By Larry Gellar
Although S&P (MHP) has gained a bit of notoriety lately for its downgrade of the U.S. credit rating, the S&P 500 is still a useful resource for tracking the stock market’s overall performance. In fact, the S&P 500 (SPY) has been down substantially lately, but we believe there are still some good stocks to be found in the composite. Let’s take at our favorite eight:
Northeast Utilities (NU) – This utility company has seen steady increases over the past year, and recent news of the company’s earnings has helped fend off the market’s bearish sentiment. In fact, net income went up for the fourth straight quarter. The stock has remained cheap though as its P/E ratio is a reasonable 13.07. This is especially attractive compared to NiSource (NI)’s P/E ratio of 17.10, which is another company that provides energy to New England. Additionally, rumors of a merger with Public Enterprise Group (PEG) have been swirling, although this is merely speculation. In fact, Northeast merged with NSTAR (NST) recently, and we believe that this will strengthen the firm for years to come. Northeast is already well known throughout the New England area for its great customer service, and this should not change once the merger with NSTAR is finalized. In addition, many shareholders are excited about the company’s Greater Springfield Reliability Project, which should improve service even further. As with all utility companies, performance must be considered with an eye on the quarter’s weather, and Northeast’s profits are still noteworthy when taking this into account. Northeast’s efforts to control costs in particular have been quite successful too. Even peripheral divisions like natural gas have performed well.
Advanced Micro Devices, Inc. (AMD) – AMD nearly hit $10 earlier in the year, but the stock was closer to $6.5 at the time of this writing. While many investors believe this stock should be left for dead due to decreasing market share, we are inclined to disagree. We do agree that competitors like Intel (INTC), IBM (IBM), and NVIDIA (NVDA) have bright futures, but these stocks are trading at much higher premiums. In fact, these stocks have P/E ratios of 9.23, 13.50, and 28.14 respectively. With its P/E ratio of 5.31, AMD will certainly see some price appreciation once the bull market returns. Although the past two quarters have had slightly negative cash flows, we would be surprised if future quarters do not hold some inflows for this company. With cash per share of 2.57 (higher than industry bellwether Intel), AMD’s financial health should not be doubted. Another statistic of interest is AMD’s beta of 2.30. While we usually prefer low-beta stocks in a time of such poor sentiment, AMD could be the stock for those with an appetite for risk. Technical analysis points to AMD dropping a bit lower before an upswing, so investors may wish to watch the stock for a few days prior to making a move.
DeVry Inc. (DV) – This for-profit education provider has benefited from a high unemployment rate, and we believe that this trend will continue. Essentially the problem is that the economy is not creating jobs fast enough, which means that people will continue to head back to school in droves. While the education sector as a whole looks strong, we prefer DeVry on the basis of its cheap growth. The company’s PEG of 1.10 is only slightly better than Education Management’s (EDMC) 1.12, but it is significantly better than Apollo’s (APOL) 1.84. DeVry’s gross margin and quarterly revenue growth are also stronger than these competitors. While many shareholders fear more regulation of the schools that companies like DeVry own, we believe that any future regulation will not present a huge problem for the company. DeVry’s focus on education that leads to specific careers will be another important factor in its future success. This focus is tremendously important in an economy where jobs are relatively scarce. DeVry is financially strong too – three of the past four quarters have seen positive cash flows. Although this Seeking Alpha article is over a month old, it still has some great insight into the for-profit education sector. In fact, many investors will find these stocks’ low betas quite attractive.
Adobe Systems Inc. (ADBE) – Although Adobe was trading for nearly $36 not too long ago, the recent bear market has hit this stock hard. In fact, this may be a great opportunity to buy the ever-popular maker of Flash software. The stock is currently trading at an attractive 12.81 times earnings, which is lower than the ever-popular Apple (AAPL). Adobe is also noteworthy for its whopping gross margin of 89.55%. Additionally, the company experienced a net cash inflow of $150,265,000 for the quarter ending March 4th, which has helped to add to the company’s already impressive finances. Furthermore, we continue to be impressed with Adobe’s portfolio of software offerings, which can be reviewed here.
Future releases will benefit the company too, notably the Adobe Edge. This application will facilitate animation through the HTML5 format, which could be hugely important as the Internet continues to develop. In fact, the main advantage of Edge is its wide range of compatibility, which will work seamlessly with traditional computers as well as smartphones. Aside from the strong lineup of products, there are other reasons to believe that Adobe will experience future financial success. Furthermore, Adobe’s wise management of accounts receivables will benefit earnings to come.
Southwestern Energy (SWN) – Southwestern's stock has taken quite a hit lately, even more so than many other securities. This is surprising because some aspects of the company’s operations are very attractive. In particular, Southwestern’s margins are quite high compared to others in the energy industry. Southwestern’s recent earnings report is also worth taking a looking at. Southwestern’s earnings were better than both last year’s Q2 results as well as analyst estimates. In fact, the company’s Fayetteville Shale has been quite doing well as explained here. Additionally, some segments such as Exploration and Production as well as Midstream Services have done particularly well. Note however that Southwestern does not offer dividends, so investors looking for those might be off with Chesapeake Energy (CHK) or Williams Companies (WMB). Keep in mind that both of those companies offer higher betas. As discussed in Seeking Alpha’s earnings call transcript, Southwestern is also benefiting from some of its techniques that offer a very quick drilling time. This is important for the company’s ability to reduce costs and could be especially important in today’s natural gas environment. Future drilling in Pennsylvania and New Brunswick should help Southwestern’s productivity as well. Finally, Southwestern is financially strong too, and the company has a relatively low level of debt.
CVS Caremark Corporation (CVS) – CVS has performed well since September 2010, although the stock has been down due to economic concerns as well as a slightly worse earnings report than expected. Regardless, there were still many good things in the earnings release. The Pharmaceutical Services division did particularly well because of a contract with Aetna (AET), and the company is also benefiting from its acquisition of one of American Universal’s segments. Revenues were up 11% from a year ago, and we believe that the company will be able to cut costs adequately to renew its profit growth. In fact, the earnings report has made CVS attractively priced with a P/E ratio of 13.13. This compares favorably with Walgreen (WAG), which competes mostly with the CVS part of CVS Caremark, and Express Scripts (ESRX), which competes mostly with Caremark. In fact, although the Caremark portion of CVS hasn’t performed perfectly lately due to the economy, we feel that the CVS side of the business will help to make up for it. Other statistics working in CVS Caremark’s favor are a quarterly revenue growth of 10.90% and an operating margin of 5.99%. Additionally, we are impressed with CVS’s cash flows, which have been positive for three straight quarters now.
Pitney Bowes Inc. (PBI) – This mail specialist has been on a decline for some time now, although the company did recently release a very encouraging earnings report. Earnings per share increased to $0.30 from the 2010 Q2 EPS of $0.19. In fact, this was due to both increased revenues and decreased costs. With a whopping dividend yield of 7.40%, shareholders certainly have reason to be excited. Pitney Bowes operates in a somewhat unique niche, so it is not easy to compare it to other companies. Regardless, we believe that Pitney Bowes’ P/E ratio of 11.11 is quite reasonable, even in today’s relatively cheap market. Additionally, two of the past three quarters have been ones of cash inflow for Pitney Bowes. As noted in this article, Pitney Bowes could also be a short squeeze opportunity right now. On the other hand, it should be mentioned that CEO Murray Martin is not particularly popular with shareholders, but we believe that he has provided a great job of guiding the company through these tough economic times. Additionally, while Pitney Bowes certainly benefits from a stronger economy, we feel that certain elements of the company provide at least some cushion from the rest of the business world. With a beta of 1.13, this company represents a good middle ground between a defensive and aggressive play.
Coventry Health Care, Inc. (CVH) – Coventry's stock has performed well since September 2010, primarily due the company’s 2010 acquisitions of Mercy Health Plans and Preferred Health Systems. Coventry’s main business is healthcare insurance, and it offers this at a great value to investors. P/E ratio is quite low compared to competitors like Aetna (AET), Unitedhealth (UNH), and WellPoint (WLP). Note that Coventry’s P/E is 5.92, compared to 7.53 for Aetna, 9.41 for Unitedhealth, and 7.55 for WellPoint. As discussed in this Seeking Alpha earnings call transcript, Coventry received a favorable outcome in recent litigation, which should certainly be seen by shareholders as great news. CEO Allen Wise also discussed the company’s success with financing operations. Specifically, the company has been able to take advantage of some low interest rates for its borrowing. Despite this, the company’s debt levels remain reasonable. Coventry also announced that it is on the prowl for acquisitions, which is a move we greatly applaud. It should be noted that Coventry hasn’t always had a great statement of cash flows, but the situation looks to be improving. In fact, in the most recent quarter the company experienced what was nearly a $300 million inflow. Look for this trend to continue as the company’s Medicare-based operations are expected to perform well.