A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123 has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems, I used one of them the "ValueSheet" in this article.
The "ValueSheet" ranking system is quite complex, and it is taking into account many factors like; valuation ratios, growth rates, profitability ratios, financial strength, asset utilization, technical rank, industry rank, and industry leadership, as shown in Portfolio123's chart below.
In order to find out how such a ranking formula would have performed during the last 15 years, I ran a back-test, which is available by the Portfolio123's screener. For the back-test, I took all the 7,014 stocks in the Portfolio123's database.
The back-test results are shown in the chart below. For the back-test, I divided the 7,014 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "ValueSheet" rank. The highest ranked group with the ranking score of 95-100, which is shown by the light blue column in the chart, has given by far the best return, an average annual return of about 17%, while the average annual return of the S&P 500 index during the same period was about 3% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have given superior returns. This brings me to the conclusion that the ranking system is very useful.
After running the "ValueSheet" ranking system on all S&P 500 stocks that pay a dividend with a higher than 2% yield, on September 01, I discovered the twenty best stocks, which are shown in the table below. Since I have already written about the first six stocks of the list (INTC, STX, KLAC, SYMC, MCHP, CF), in this article, I will focus on the seventh stock BlackRock, Inc. (NYSE:BLK).
According to the company, BlackRock is the world's largest asset manager. The firm primarily provides its services to institutional, intermediary, and individual investors. It also manages accounts for corporate, public, union and industry pension plans, insurance companies, third-party mutual funds, endowments, foundations, charities, corporations, official institutions, and banks. BlackRock, Inc. was founded in 1988 and is based in New York City with additional offices in Boston, Massachusetts, London, United Kingdom, Brazil, Philadelphia, Pennsylvania, Plainsboro, New Jersey, and San Francisco, California.
The table below presents the valuation metrics of BLK, the data were taken from Yahoo Finance and finviz.com.
BlackRock's valuation metrics are very good; the Enterprise Value/EBITDA ratio is low at 12.68, and the average annual earnings growth estimates for the next five years is very high at 15.50%. The PEG ratio is pretty low at 1.10.
Latest Quarter Results
On July 16, BlackRock reported its second-quarter 2014 financial results, which beat EPS expectations by $0.43 (9.60%), and beat on revenue.
- 19% AUM growth from the second quarter of 2013
- $38.0 billion of long-term net inflows for the second quarter of 2014
- 32% operating income growth (15% as adjusted) from the second quarter of 2013
- 40.4% operating margin (42.4% as adjusted) for the second quarter of 2014
- 13% diluted EPS growth (18% as adjusted) from the second quarter of 2013
- Consistent capital management with $250 million of quarterly share repurchases
In the report, Laurence D. Fink, Chairman and CEO of BlackRock commented:
In the second quarter, we saw strong revenue growth driven by a combination of robust organic revenue gains and market tailwinds. Our results, with revenue up 12% and as adjusted EPS up 18% year-over-year, once again demonstrate the benefits of our diverse platform. During the quarter we generated 4% annualized organic growth or $38.0 billion in long-term net new business. We continue to execute on long-term growth strategies by focusing on key industry trends impacting our clients, including ETFs, alternatives, retirement, outcomes and solutions.
Dividend and Share Repurchase
BlackRock, has been paying uninterrupted dividends since September 2003. Since the inception of its dividend, BlackRock's per share dividend has increased each year except 2009, when it was unchanged. The forward annual dividend yield is at 2.34%, and the payout ratio is only 38.9%. The annual rate of dividend growth over the past three years was very high at 18.9%, and over the past five years, was also very high at 16.6%.
Source: Charles Schwab
Since the company generates lots of cash, and the payout ratio is low, there is a good chance that the company will continue to raise its dividend payment.
At each one of the last six quarters, the company utilized $250 million for share repurchase.
Source: 2Q14 EARNINGS Supplement
A comparison of key fundamental data between BlackRock and its main competitors is shown in the table below.
BlackRock has the highest dividend yield among the stocks in the group, and the highest operating margin. However, its price to sales ratio is the highest.
The charts below give some technical analysis information.
The BLK stock price is 4.89% above its 20-day simple moving average, 4.62% above its 50-day simple moving average and 8.61% above its 200-day simple moving average. Those indicate a short-term, mid-term and a long-term uptrend.
Chart: TradeStation Group, Inc.
The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.96 and ascending, which is a bullish signal (a rising MACD histogram that is crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 62.05 which do not indicate oversold or overbought conditions.
Many analysts are covering the stock, among the nineteen analysts, one rates it as a Strong Buy, nine rate it as a Buy, and nine analysts rate it as a Hold.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering BLK stock there are only three analysts who have the four or five star rating, and all of them recommend the stock.
According to Reuters press release, the European Central Bank has hired BlackRock to provide consultancy services in its preparations for a programme to buy asset-backed securities. On August 27, an ECB spokesman said that BlackRock will provide advice on the design and implementation of a potential ABS purchase programme, but all final decisions will be taken by the ECB itself. ECB President Mario Draghi said on Friday the central bank's preparations for outright purchases of ABS were "fast moving forward and we expect that it should contribute to further credit easing."
BlackRock has been able to show an earnings per share surprise in each one of the last three quarters, as shown in the table below.
In my opinion, the fact that the company succeeds to beat analyst expectations quarter after quarter demonstrates the strength of its business, and there is a good chance that BlackRock will continue to surprise by reporting better than estimate results also in the future.
BLK's stock has underperformed the market year to date. Since the start of the year BLK's stock has gained only 4.4%, while the S&P 500 index has risen 8.4%, and the Nasdaq Composite Index has increased 9.7%. However, in 2013, BLK's stock outperformed the market. Since the beginning of 2013, BLK's stock has gained 59.9%, while the S&P 500 index has increased 40.5%, and the Nasdaq Composite Index has risen 51.7%. Nevertheless, considering its good valuation metrics and strong earnings growth prospects, BLK's stock, in my opinion, has plenty of room to move up.
I see strong revenue and earnings growth prospects for the company. As a result of its impressive performance in the recent years, BlackRock has been able to attract many new clients. According to the company, its active fixed income product suite continues to excel, with 90% of taxable assets above benchmark or peer median for the three-year period. The company saw during the last quarter $13.1 billion of long-term net inflows in Retail as it continued to raise it brand profile, evolve its product set and deepen its distribution relationships. Furthermore, the fact that the European Central Bank has hired BlackRock to provide consultancy services in its preparations for a programme to buy asset-backed securities, demonstrates the high reputation that BlackRock has all over the world.
BlackRock has compelling valuation metrics and strong earnings growth prospects. The company is generating strong cash flows and returns value to its shareholders by stock buybacks and dividend payments. Moreover, BlackRock has been able to show an earnings per share surprise in each one of the last three-quarters. All these factors bring me to the conclusion that BLK stock is a smart long-term investment.
Disclosure: The author is long INTC, STX, KLAC, SYMC, MCHP, BLK, TROW, MSFT.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.