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 (NASDAQ:SRCL), is certainly a defensive stock. The lone Consumer Discretionary stock, Family Dollar (NYSE: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 (NYSE:LH) and Quest Diagnostics (NYSE:DGX) are down a bit this year after being down just slightly last year, with investors somewhat concerned about reimbursement. Gilead (NASDAQ:GILD) was up last year, but it has retreated this year and is at the lowest PE in quite some time. St. Jude (NYSE:STJ), which has been at 38 for six years, is on my watchlist. It sure seems inexpensive. I recently added Becton Dickinson (NYSE: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 (NASDAQ:AKAM) is one that I own both in a portfolio I manage as well as my Top 20 model portfolio (up 54% YTD). Verizon (NYSE: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