Valentine 2016 Portfolio: Stocks To Love And Hate

|
Includes: AAL, AAPL, BCS, CEO, CRI, CSIQ, CVS, DAL, EMN, EXC, F, FII, GILD, ICLR, JCI, KR, LAZ, LEA, MAS, MDLZ, MGA, MOS, PRXL, RAI, RE, SFM, SNN, SNV, TJX, TM, VLO, WYN, XL
by: GreenGrowthGeek

Summary

Article filters stocks for quality based on short interest and two separate quality rankings.

The Portfolio has good diversification.

Stocks within the same sector are compared.

Readers will no doubt find both companies to love and hate in this portfolio.

Every investor looks for the proverbial diamond in the rough or the rose among the thorns when it comes to discovering a high quality stock or portfolio of stocks. This article filters stocks based on three separate criterion that are not of the author's design. First of all, each stock on the list, except where noted is among less than 90 current 5 Star stocks according to the S&P Capital IQ rating, unless otherwise noted. Secondly, if the stock has a Thomson Reuters ranking, it has to be at least neutral, with a strong preference for rankings of 6 or above (out of 10). Thirdly, the short interest of each stock is factored in. The lower the short interest the better as this indicates real world quality according to current market factors. Some sectors have more volatility and hence a higher short interest than others so a higher short interest is allowed in sectors like technology or biotechnology. A P/E over 25 and a short ratio above 5 and float above 5% (except where otherwise noted) will disqualify a stock. When two or more stocks from the same sector niche make the cut, these stocks are compared based on the three criteria and other factors such as P/E and dividend.

Readers may remember my previous article the 2016 Growth/Value Hybrid Portfolio Top Ten that filtered for growth stocks that had an S&P I. Q. of at least 4 stars, at least a neutral Thomson Reuters ranking and a P/E of 13.5 or below. Surprisingly, only 5 of the more than 20 stocks that make the High Quality Portfolio are on both lists. These five are Apple (NASDAQ:AAPL), Gilead (NASDAQ:GILD), Valero (NYSE:VLO) ,Lear (NYSE:LEA) and Masco (NYSE:MAS). Each of these five companies could be considered portfolio All Stars, having passed two separate screens for quality and one for value. It should be noted however, that Masco would no longer qualify today for the Growth/Value list as its P/E is now above 20.

Let's look at the results by sector. There will be an attempt to list the top ranking companies toward the beginning of the list with other companies that qualified in the same sector. Although there is some subjectivity in this ranking, I will attempt to justify the top picks with the criteria and with other metrics. The metrics and rankings are as of the close of trading on 2/11/16.

1. Apple There is a lot to like about AAPL. its quality rankings are stellar 5 Star, 7 out of 10 Thomson Reuters, a short ratio of only 1.0 and short float of a mere 1.2% and a P/E of only 10.3 in the high priced technology sector. Heck, Apple even has a 2% dividend. Also worth a look in this sector is 5 Star stocks Symantec (SYM) Each It meets the criteria and pays a dividend--SYMC actually pays 3.2%. SYM has a much higher PE than Apple and a TR rating of only 5.

2. Gilead Much like Apple, Gilead has virtually everything going for it in terms of the criteria and its valuation: 5 Star, Thomson Reuters 8 of 10, short ratio of 1.4, short float 1.5% and an incredible P/E for the biotech sector of 7.4. GILD pays a 1.96% dividend to boot. Gilead has its detractors who point out that its share price in 2015 was flat and that its sales margins will be falling, especially with its high priced HCV drug(s). To me, those factors seem more than priced in, but that's another article. Also worth a look in biotech is Parexel (NASDAQ:PRXL) 5 Star and TR 6 and ICON (NASDAQ:ICLR) 5 Star and TR 10. Again, each has a much higher PE, much higher short numbers and neither pays a dividend.

3. Valero is an oil/gasoline refiner that gets an 8 from Thomson Reuters. its short interest is quite low for the sector: short ratio of 1.9 and short float of 3.35%. VLO's P/E is a low 6.8 and the dividend is a quite respectable 4.37% One could certainly argue that VLO is quite undervalued as all of the oil industry has been punished despite that fact that refiners like VLO actually benefit from low oil prices. A riskier oil play, with a potentially larger reward would be now 4 Star (recently downgraded) CNOOC Ltd (NYSE:CEO) which has no TR rating and (for the industry) quite low short numbers of 3.9 and .55%. CEO has a P/E of 6.8 and a high dividend of 7.92% If you feel that oil is at or near a bottom and that prices will rebound fairly soon, you may like CEO.

4. General Motors (NYSE:GM) or Ford (NYSE:F) you pick as the numbers are quite similar. Ford gets the nod by Thomson Reuters with a perfect 10 while GM's PE is a mere 4.8. Each pays a dividend above 5% and each has low short numbers. The auto industry looks like a winning sector right now, but the share prices of the companies have not been reflecting much confidence, being punished in 2016 with the drop in the stock market. Some would call these companies value traps, but I think the metrics show that they are actually true value plays and significantly undervalued.

5. Delta Air Lines (NYSE:DAL) edges out American Airlines (NASDAQ:AAL) slightly in terms of the short interest with DAL in at 1.3 and 1.97% while AAL is at 1.5 and 2.94% AAL does have a lower P/E (5.3 compared to 7.7). JetBlue (NASDAQ:JBLU) also gets a 5 star and a TR 8, but its short float is 7.7% The airlines are making record profits with low gasoline prices so I won't argue if you pick all three companies for your portfolio. Much like the auto sector the airline sector looks like a winning sector in 2016.

6. Kroger (NYSE:KR) or CVS Health (NYSE:CVS) you pick as the numbers are virtually identical for these two food and drug retailers. Kroger gets 8/10 from TR while CVS gets 7/10. KR has solid short numbers of 2.8 and 2.6% while CVS is even better with 2.6 and 1.4% Both companies are valued rather richly with KR at a P/E of 18.2 and CVS even higher at 20.

7. Lazard Ltd. (NYSE:LAZ) (recently downgraded to 4 Stars)has stellar numbers with a 4.6% dividend, an extremely low P/E of 4.0 and tiny short numbers of 0.6 and .77%. If you love the financial investment sector, which should be a great long term play with the aging of America and the developed world, then Federated Investors (NYSE:FII) also qualifies with 5 stars and a TR rating of 6 as well as a P/E of 14.6, a 4.2% dividend, but a much higher short interest: 5.9 and 5.2%

8. Lear or Magna (NYSE:MGA) you pick as the numbers are both outstanding. Lear has a TR 8 of 10 and MGA has no TR ranking. However, MGA actually beats our All Star LEA on the other metrics with a lower P/E of 6.7 a higher dividend of 2.8% and a much lower short interest of 0.4 and 0.33% compared to LEA's 2.0 and 3.25%. If you love the currently booming auto parts sector, then you might even want to consider Johnson Controls (NYSE:JCI) which also gets 5 stars and has a low short interest, but a higher P/E of 16.1.

9. Smith and Nephew (NYSE:SNN) is, surprisingly, the only 5 star company in either the pharmaceutical or medical device sector. It has no TR ranking, but it does have a small real world short interest of 2.4 and .17% The stock is not cheap, however, at a P/E of 34.4. The highest rated pharmaceutical was Johnson and Johnson (NYSE:JNJ)with a 4 Star S&P Quality IQ rating and a 8/10 Thomson Reuters ranking. JNJ has a low short interest and a lower P/E 19.0 than SNN.

10. Eastman Chemical (NYSE:EMN) rates the best among the industrials and has a short interest of 2.4 and 2.2% and a low P/E of 10.8. Mosaic (NYSE:MOS) also gets 5 stars, but only 5/10 from TR and its short interest is much higher at 3.2 and 6.85% MOS does have a very low P/E of 7.1 and a good dividend of 4.7% The chemical companies look to be the most appealing of the industrials in 2016.

11. Exelon (NYSE:EXC) is our one utility with 5 stars and 10/10 with TR. It has a low P/E of 12.6 a good 3.98% dividend and short numbers of 3.2 and 2.63%.

12. Synovus Financial (NYSE:SNV) gets a perfect S&P Capital IQ score, a Thomson Reuters 9/10 and it has a short interest of 2.3 and 2.87% it's the only 5 star bank besides Barclays (NYSE:BCS) which has a very high P/E of 91. The BCS short interest is tiny: a ratio of 1.0 and float of only .09% and BCS has a very nice 4.26% dividend.

13. Reynolds American (NYSE:RAI) qualifies with 5 Stars and 7/10 TR, a short interest of 2.6 and 1.92% It has a P/E of 17.9 and a 3% dividend. Some hate the tobacco industry for health reasons, but other investors love it for its stability and its good relative performance when more volatile sectors take a beating in market downturns.

14. Mondelez International (NASDAQ:MDLZ) may be your cup of tea if you love snack food and popular beverages. You may hate it if you call its products "junk food." It looks undervalued with a P/E of 8.6 while getting 5 Stars and 4/10 from TR. its short interest is quite low at 1.6 and 1.14% and it pays a dividend of 1.21%

15. TJX Companies (NYSE:TJX) gets the nod in clothing retail with a 9/10 TR ranking along with its 5 Stars from S&P IQ. The short interest is low at 2.2 and 1.32%. Carter's (NYSE:CRI) is also worth a look if you like this sector.

16. Everest Re Group (NYSE:RE) in the insurance sector gets perfect scores from both S&P IQ and Thomson Reuters while boasting a low P/E of 8.4 and a solid dividend of 2.49% It does have higher short numbers than most on this list: ratio 4.9 and float of 4.85% XL Group (NYSE:XL) is also worth a look and it has a lower short interest: 1.6 and 1.7%, but only gets a 4/10 TR rating.

17. Wyndham Worldwide (NYSE:WYN) will leave a light on for you or sell you a timeshare while paying a nice dividend of 2.6% at a P/E of 13.6. But this travel/lodging company does have a significantly higher short interest than most on this list: a short ratio of 7.7 and a short float of 10.72%. I am tempted to remove WYN from the list due to the short interest, but the sector is volatile and it seems the other metrics are solid.

18. Masco Corp. in the housing sector gets 5 stars and an 8 from Thomson Reuters. its short interest is a respectable ratio of 2.1 and float of 3.96% it's a bit pricey with a P/E of 21.9 and it pays a modest 1.5% dividend.

The reader has just been given a list of 18 sectors with stocks that met the criteria. Thirty three different companies were discussed--probably something for everyone to both love and hate. Most financial advisors recommend that any individual investor who wants to buy stocks should be diversified. I would maintain that if one would pick at least one company from the 18 various sectors, one would have a nicely diversified portfolio of high quality stocks, most of which have a P/E below the market mean average. Even though I have a couple microcap "home run" stocks that I love that could never make this list, I believe that this portfolio is truly my best idea for 2016 for most investors.

Since I am truly a GreenGrowthGeek I am going to throw in two bonus picks, one from solar energy and one from the health food sector. From solar I pick Canadian Solar Inc. (NASDAQ:CSIQ) which is not rated by S&P Capital IQ, but gets a perfect 10 from Thompson Reuters. It seems significantly undervalued right now with a P/E of on 6.4 in what can be a pricey sector. its short interest is respectable for its small size and its sector at a ratio of 1.9 and a float of 12.54%.

Sprouts Farmers Market (NASDAQ:SFM) is a great pick in organic and healthful foods. It does actually get a 5 Star S &P Capital IQ ranking and a Tompson Reuters 9 of 10. The short ratio is 4.5 and the short float is 11.1% its P/E is a pricey 31.0, but this is a growing industry with high P/Es.

Hopefully, this article has given the investor excellent food for thought by filtering stocks using three "high quality" filters outside of the author's control and looking at several other metrics as well. Obviously, it is up to the reader to decide upon the merits of each individual stock mentioned based on many factors. It will be interesting to see how the 35 stocks listed will hold up in comparison to the SPY starting on 2/12/16. My hypothesis is that this portfolio of diversified high quality stocks will outperform the SPY.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GILD over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.