The S&P 500 moved into the green in May and has never looked back. So far in Q3, it's up a whopping 16.8%, even better than Q2's 15.9% total return. Despite the large advance, 40 of the members are actually down QTD. Thinking that there might be some opportunities from the long side, I wanted to take a closer look, so I created a screen in StockVal to narrow the list. Here is how I constrained the group:
- 50dma > 200dma (maximum 10%)
- PE F12M <120% of 5yr Median
- Net Debt to Capital < 60%
The first constraint is to assure that the trend is up but it isn't overextended. The second constraint makes sure the PE isn't super-inflated. The final factor kicks out balance-sheet disasters. Here are the 15 stocks:
Note that several different sectors are included (7 out of 10). As a group, these stocks are certainly lagging the market this year, but they did better last year for the most part. The group also has a lower PE than the market in general. I also included a measure of earnings revisions. In general, the group isn't seeing large negative revisions that are driving the price declines, as the median is about unchanged.
Running through the list, I do have a few observations. The lone Industrial stock, Stericycle (SRCL), is certainly a defensive stock. The lone Consumer Discretionary stock, Family Dollar (FDO), has pulled back recently after being up strongly in 2008. This stock looks very inexpensive to me - I recently added it to the Conservative Growth/Balanced model portfolio.
There are several Healthcare stocks on the list. LabCorp (LH) and Quest Diagnostics (DGX) are down a bit this year after being down just slightly last year, with investors somewhat concerned about reimbursement. Gilead (GILD) was up last year, but it has retreated this year and is at the lowest PE in quite some time. St. Jude (STJ), which has been at 38 for six years, is on my watchlist. It sure seems inexpensive. I recently added Becton Dickinson (BDX) to the Conservative Growth/Balanced model portfolio too. Analysts were caught off guard when the company indicated that 2010 EPS wouldn't benefit from the currency hedging that helped boost 2009. I like the broad product portfolio and the high international exposure.
I don't really have too much to say about the two Finance names that made the list. Electronic Arts (ERTS) seems rather inexpensive considering its large cash hoard and its decade-low PE. Akamai (AKAM) is one that I own both in a portfolio I manage as well as my Top 20 model portfolio (up 54% YTD). Verizon (VZ) made the cut, but I am suspicous. Finally, there are three Utilities that probably merit a look.
Many of these stocks are defensive and have given up some ground as investors have become a bit bolder. It probably makes sense to take a closer look at these names, as they could play catch-up if the market continues its strong bid or come back into favor if it pauses or retrenches.
Disclosure: Long AKAM in a portfolio I manage