The market posted a great quarter, with stocks rising 10% as measured by the S&P 500. One could argue that they did even better, except that Apple (AAPL) dragged them down, though this isn't as big a deal as many suggest (I calculate the decline in AAPL is worth about 0.5%). Market leadership looks broad. I put together this chart of the S&P 500 that shows a very favorable skew:
In case it's not clear, the S&P 500 rose in price by 10%, but 59% of the stocks in the S&P 500 rose more than 10%, while 41% rose less than 10%. The stocks that gained 10% more than the market (i.e. up 20% or more) outnumbered those that ended up more than 10% behind the market (i.e. fell), and those in the 10-20% bucket outnumbered those in the 0-10% bucket rather considerably. Of course, this is confirmed by looking at the performance of Mid-Caps and Small-Caps too, as the S&P 400 Mid-Cap (+13.5% total return) and the S&P 600 Small-Cap (+11.81% total return) both eclipsed the S&P 500's 10.61% return with dividends.
I hate chasing stocks, and I find looking at the real dogs to usually be a frustrating experience, with many of them proving to be a falling knife. With this in mind, I want to focus my hunt for new ideas on those in the "0-10%" bucket. These are the laggards but not losers, as they didn't keep up with the market but they weren't so bad that their price declined. In a bull market, this seems like a sound strategy, especially one that may face some rotation as we likely cool off a bit. With this in mind, I took those 141 stocks in the 0-10% bucket and ran the following screen:
- PE vs. 5-year Average < 1.2X
- 1-year EPS Growth >10%
- 1-year Sales Growth > 6%
- Current Year EPS 3-month Revisions > -1%
The goal was to find stocks not trading too far above their valuation range over the past five years that are growing and don't have analysts chopping their estimates sharply. We started off with 141 stocks from all ten economic sectors. We ended up with just these 20:
As always, keep in mind that this is just a screen, and not recommendations. I included a lot of extra information (source of all data is Baseline) in order to help readers hone in on names that may be of interest. The list is sorted by economic sector and by PE vs. 5-year average. I included a column for distance from the 52-week high and shaded in red the four that are more than 10% below. I also included a column for the 2-year price range. Five stocks (in green) are in solid uptrends, while three (in red) have lagged the market and actually declined. I shaded in yellow the three stocks with PE ratios above 20X and also highlighted those stocks trading above their average PE over the past five years. Finally, I included some information about 2013 and 2014 earnings growth estimates. Most of the names that made the cut are expected to grow faster than the market.
Let me quickly share some thought on going down the list. Lennar (LEN) is interesting if you believe the numbers. Of course, the homebuilders have been on a tear I don't have a lot of confidence and remember them trading at single-digit PEs even when the story was great back in 2005. I don't really follow Fossil (FOSL) closely enough to comment.
Costco (COST) is a great company, and I am a loyal customer! The stock has the benefit of being mainly a domestic play, and the staples group has been on fire (more brands than sellers though). It's not cheap, just ok. Helmerich & Payne (HP) is on my watchlist. Again, a very high quality company compared to its peers, but it doesn't look like a great entry to me here. We picked some up in my Top 20 Model Portfolio last year and exited too early but with a big gain. Selling too early has been a real problem for me! As far as HP, I think the recent run is due to natural gas prices rising, but I am not optimistic that natural gas drilling picks up here.
The number of banks (and other financials) is quite telling. After doing very well in 2012 but after a horrible 2007-2011, the sector is definitely working, marginally outperforming the market in Q1. As I look at these stocks, I see reasonably low valuations (also on P/TB basis). US Bancorp (USB) and Wells Fargo (WFC) are very high quality. S&P rates WFC in quality as A-, a ranking it doesn't bestow upon too many banks. I think I like this one better than LEN with respect to housing. I think BB&T (BBT) is interesting too. The analysts aren't expecting big growth next year, but I think that the numbers may be too conservative. A stronger economy and higher loan demand could help boost margins. Public Storage (PSA) is not so appealing.
Healthcare has been on fire, so these laggards are really missing the party. Varian Medical (VAR) stands out as the most interesting to me of these five. The company makes radiation equipment for treating cancer and is a free cash flow monster. It has $6 of net cash per share and aggressively repurchases stock. I bet that if they started paying a dividend, which they easily could do, then the stock would likely move from 17PE to 20PE. This is one that will ultimately be acquired by a larger player in my view. Plus, what a great chart:
Among the Tech companies, I think Qualcomm (QCOM) deserves a close look. What's not to like? Let's look first at the chart:
This is a weekly view. Unlike a lot of Large-Cap Tech, this one is at the highs of the last decade. At 15PE, it hasn't really been cheaper over the past decade either (low was 14X in 2010 after the Flash Crash). It's a dividend growth stock (1.5% yield with boosts each year since they started paying it in 2003). Almost $8 per share in cash and no debt too. When I want to know what's going on in Technology, I turn to contributor Ashraf Eassa, and he is very bullish on QCOM, last saying to buy it because it's on sale. He argues that their chips are so good that even Samsung, with its own manufacturing capability, uses them.
Cognizant (CTSH) has caught my attention too, especially after I found a mini-CTSH and missed it [Virtusa (VRTU)]. CTSH has $10 per share in cash. Indian outsourcing used to be hot. While I don't hear so much about it, the company continues to grow nicely. I wonder too if the lack of a dividend hurts this one, as its board has opted for repurchases instead. Citrix (CTXS) has stalled the last two years. I don't really have much to say. As far as Eastman Chemical (EMN), this one is bucking the trend for the Materials sector and breaking to an all-time high. The company, which acquired Solutia last year, gave really bullish guidance in February, suggesting that 2013 will see 17-19% growth and that the company could earn $8 in 2015.
While there are good ideas likely even among the losers (like AAPL in my opinion), I like the idea of focusing on what I sometimes call "healthy laggards". The last time I used that term was in early October, sharing 10 names that met the criteria (a little different from this screen). 9 of the 10 are up, most very sharply, and the one that fell jumped to an all-time high first. They don't always work - there is no simple quantitative method (or any method for that matter!) that does. I have shared a few ideas that piqued my interest. As always, I encourage readers to share their views.