Given the recent strength in the stock market and the historical strength the market has shown in the month of December, we feel that institutional investors will be looking for large capitalization stocks to participate in the current rally. We screened our database of the largest 1000 stocks to look for companies that could attract investors searching for stable, high quality stocks; and found these five companies with a bullish rating, a 5 year ROE > 85% of all stocks screened, consistent EPS over 5 years, a PEG ratio < 1.5 and an attractive P/E ratio based on projected 2011 earnings.
Our rating is based on a 20-factor model incorporating Financial Metrics, Earnings Performance, Price/Volume activity and Expert Opinions to determine a stock’s potential over the next 3-6 months.
We believe these large cap companies should pick up steam and perform well going into 2011 as institutional investors balance their portfolios to include such bellwethers where attractive 5 year ROE, consistent earnings performance and a low projected P/E ratio could lead to further gains.
Cigna Corporation (CI): 37.98
Cigna’s attractive Financial Metrics are driven by a strong ROE and a very low price/sales ratio.
Bullish analyst opinions, upward earnings estimate revisions and positive money flow all contribute to a very bullish rating.
The company seems to have positioned itself well vs. the new medical reform rules given that its medical-loss-ratio is already above the new required minimum ratio of 85%, and its business model is more of a manager for big companies’ self insured health plans allowing it to get paid in fees.
General Dynamics Corporation (GD): 67.58
Although its core businesses continue to be strong, GD is trading 15% below its 52 week high. An attractive price/sales ratio, favorable Business Value* and a very strong ROE contribute to the company’s very bullish Financial Metrics.
Consistent earnings growth and a favorable projected P/E ratio lead to a very bullish Earnings Performance metric. Upward earnings revisions, strong money flow and a very low short interest together provide additional factors adding up to a very bullish rating.
The stock has rallied 20% since hitting a low in September; and we think this rally will continue into 2011, taking the stock back to its high made earlier this year.
Honeywell International Inc (HON): 51.45
Despite posting a 30% gain YTD, Honeywell is still undervalued based on its attractive metrics. The company has posted consistent earnings with good profit margins over the last 5 years, leading to upward earnings estimate revisions; and has a very strong ROE and a favorable Business Value*.
Honeywell has shown positive price strength vs. the broad market and vs. its industry, reaching higher highs in the last 3 months. Money Flow activity, price trend, and volume trend together contribute to a very bullish Price/Volume component.
Recent insider buying, increasingly bullish analyst opinions and a very low short interest add up to very bullish Expert Opinions. All these factors together contribute to a very bullish rating, suggesting further upside potential for the company’s stock as an excellent management team continues leading the company’s expansion into international markets.
Microsoft Corporation (MSFT): 27.02
With high profit margins and ROE, strong cash flows and a positive Business Value*, MSFT makes a compelling case to continue generating investor interest in 2011.
Consistent earnings growth and a history of earnings surprises have led to upward earnings estimate revisions and contribute to a very bullish Earnings Performance metric in the Power Gauge.
A very low short interest provides another indication that the company is well respected by the investor community.
With a very bullish projected P/E ratio based on 2011 earnings estimates, Microsoft is an attractive addition to a portfolio looking for a low risk company that can begin to outperform the market.
Lam Research Corporation (LRCX): 49.22
Lam Research boasts a healthy balance sheet with lots of cash on hand and very little debt. Strong Business Value* with very high profit margins and a very bullish ROE contribute to the company’s bullish Financial Metrics.
Very positive Money Flow activity, a strong price trend, and favorable price strength vs. the broader market and its industry contribute to a bullish Price/Volume ranking.
Recent earnings surprises, and an attractive projected P/E ratio based on 2011 EPS estimates, have led to very bullish analyst opinions about the company’s potential going into next year.
The stock has posted a 25% gain in the last 3 months, and given its strong momentum, we believe the trend will continue into the first half of 2011.
* Business Value is the most heavily weighted factor in our 20 factor Power Gauge rating. It measures free cash flow per share on a relative basis vs. 3000 stocks. It is similar to EV/FCF.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.