The stock market was able to put in a small rally last week. Unfortunately, for the bulls, volume was lower on the week compared to the previous three weeks when stock market indexes fell. This continues the pattern of heavy volume distribution followed by lower volume accumulation since the S&P 500 and Nasdaq topped out on April 2nd and April 3rd respectively.
I penned an instablog on April 23rd discussing exactly why the three year bull market was coming to an end based on 130 years of price and volume action in stock market indexes around the world. If this analysis is correct and we are about to enter a period of poor performance for equities, there are still groups of stocks that will outperform the overall market. These leading sectors in a down trending market historically include Tobacco, Utilities, Medical, and Food & Beverage stocks. Today I want to take a look at four leading stocks in each sector based on price action, EPS growth, sales growth, and other important fundamental factors I need to see before I will take a significant position on the long side.
First up, the safest of the list of leaders I am watching, Philip Morris (PM). Philip Morris is a New York, NY manufacturer of cigarettes sold worldwide under the Marlboro, L&M, and other brands. Philip Morris EPS has grown 20%, 8%, 20%, 18%, 34%, 37%, 13%, and 18% during the past eight quarters. Sales growth, during the same period, has grown 14%, 2%, 5%, 6%, 16%, 22%, 6%, and 9%. Clearly the message that cigarettes are horrible for your health has fallen on deaf ears, as 2012 and 2013 annual EPS estimates are for gains of 8% and 11% respectively.
Philip Morris has a huge debt to shareholder equity over 999% (my data provider Marketsmith only goes to 999%), a massive return on equity of 461%, a cash flow of $5.57 a share, an annual EPS growth rate of 12%, and offers a 3.6% dividend. The current P/E ratio is in the upper end of its 5-year historical range of 10-18 at a current 17. Mutual fund ownership is heavy, with 2501 funds having positions in this stock. Normally big growth quarter-to-quarter in mutual fund ownership is important in my analysis of new longs. However, when it comes to investing in a down trending market, this is not an important factor with such a large stock.
At the same time, I like to see management own shares of the company stock. Philip Morris has 0% management ownership. Once again, this is not a concern with a company this old.
Next up, a company that I give money to every month, Hawaiian Electric (HE). Hawaiian Electric is a Honolulu, HI provider of electric public utility service to 446,229 customers on the islands of Oahu, Maui, Lanai, Molokai, and Hawaii. Hawaiian Electric's EPS growth has exploded (exploded relative to the normal growth rate of a utility company) in the past three quarters gaining 43%, 38%, and 33%. This is being driven by sales growth which has grown 25%, 12%, 12%, 15%, 21%, 28%, 22%, and 15% the past eight quarters. 2012 and 2013 annual EPS estimates, much to my chagrin, are for gains of 10% and 7% respectively.
Hawaiian Electric carries a 103% debt to shareholder equity, sports a 9% return on equity, has a cash flow of $3.20 a share, has an annual EPS growth rate of 4%, and currently offers a 4.6% dividend. The P/E ratio is currently at 17 which is in the mid-range of its historical five-year range of 9-26. 255 mutual funds are currently invested in the stock as compared to 254 funds eight months ago. Management only owns 1% of the shares outstanding. As I noted before, both of these numbers are normal for older established companies.
Moving on to a higher-growth safety-sector play is a stock I have been recommending to subscribers for over a year-- Hain Celestial Group (HAIN). Hain Celestial Group is a Melville, NY manufacturer and distributor of natural and organic food products and personal care products. Hain Celestial's EPS growth has been phenomenal, growing 19%, 14%, 39%, 38%, 40%, 12%, 33%, and 50% the past eight quarters. Sales growth is just as impressive, with gains of 12%, 21%, 30%, 31%, 7%, 32%, and 32% in the past seven quarters. The future looks bright for Hain Celestial with 2012 and 2013 annual EPS estimates expecting gains of 33% and 16% respectively.
Hain Celestial has a 26% debt to shareholder equity, sports a 7% return on equity, has a cash flow of $1.92 a share, and an annual EPS growth rate of 2%. The P/E ratio is at the high end of its 5-year range of 9-33 at a current 32. Hain Celestial might be an old company but mutual funds and management are aware of the new exciting potential growth of the all natural/organic markets. Mutual fund ownership has increased from 273 to 370 funds in the past eight quarters. Management owns 6% of the shares outstanding, signaling their vested interest in making sure the company grows profits in the future.
The last company is the fasting growing of all of our safe-sector stocks, and thus has the best chances of producing the biggest long term gains. I penned an article about this company in 2010. Since that article the stock has risen 150%. SXC Health Solutions (SXCI) is a Lisle, IL provider of pharmacy benefit management services and healthcare information technology systems. SXC Health Solutions' EPS growth has been exciting, with gains of 7%, 22%, 8%, 27%, 31%, 57%, 71%, and 58% the past eight quarters. Clearly spurring those numbers is sales growth. Sales have grown 49%, 28%, 19%, 143%, 153%, 163%, 162%, and 56% the past eight quarters. This huge growth is expected to continue with 2012 and 2013 EPS estimates for gains of 46% and 25% respectively.
SXC Health Solutions has 0% debt to shareholder equity, a 17% return on equity, a cash flow of $1.80 a share, a 49% annual EPS growth rate, and spends 0.3% of sales on R&D. The P/E ratio is currently at 49 which is in the high end of its 5-year historical range of 12-55. Mutual fund ownership in SXC Health Solutions is growing rapidly, from 402 funds eight quarters ago to 610 funds as of the most recently reported quarter. Surprisingly, management only owns 1% of the shares outstanding. With the potential future growth you would think they would own more.
All of these stocks make great long considerations, even if the market turns ugly here. However, only Hain Celestial and SXC Health Solutions have the numbers necessary to go on to be big stock market winners over the upcoming years through multiple market cycles. The fundamentals above tell me that these are the stocks I want to buy in a rough tape. However, I am a trend follower, and thus only want to enter the stocks when the odds are completely in my favor.
On that note, I am waiting for Philip Morris to blast through its 50 day moving average before I initiate a long position. If it fails to do so, I will have to wait for a better signal to enter Philip Morris, when conditions do favor a new long position. Hawaiian Electric is currently in a strong uptrend, hitting new highs. Right now, I want Hawaiian Electric to pullback on lower volume toward the 50 day moving average and then bounce off this line on stronger volume. If the stock can do this, I will initiate a new long position.
Hain Celestial group is currently in a very strong uptrend. I regretfully missed entering Hain Celestial on its clean breakout to new highs in March, and thus I am waiting for it to pullback to the 50 day moving average. A bounce off of this key support line on strong volume would be the signal to go long. SXC Healthcare Solutions has been basing in a beautiful five week tight flat base pattern. A move on strong volume off the 10 day moving average or a breakout to a new 52-week high would be my signal to get very long this stock.
If these stocks fail to produce any of the signals mentioned above, I will re-evaluate the situation and look for a future potential area to purchase these stocks. If I purchase these shares and they violate the key 50 day moving average, I will be quick to cut my losses. A quick tutorial: Those that do not cut their losses in the stock market will eventually take the mother of all losses. You must always cut your losses when you are wrong. This is what the greatest traders of all-time did and do, and this is what you should also be doing.