Add Spice To Your Portfolio

12/5/2011


Looking for a way to make your pancakes taste better? Try augmenting your normal batter with vanilla extract and allspice or nutmeg. You get the same fluffy goodness, with extra taste kickers to help improve on an old favorite.

In the kitchen, success stems from your recipe. The same holds for your investment portfolio, where diversification can do more than just reduce risk. For instance, let's consider the S&P 1500 Index's most volatile sector — technology — and its least volatile — consumer staples.

A $10,000 investment in the S&P 1500 Consumer Staples Sector Index would have grown to $29,533 (an annualized cumulative return of 7.5%) in the 15 years ended October, while the same investment in the tech sector would have grown to $26,915 (6.8%). Yet in those fifteen 12-month periods, the tech sector's average return was 12.5%, versus 8.0% for the consumer staples sector.

So why did the tech investment end up with a lower value despite the higher average return? Blame three bad years. The tech index lost more than 28% of its value in three of the 12-month periods, including a 53% loss in the 12 months ended October 2001. In contrast, the consumer staples sector never lost more than 12.3% in any of the 12-month periods.

Technology and consumer staples stocks tend to follow different paths, but a combination of the two tastes better than either sector does on its own. A portfolio containing equal portions of the technology and consumer staples index, rebalanced to those weightings every 12 months, would have outperformed either of the individual sector indexes over the last 15 years.

The portfolio's annual returns are only slightly more volatile than those of the broader S&P 1500 Index. The consumer-staples presence would have kept investors from fully cashing in on tech's best years, but it more than offset that negative by blunting the impact of tech's lean periods.

SECTOR ANALYSIS
Sector Averages
12-Month
Growth
Est. EPS
Growth,
Next Yr.
(%)
Price/
Earnings
Ratio
(%)
Price/
Sales
Ratio
(%)
Quadrix
Overall
Score
Sector (No. Of Cos.)
Div.
Yield
(%)
Sales
(%)
EPS
(%)
Cons. Discret. (253)
1.2
8
17
17
17
1.1
60
Consumer Staples (77)
2.0
13
7
11
17
1.3
55
Energy (89)
0.8
23
11
18
18
2.2
60
Financials (261)
2.9
7
8
16
19
2.6
48
Health Care (155)
0.6
13
14
11
18
1.9
63
Industrials (218)
1.5
15
20
18
17
1.1
62
Materials (92)
1.8
18
14
18
15
1.1
57
Technology (269)
0.6
15
16
15
20
2.2
60
Telecom Services (17)
2.5
22
1
18
19
1.4
50
Utilities (69)
3.9
3
3
6
16
1.3
42
S&P 1500 Index (1500)
1.6
12
14
15
18
1.7
57
Notes: Averages exclude yields over 10%, growth rates over 100%, P/E ratios below 0 or above 75, and P/S ratios above 15. Quadrix scores are percentile ranks, with 100 the best.

It is no accident that our buy lists feature companies from a variety of sectors. Owning stocks in different parts of the market, stocks that follow different cycles, helps insulate investors from weakness in one or two segments of the economy.

The table below lists intriguing stocks from each of the 10 market sectors. We required scores of at least 70 in Quadrix® Overall to weed out those with poor fundamentals. In most cases, the companies earn at least 70 in both of our sector-specific scores designed to rank stocks within their sector.

TOP STOCKS IN 10 SECTORS
Below we present two to five favorites from each of the 10 market sectors. Stocks on our buy lists are presented in bold. All four utilities are components of our Top 15 Utilities portfolio. Quadrix scores and sector-specific scores are percentile ranks, with 100 the best.
12-Month
Growth
Sector Scores
Sector
Company (Price; Ticker)
Div.
Yield
(%)
P/E
Ratio
Sales
(%)
EPS
(%)
Quadrix
Overall
Score
12-
Factor
Sector
Reranked
Overall
Consumer Discretionary
AutoZone ($323; AZO)
0.0
17
10
30
85
76
79
Bed Bath & Beyond
($60; BBBY)
0.0
17
10
32
91
90
90
DirecTV Group
($46; DTV)
0.0
14
12
47
98
93
100
Wyndham Worldwide
($34; WYN)
1.8
14
9
33
92
94
93
Consumer Staples
CVS Caremark
($38; CVS)
1.3
14
7
1
81
84
81
Wal-Mart Stores
($58; WMT)
2.5
13
5
11
83
78
83
Energy
Chevron
($97; CVX)
3.3
7
24
60
99
97
96
Exxon Mobil
($77; XOM)
2.4
9
28
46
95
70
90
Financials
Aflac ($41; AFL)
3.2
7
7
(13)
97
96
100
U.S. Bancorp ($25; USB)
2.0
11
4
47
90
81
92
Health Care
Agilent Technologies
($35; A)
0.0
12
21
48
95
65
92
UnitedHealth Group
($46; UNH)
1.4
10
9
17
95
94
96
Industrials
AGCO ($43; AGCO)
0.0
11
28
112
99
100
100
Caterpillar ($91; CAT)
2.0
13
48
114
95
89
95
Materials
CF Industries ($144; CF)
1.1
8
74
206
100
100
100
Newmont Mining
($65; NEM)
2.1
15
7
15
85
80
79
Technology
Apple ($373; AAPL)
0.0
13
66
83
100
100
99
Google ($583; GOOG)
0.0
17
30
25
96
96
97
Intel ($24; INTC)
3.6
10
21
19
100
99
100
MasterCard ($358; MA)
0.2
20
19
36
93
85
96
Oracle ($30; ORCL)
0.8
13
25
33
96
88
95
Telecom Services
Nippon Telegraph
($24; NTT)
0.0
10
16
9
84
68
95
Rogers Commun.
($36; RCI) e
3.9
12
3
9
84
47
79
Utilities
Cleco ($35; CNL)
3.6
11
5
39
84
96
98
Energen ($49; EGN)
1.1
11
0
9
72
99
96
PPL ($29; PPL)
4.8
10
24
21
83
100
100
Sempra Energy
($52; SRE)
3.7
12
7
28
73
95
94
e Dividend yield estimated.

In this issue we will profile a favorite from each sector. Technology giant Apple ($373; AAPL) is reviewed in Analysts' Choice, and you can read about the other nine below.

Consumer discretionary

Bed Bath & Beyond ($60; BBBY) exudes steadiness in the often-turbulent consumer discretionary sector. Its Overall score has exceeded 80 for at least 24 straight month-ends. Annual sales have risen every year for the past decade and are projected to grow 8% in fiscal 2012 ending February. Cash provided by operations increased in nine of the last 11 quarters. The shares have risen 21% so far this year, adding to a 27% gain last year and a 52% surge in 2009. Bed Bath & Beyond is a Focus List Buy and a Long-Term Buy.


Consumer staples

Wal-Mart Stores ($58; WMT) delivered 8% sales growth in the October quarter, the third consecutive quarter of accelerating growth, with international operations setting the pace. Wall Street expects per-share-profit growth of 8% in the January quarter and 9% in fiscal 2013 ending January, and the retail giant seems capable of double-digit annual profit growth over the next five years. At 13 times trailing earnings, Wal-Mart looks cheap relative to that growth potential. The stock is a Long-Term Buy.


Energy

Chevron's ($97; CVX) operating cash flow has risen in eight consecutive quarters and 34% over the past year. Chevron must suspend drilling in Brazil while regulators investigate a November oil spill, but the near-term effect should be minimal — Brazil represents about 1% of Chevron's oil production. Shares pulled back after the disaster but are still up 7% for the year, while S&P 1500 Energy Sector Index has slipped 2%. Chevron, with a fat 3.3% dividend yield but a lean 24% payout ratio, is a Focus List Buy and a Long-Term Buy.


Financials

Aflac's ($41; AFL) mascot could be mistaken for its investors, ruffled by overseas disasters, pushing shares from near $60 in March down to $31 in September. But the insurer's operating momentum remains intact, with per-share operating earnings up 15% in the nine months ended September. Concerns about Aflac's exposure to European debt appear to be dissipating. Since an announcement by credit-rating agency Moody's that it was considering downgrading the debt of banks in 15 European countries, Aflac has outperformed the S&P 500 Index. Aflac is a Buy and a Long-Term Buy.


Health care

In the past 12 months, Agilent Technologies' ($35; A) per-share profits jumped 48%, nearly triple the average health-care stock in the S&P 1500. Yet the shares trade at just 12 times trailing earnings, 16% below the sector average. While the defense business has lagged, Agilent's biggest markets — industrial and communications — continue to deliver double-digit sales growth. Agilent is a Focus List Buy and a Long-Term Buy.


Industrials

AGCO ($43; AGCO) has produced spectacular growth in the past year, with revenue surging 28% while per-share profits more than doubled. That pace will probably slow in 2012, though Wall Street still anticipates 9% growth for both metrics. Shares trade at just nine times estimated 2012 profits, 24% below the average for industrial stocks. AGCO earns an Overall score of 99, and both of its sector-specific scores are 100, the maximum possible. AGCO is a Focus List Buy.


Materials

Lifted by strong gold prices, Newmont Mining ($65; NEM) shares have risen 6% this year, versus a 13% decline for the S&P 1500 Materials Sector Index. Per-share profits are expected to climb 35% in 2012, nearly double the sector's estimated growth. Newmont's trailing P/E is less than 15, 22% below its three-year average and 41% below the five-year average. Newmont, the world's second-biggest gold producer, is a Buy and a Long-Term Buy.


Telecom services

Nippon Telegraph & Telephone ($24; NTT), Japan's largest telecommunications company, provides mobile-phone service to nearly 59 million customers, as well as nearly 29 million land lines. The company added a net 983,000 mobile subscribers and 910,000 Internet-telephony subscribers in the six months ended September. NTT is not on our buy lists, but it does earn an A (above average) rating in our Monitored List.


Utilities

PPL ($29; PPL) earns 100, the maximum possible, for both sector-specific scores designed to rate stocks relative to others in the same sector. PPL's Overall score of 83 is also among the best in a sector known for mediocre scores. PPL offers an attractive blend of operating momentum (sales and profit growth of more than 20% over the last year) and value (trailing P/E ratio of 10, 30% below the median for electric utilities in the S&P 1500 Index). PPL earns an A rating in our Utility Update and is a component of our Top 15 Utilities Portfolio.


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