The 'Best' CCC Companies For Re-Positioning A Portfolio For A Coming Market Correction

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Includes: ADM, BG, CAH, CBU, CFR, DOV, MDP, ORI, PB, PBCT, PH, PII, TGT, TROW, XOM
by: Dennis Dugan

Summary

The economic expansion is long in the tooth.

A market correction is surely coming.

The market correction will probably come in 2017 or 2018.

Nevertheless, it's never too early to begin planning for its arrival.

As I begin this article, let me invite SA readers to visit the latest update of "The Dugan Family Retirement Investing Plan" found here, in my SA Instablog.

For readers not experienced in investing or not yet understanding the value of "planning," be it strategic or tactical planning, the Dugan Family Retirement Investing Plan may be a good primer to help you get started on the road to successful investing. For experienced investors, or those who have read previous versions of our family's investing plan, this latest version of the plan may be a valuable reminder of important investing tenets. Plus, there are some modifications, new information and a bunch of new graphs to further your quest for investing success. Because, knowledge is power.

I read this morning, in an SA article, that it's been 7 years since the end of the great recession and the beginning of the current economic growth period in the U.S. Seven years marks a period of economic expansion, however anemic, as getting long in the tooth by historical standards.

From reading Jeff Miller and others, I believe we aren't in danger of a recession for maybe a year. That said, it would still be prudent to begin thinking about positioning one's portfolio into a more conservative posture in anticipation of when the inevitable market correction and recession arrive.

I think SA readers are a conservative bunch, on average, and if one is inclined to begin positioning for a correction, the stock characteristics one might look for could be:

  • Stocks of companies which raised their dividends through both the great recession and the recession preceding it. This would be a strong harbinger that they would also raise it during the next recession. That means a minimum of 15 years on the CCC list.
  • Stocks with strong current conditions and good future prospects. These are the conditions measured by the Dugan Stock Scoring System. This means considering only stocks in the top Dugan-Scoring half of the CCC list, or a Dugan Score of 46 or higher.
  • As a "Carnevalian," I would insist stocks not be over-valued. This means a relative Graham score of 85 or less.
  • As a DGI, stocks must have a yield of 2.3% or higher.
  • Finally, I don't want small-cap stocks in a down market. So, a minimum market cap of $1B is required.

Now, just to explain. The Dugan Scoring System is a tool to identify the overall quality of CCC companies. I believe there is a strong correlation between Dugan Scores and the quality of stocks. Those companies' stocks earning high Dugan Scores are high quality stocks which should produce better investing results, going forward, than otherwise would be attained by simply filtering for desired characteristics. In this context, highest quality means companies which have:

Strong current conditions, as exemplified by: great value as measured by relative Graham number, low payout ratio, low debt/equity ratio and high most recent dividend increase percentage. Excellent future prospects, as exemplified by: high EPS growth forecasts for this year, next year and 5 years out, and excellent dividend growth histories.

The Dugan Stock Scoring System isn't a popularity contest. It is a disciplined, systematic and dispassionate approach that evaluates each CCC stock on the basis of a wide variety of investment criteria from four broad categories: risk, value, past performance and future performance expectations.

So, the purpose of the Scoring System is to determine the all-around quality of a stock for buying, holding or even selling purposes. No stocks, like no people, are perfect. Even high quality and high scoring stocks have weaknesses, the same as low scoring and low quality stocks have some strengths. So, a Dugan Score is a balanced, holistic picture of a stock, which includes its strengths and weaknesses.

You can see from the above explanations, the Dugan Scoring System is about the current state, and expected future performance, of a company's stock; not necessarily the company itself. And, it doesn't matter how well a company's stock has performed for its owners in the past. What only matters is the current condition and expected future performance of the stock.

The table below is a summary of the metrics used in the Dugan Scoring System, along with each metric's relative weighting in the overall formula. The weightings are my assessment of each metric's relative importance in calculating the company's overall quality.

Some months ago, I made a few changes in the scoring system. The primary change was to limit the maximum achievable score to 100 points, versus the previous 150. I did this to give Dugan Scores a familiar and understandable frame of reference for SA readers. The changes did not have a material impact on which companies scored high or low.

An additional change to the scoring system is a small bonus, or penalty, applied to the earned score for each CCC stock, based on a three brokers' recommendations for current sector weightings. The base bonus or penalty calculation is simple: market weight earns zero points, overweight earns 1 point per broker, underweight earns minus 1 point per broker.

Using the Dugan Stock Scoring System, and the above 5 filters, yields the following companies as those one might consider when repositioning for a market correction:

BEST ccc stocks for a correction Click to enlarge

Now, let's take a closer look at one of the higher scoring stocks in the table, Bunge (NYSE: BG). With a market cap of $8B and an acceptable yield of 2.84%, it should be of interest to SA readers.

From the table above, a fine MR dividend increase of 11%, excellent EPS payout ratio of 36% and low relative Graham number of minus 13 show BG has a strong current condition. Switching to BG's future prospects, all 3 of its future EPS growth forecasts (TY, NY and 5-yr) are solidly double digit.

Let's see if FASTGraphs corroborates these findings.

BG FG 1 of 2 Click to enlarge

From the FASTGraph picture above, we see a P/E of only 11.8, which illustrates BG is selling way below (21%) its normal long-term P/E of almost 15. While just barely having an investment grade credit rating, BBB is plenty good because of its low debt/cap ratio of only 31%. I can't explain why the debt/equity ratio shown in the CCC list, at 0.8, differs so much from FASTGraph's.

From the FASTGraph below, we see an excellent expected earnings growth of 11.9%. If the 12 analysts who forecast that earnings growth through the end of 2017 are correct, an investment today in BG could be expected to provide an annual rate of return of 33.94% (see inset box, dotted line and red circle) between now and 12/31/2017. That EPS growth rate is corroborated by the CCC list above which shows an expected 5-year growth of 10%/year. The great most recent dividend increase of 11% shows that BG's executives and board of directors have high confidence in BG continuing its fine history of dividend growth as illustrated in the CCC list.

BG FG 2 of 2 Click to enlarge

I hope you enjoyed this journey. Comments are encouraged. Happy investing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. (Borrowed from Chuck Carnevale.)

Disclosure: I am/we are long ADM, MDP, XOM.

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.