Focus List Update: Surge in Higher Risk Stocks Continues

by: Stephen Castellano

Another week, another rally.

The S&P 500 returned 2.11% for the week and the Russell 3000 Index returned 2.35%. In contrast, new stocks on our "high-quality" list returned 2.51% but "low-quality" was the way to go, returning 3.90%.

The three new stocks on our high-quality "focus" list, which were derived from additional forward-looking factors, declined by 0.19% on average and the four low-quality focus list stocks moved up by 2.99%. Not exactly the trend we were hoping to see when we started tracking such a list on March 5, but in keeping with the ongoing surge we have seen in higher risk stocks.

Increasingly it seems that investors have bought into the idea that the economy has bottomed, that fundamentals have turned the corner, or are about to do so, for many companies. For apparently an increasing number of investors, everything is now a buy - it's just a matter to what degree.

For example, over the last seven weeks new "high-quality" stocks on our weekly lists have returned 7.60% on average, above the S&P 500 return of 6.90%. But new "low-quality" stocks on our weekly lists have returned 9.30%. Even worse, the derived "high-quality" focus list stocks have returned 2.90% and "low-quality" focus list stocks have returned 12.93%.

At some point a focus on fundamentals will start to matter, but for now it seems an important driving factor is analyst revisions.

New stocks for the week, April 23 to April 30 2010
Around 2pm on Friday, April 23, we released an updated list of weekly "high-quality" and "low-quality" ideas. We updated our data following the close, and as a result there have been a few changes relative to the Friday afternoon list.

As of the close of April 23, 2010, there are 10 new "high-quality" stock ideas, four of which make our focus list. There are also 12 new "low-quality" stocks, including two focus list ideas.

New "high-quality" ideas for the week include ITT Educational Services Inc. (NYSE:ESI), Tupperware Brands Corporation (NYSE:TUP), Tractor Supply Company (NASDAQ:TSCO), McDonald's Corp. (NYSE:MCD), New York Community Bancorp Inc. (NYB), Wells Fargo & Company (NYSE:WFC), AmerisourceBergen Corporation (NYSE:ABC), L-3 Communications Holdings Inc. (NYSE:LLL), Intel Corporation (NASDAQ:INTC) and AptarGroup, Inc. (NYSE:ATR).

Focus list ideas derived from this group include TUP, TSCO, MCD and NYB.

New "low-quality" ideas for the week include Sony Corporation (NYSE:SNE), Panasonic Corporation (PC), Nabors Industries Ltd. (NYSE:NBR), Anadarko Petroleum Corporation (NYSE:APC), SunTrust Banks, Inc. (NYSE:STI), Janus Capital Group Inc. (NYSE:JNS), Kyocera Corp. (NYSE:KYO), Randgold Resources Ltd. (NASDAQ:GOLD), Reliance Steel & Aluminum Co. (NYSE:RS), Indosat tbk PT (IIT), OGE Energy Corp. (NYSE:OGE). and PPL Corporation (NYSE:PPL).

High Quality Stocks Off the "Buy List"
As predicted, one of our favorite stocks for long-term investors is off the "Buy List" due to sharply lower analyst revisions: Gilead Sciences Inc. (NASDAQ:GILD). This illustrates the importance of using experience and insight to override factor models. Also moving off the list due solely to downward revised analyst revisions are: AutoZone (NYSE:AZO), Del Monte Foods (DLM), Rayonier Inc. (NYSE:RYN), Banco Santander-Chile (NYSE:SAN), Sybase (SAN) and Freeport-McMoran (NYSE:FCX). These stocks may be worth keeping an eye on since they all continue to show good relative value and strong operating momentum.

Low Quality Stocks Off the "Sell List"
Arch Coal Inc. (ACI) and CNH Global NV (NYSE:CNH) are off our "low-quality" list as a result of sharply higher improvements in analyst revisions, and so are Starwood Hotels & Resorts (HOT) and TransAlta Corp. (NYSE:TAC) on significantly higher analyst revisions. These may be worth taking a closer look at as well.

About the Focus List Update
Focus List Update ideas, which we have only been tracking since March 5, 2010, are generated in a similar way to the Ascendere Long/Short Model Portfolio, which rebalances roughly 80-100 stocks on a monthly basis. Unlike our monthly model portfolio, we have not backtested the factors in our weekly focus list, but we would not be sharing these ideas unless we thought they could show some promise on average over time. We realize the higher frequency of this strategy may be introducing some noise to the process.

Perhaps one way to cut through the noise is to compare these weekly lists with lists from other sources. For example, a number of the stocks on these weekly updates have appeared on Goldman Sachs's Conviction Lists a few days or weeks later. Domtar Corp. (NYSE:UFS) is the best example of this. We note that some of the best names on this list have preempted a number of sell side upgrades, as described in our "Nostradamus" report, and such stocks seem to show the most promise.

A pdf of this report is available here.

Risks and Disclaimers
Investing in stocks entails a high degree of risk, including the risk of total loss. We are not soliciting the sale of any security. We do our best to provide relatively and accurate data and analysis, but make no guarantee.

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"High-Quality" Stocks Off the "Buy List"

"Low-Quality Stocks Off the" Sell List"

Disclosure: None