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Summary

  • I look at the holdings of the Financial SPDR and the Health Care SPDR to find the "best-of-breed" stock in each sector.
  • I combined fundamentals, corporate governance, and CEO approval to determine the best stock in each sector.
  • The two stocks I determined were "best-of-breed" have significantly outperformed their respective sectors, and one is a Dividend Aristocrat.

This is the fourth article in a series of articles where I will highlight the "best-of-breed" stock for each of the nine major sectors covered by the SPDRs. For this article, I will be covering the holdings of the Financial SPDR (NYSEARCA:XLF) and the Health Care SPDR (NYSEARCA:XLV) to find the top stock in each. To aid in my search, I will be using the Finviz.com stock screener to screen for fundamentals, corporate governance data from Institutional Shareholder Services [ISS], and glassdoor.com for CEO approval ratings. The reason why I chose these three categories was that I wanted to find companies with strong fundamentals, good corporate governance, and companies with employees who believe in management.

Best of Breed Part 1: Technology & Utilities

Best of Breed Part 2: Staples & Discretionary

Best of Breed Part 3: Energy & Materials

Step #1: Finviz Screener Criteria

I downloaded the holdings of XLF and XLV into a spreadsheet, and copied them into the Finviz stock screener. I then used the following bullets below, which are the screen criteria I used to get my initial list of stocks. I found that only 15 stocks of the 83 holdings of XLF, and 8 of the 54 holdings of XLV met the criteria I set below, and those companies are listed in the table below my criteria.

  • Return on Equity: +10%
  • Return on Investment: +5%
  • EPS Growth Past 5 years: Positive
  • EPS Growth Next 5 years: Positive
  • LT Debt/Equity: <1
  • Dividend Yield: Positive
  • Operating Margin: >20%
  • Profit Margin: >10%
  • Float Short: <5%
  • Performance [1 year]: Up

Financials

Healthcare

(NYSE:ACE)

ACE Limited

(NYSE:AGN)

Allergan Inc.

(NYSE:AFL)

AFLAC Inc.

(NYSE:COV)

Covidien Plc

(NYSE:BEN)

Franklin Resources Inc.

(NYSE:JNJ)

Johnson & Johnson

(NYSE:BLK)

BlackRock Inc.

(NYSE:LLY)

Eli Lilly & Co.

(NYSE:CB)

Chubb Corp.

(NYSE:MDT)

Medtronic Inc.

(NASDAQ:FITB)

Fifth Third Bancorp (OH)

(NYSE:PFE)

Pfizer Inc.

(NASDAQ:HBAN)

Huntington Bancshares (OH)

(NYSE:STJ)

St Jude Medical Inc.

(NYSE:IVZ)

Invesco Ltd.

(NYSE:ZMH)

Zimmer Holdings Inc.

(NYSE:MHFI)

McGraw Hill Financial Inc.

(NYSE:PSA)

Public Storage

(NYSE:TMK)

Torchmark Corp.

(NASDAQ:TROW)

T. Rowe Price Group Inc.

(NYSE:TRV)

Travelers Cos. Inc.

(NYSE:USB)

U.S. Bancorp

(NYSE:WFC)

Wells Fargo & Co.

Step #2: ISS Corporate Governance

For this step, I looked at the corporate governance score from ISS to see which companies had the lowest score. The score ISS gives is from 1-10, with 1 being the best score, which means that company has the lowest governance risk, whereas a score of 10 means that company has a high governance risk. The governance score for each company is listed in the table below, and the top 50% are highlighted, and those stocks will make it to my final step.

Financials

Healthcare

Governance Rating

Governance Rating

TMK

Torchmark Corp.

1

ZMH

Zimmer Holdings Inc.

1

TRV

Travelers Cos. Inc.

3

JNJ

Johnson & Johnson

2

USB

U.S. Bancorp

3

PFE

Pfizer Inc.

4

WFC

Wells Fargo & Co.

3

MDT

Medtronic Inc.

4

CB

Chubb Corp.

4

COV

Covidien Plc

6

TROW

T. Rowe Price Group Inc.

4

AGN

Allergan Inc.

8

HBAN

Huntington Bancshares (OH)

5

STJ

St Jude Medical Inc.

9

MHFI

McGraw Hill Financial Inc.

6

LLY

Eli Lilly & Co.

9

BEN

Franklin Resources Inc.

6

BLK

BlackRock Inc.

6

ACE

ACE Limited

7

FITB

Fifth Third Bancorp (OH)

8

IVZ

Invesco Ltd.

8

AFL

AFLAC Inc.

9

PSA

Public Storage

9

Step #3: CEO Approval

For this step, I looked at the CEO approval ratings for each of the top companies from my corporate governance section above for Financials and Healthcare, and the results are shown in the table below. The financial company with the highest CEO approval rating was U.S. Bancorp, with 90%, and thus is the company that I have determined is the "best-of-breed" stock for the financial sector. The healthcare company with the highest CEO approval rating was Johnson & Johnson, with 89%, and thus is the company that I have determined is the "best-of-breed" stock for the healthcare sector.

Financials

Healthcare

CEO Approval

CEO Approval

USB

U.S. Bancorp

90%

JNJ

Johnson & Johnson

89%

TROW

T. Rowe Price Group Inc.

87%

MDT

Medtronic Inc.

82%

TRV

Travelers Cos. Inc.

80%

PFE

Pfizer Inc.

64%

CB

Chubb Corp.

76%

ZMH

Zimmer Holdings Inc.

30%

WFC

Wells Fargo & Co.

75%

HBAN

Huntington Bancshares (OH)

74%

TMK

Torchmark Corp.

60%

Performance of U.S. Bancorp and Johnson & Johnson

The two charts below show the performance of USB and JNJ compared to XLF and XLV since the inception in 1998 for each of the sector SPDR ETFs. As you can see, U.S. Bank has significantly outperformed the XLF by a wide margin. The chart shows that the USB essentially performed close to the same as XLF up to the financial crisis, however, during and after the crisis, USB has had a significant outperformance. The second chart shows that JNJ has steadily outperformed the XLV, with the margin of outperformance being essentially the same for the last 15+ years.

Chart #1: U.S. Bancorp [Black line] vs. XLF [Blue Line]

Chart #2: Johnson & Johnson [Black line] vs. XLV [Blue Line]

The pair of charts below show the yearly dividend totals for USB and JNJ, and shows that USB had been growing its dividend up to the financial crisis, and then, its dividend took a major dive; it has since raised its dividend back up, however, it is still roughly 50% lower than its peak in 2008. JNJ is the model stock for dividend growth; no matter what the market conditions, boom or bust, JNJ has shown the ability to consistently increase its dividend. [Dividend Data from Dividendchannel.com]

(click to enlarge)

(click to enlarge)

Closing thoughts

I believe U.S. Bancorp and Johnson & Johnson are worth a deeper look because they met all my fundamental criteria, which I believe, are important factors that make each company strong. In addition, including additional factors like corporate governance and employees' views of management, I believe, when combined with strong fundamentals, is a solid method of determining stocks that are best-of-breed. In my final article, I will be covering the Industrials sector.

Disclaimer

Source: Best Of Breed Part 4: Financials And Healthcare