beyond
($59; BBBY)
17
32
17
25
15
95
Cons. Discret.
CF Industries
($147; CF)
10
132
761
164
(8)
100
Materials
CSX ($21; CSX)
13
41
36
27
16
79
Industrials
DirecTV ($46; DTV)
15
51
5
35
26
93
Cons. Discret.
Exxon Mobil
($76; XOM)
10
46
41
38
2
90
Energy
Intel ($23; INTC)
10
23
14
16
4
99
Technology
MasterCard
($330; MA)
20
28
107
25
18
93
Technology
Oracle ($31; ORCL)
14
33
46
9
10
97
Technology
Walter Energy
($66; WLT)
8
94
33
7
28
86
Materials
Portfolio median
16
43
43
26
14
94
* Quadrix scores are percentile ranks, with 100 the best.

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