This past decade has not been a very stellar one for the stock market. In fact, ten years ago today, the S&P 500 was trading at 1,184. Today it is trading around 1,177. It has been a lost decade for index investors for sure.
Many well-known, widely held stocks have also had a lost decade. Take a look at the following table that lists the average annual ten year return for many of these popular, bellwether stocks: 10 Yr. avg. return (includes dividends)
Microsoft (NASDAQ:MSFT) 0.6%
Intel (NASDAQ:INTC) -1.5%
General Electric (NYSE:GE) -6.3%
Pfizer (NYSE:PFE) -4.3%
Johnson & Johnson (NYSE:JNJ) 4.2%
Cisco (NASDAQ:CSCO) -0.7%
Home Depot (NYSE:HD) -1.7%
Wal-Mart (NYSE:WMT) 2.2%
AT&T (NYSE:T) 1.3%
Bank of America (NYSE:BAC) -12.1%
I don't know of any investor who is not seeking alpha in the market. Sorry, but I do not see these stocks, that are dependent on a strong economy delivering that alpha any time soon. I see, hear, and read arguments as to why these stocks are great value plays all of the time. I love stocks that offer great value, but what is wrong with demanding some performance along with that value?
Let's now look at the average ten year returns of some stocks that have delivered alpha despite a lost decade for the stock market.
10 Year avg. return (including dividends)
Autozone (NYSE:AZO) 20.9%
Ross Stores (NASDAQ:ROST) 18.7%
Dollar Tree (NASDAQ:DLTR) 15.7%
Apple (NASDAQ:AAPL) 45.3%
Terra Nitrogen (NYSE:TNH) 49.8%
Amazon.com (NASDAQ:AMZN) 35.0%
First Cash Fin. (NASDAQ:FCFS) 30.5%
Core Labs (NYSE:CLB) 28.1%
Carbo Ceramics (NYSE:CRR) 24.2%
Priceline.com (NASDAQ:PCLN) 31.2%
Wow, this already looks like a better list than the first one! I think by looking at the names on the two lists, that it can argued that list number two is more stocks of today, and list number one is more stocks of yesteryear.
It has been my observation over the years that companies have life cycles. Those life cycles generally revolve around the growth of the company. Living here in San Diego, I remember when Callaway Golf (NYSE:ELY) was one of the fastest growing stocks around. The stock was a stellar performer for several years. Today, Callaway is one of the worst stocks that you could own. Callaway's stock has gone backwards by 9.2% per year over the last ten years
I also well remember all of the local folks who rode San Diego based Qualcomm (NASDAQ:QCOM) up during its meteoric rise, and then rode it all the way down during its decline. Qualcomm has delivered a tepid 5.4% per year over the last ten years to its investors. While this return is better than list one and the overall market, it would not make it on second list of stocks above.
There was obviously a time to own and profit from Callaway Golf and Qualcomm, but those investments' best years, I believe, are well in the rear-view mirror. I also strongly believe that the best years are well behind the stocks listed in the first list.
Again, pure value investors will argue that many stocks on list one currently offer attractive valuations. Again, I would counter that I like some performance with my value.
Now let's focus on the stocks on list two. It could be argued that after ten years of superior performance, these stocks are overpriced and due for a fall. Well, I also like a little value with my performance. I have seen way too many train wrecks in over-priced superior performers over the last 20 years. Just as there was a time to sell Callaway and Qualcomm before they fell, there will come a time to sell the stocks on list number two.
Let's examine one stock from list number two and see if that time is now. I want to focus on Autozone (AZO) in this article. Autozone has been, and still is a large holding at my firm.
Here is some basic information on the stock:
[Click all images to enlarge]
Data from Best Stocks Now iPhone App
Autozone is a large-cap stock that is currently trading at 13.61X forward earnings. The company is expected to earn $22.00 per share next year, and the consensus 5 year growth rate by the 20-plus analysts that follow the stock is currently 15.24%. The stock is currently trading at a discount to its growth rate.
It should be noted that Autozone's earnings have grown by an average of 19% per year of the last five years. Earnings are expected to grow by 28% this year and 14% next year. I think that it can be easily argued that Autozone has been benefiting from a very weak economy. Less new car purchases and more fixing up of the old car is very common today. I think it can also be easily argued that this situation is not going away any time soon and Autozone should continue to benefit in the future.
As I stated earlier, I like a little performance record in the stocks that I own. Let's look at how Autozone's performance stacks up against the overall market over the last 1, 3, 5, and 10 years:
Data from Best Stocks Now iPhone App
As you can see, Autozone has clobbered the market over the last 1, 3, 5, and 10 years. The stock has also done very well during the last 1, 3, and 12 months while the market has been very choppy, to say the least. Also note that the stock was up 16.3% in 2008, while the market was down 38.5%. This says a lot about the management of the company to me. Isn't bottomline performance the most important thing to judge management by? How about bottomline performance during both good times and bad times? Autozone has delivered both.
I also like value with my performance. I showed earlier how Autozone is still trading at a discount to its growth rate, even after the tremendous performance that the stock has delivered. Let's do a valuation on the stock to see what kind of upside potential that the stock still has over the next five years.
The consensus, next year's earnings estimate for Autozone is currently $22.00 per share (it was a mere $6.25 per share back in 2004). The consensus growth rate is 15.24%. If Autozone is able to meet these estimates, the company will be earning $38.82 five years from now.
Now, what kind of multiple or P/E ratio will Autozone deserve at that point? Consider the following:
- The stock currently has a P/E ratio of 17.
- The stock is currently trading at 13.82X forward earnings.
- The stock's P/E ratio has ranged between 11-16 over the last four quarters.
I am using a P/E ratio or muliple of 15X on forward earnings. This gives me a five year target price of $582.27 on the stock. This is 91.5% higher than where the stock trades today. The company does not pay a dividend, so this is not a factor.
Here is snapshot of the valuation:
Data from Best Stocks Now iPhone App
Now we have the best of both worlds. We have performance and we have value. We also have a measure of safety as the stock has held up very well during some very difficult times.
One last thing. How about the technical pattern of the stock?
It looks OK to me! In fact, the stock broke out to new all-time high today. The stock has held up very well during the extreme market volatility of the past several weeks. What is there not to like? This is just one of example of many stocks that possess these same characteristics.
Only 8% of stocks deserve an "A" grade at any given time in the market. Autozone gets one with ease and is currently ranked number 7 out of 2,735 stocks in my database:
Autozone or Cisco (CSCO)? I'll get into the zone, Autozone...
Disclosure: I am long AZO.