Alan Brochstein identifies nine stocks with both price and fundamental momentum near their 52-week high
As I type, the S&P 500 has been consolidating new highs made in September over the past few weeks. In May and then in August, I suggested that buying “breakouts” is a powerful strategy for a slowly-rising bull market. Having reviewed the strong performance from the 9 names that met the criteria of the screen I ran in August, I decided to run a similar screen again.
Using Baseline, I included some parameters that look at technicals and fundamentals. Here is what I did (and why):
- Stocks from the Russell 3000 index, with market cap > $500mm
- 3-month price return >6% (better than the market)
- YTD price return >15% (better than the market)
- 12 month price return > 18% (better than the market)
- 5 year price return > 0% (S&P 500 is down 6%, so this is a great LT momentum indicator)
- Price < 1.6X 52 week low (let’s not chase)
- Price within 4% of 52 week high (this is what we are trying to eclipse)
- 2012 estimated EPS growth > 14%
- Trailing 1-Year EPS growth >15%
- Trailing 1-year sales growth > 10%
If I can summarize, our goal is to identify stocks that are performing better than the market in terms of price action as well as sales and earnings growth but are not particularly aggressive. The stocks are performing better than the market in terms of price action as well as sales and earnings growth. My hope is that some of these stocks are cheap enough and in a good enough technical position that the breakout, if it happens, leads to a sustainable long-term advance. Here are the 9 new names that made the cut:
Please keep in mind that these are not recommendations. As always, you should do a thorough investigation of any potential investment. The companies that met the criteria, which are sorted on forward PE, come from a variety of economic sectors and market caps. I have included the net debt to capital, with the stocks having no net debt shaded in green. I also highlighted the four stocks trading at a discount to their ten-year median PE. Several of the names on this list were also on the list from August, including Investors Bancorp (ISBC), Watson Pharma (WPI), and IAC/Interactive (IACI).
Watson Pharma (WPI) is one of the few remaining generic pharmaceutical manufacturers and the only Healthcare name on the list. The company is about to close on a large acquisition, paying about $5.5 billion to acquire Actavis in a deal that was announced six months ago and will boost international sales to about 40%.
Neustar (NSR) came into existence in 1998 after the U.S. government mandated local number portability, helping the communications industry to keep track with its database. Now, the company continues to operate carrier services for voice and text as well as several other databases. The company made a transformation acquisition in its purchase of Targus Information last year. This company performed similar database analytics but to CallerID. NSR is able to help online advertisers display relevant advertisements as well.
Wabtec (WAB), which is also known as Westinghouse Air Brake Technologies, serves the global rail industry, with 51% of sales coming from outside the U.S. Growth has been quite strong in their Freight Segment, driven by a legislative change that requires adoption of “positive control technology” by 2015. Insiders own over 5% of the company.
V.F. Corp (VFC) owns many iconic apparel brands, like Timberland, which it acquired in 2011, as well as North Face, Nautica, Lee Jeans and Vans (and many more). The company reported double-digit organic sales growth in the first half of 2012. The company has boosted its dividend (currently 1.8% yield) in each of the past five years and could do so again this quarter.
IAC Interactive (IACI) is a quiet internet powerhouse, spinning off Expedia (and TripAdvisor) but retaining big brands like Match.com, Ask.com, Dictionary.com, UrbanSpoon.com, and many others. Most recently, it bought About.com for $300mm. About 60% of its sales are tied to Google (GOOG), and its CEO, Barry Diller, owns a substantial amount of stock.
Autonation (AN) is one of the leading car dealerships. The company just reported that Q3 new car sales rose 22% from a year ago. Its business is quite balanced between new and used and domestic vs. import, with parts and service and finance and insurance also diversifying sales. Over ¼ of the sales are tied to the premium luxury market.
Middleby (MIDD) is the company I know best, having followed it for the past four years. The CEO, who owns about 10% of the company, has taken this restaurant equipment supplier from a small company to an industry leader through acquisitions and organic growth. The need for energy efficiency and quicker cooking times has helped fuel the growth. Additionally, the company benefits from fast-food expansion in emerging markets as well as the well-publicized kitchen renovations at Chili’s. Another growth driver is the company’s expansion into food processing.
W. W. Grainer (GWW) just reported today and would likely not make the list if I ran the screen tomorrow due to a large one-day decline. This industrial distributor reported 12% EPS growth in Q3 on 8% sales growth and lowered its outlook for the year to 11-12% sales growth while maintaining its guidance for EPS of $10.50-10.80. While the company has historically been focused on the U.S. and Canada, it has been expanding its presence in Europe, Asia and Latin America (about 11% of sales now).
Investors Bancorp (ISBC), the holding company for Investors Bank, is a NJ-based financial institution with $12.4 billion of assets, $8.7 billion in deposits and 100 branch offices in NJ and NY (after closing on a recent acquisition of Marathon Banking). The company instituted a dividend of .05 per share last month. Unlike most banks, this one moved recently to a level that exceeds its prior high in 2008.
LKQ (LKQ) recycles car and truck parts, selling refurbished body parts and other components and systems used to repair cars and trucks. The company has been busy in the first half of the year, buying 11 companies in North America for $130mm. Late last year, it made a more substantial acquisition, buying Euro Car Parts, a distributor of aftermarket automotive products in the United Kingdom for $400mm. It also made 20 other acquisitions in North America in 2011, spending $207mm. Their IT systems set them apart from other competitors.
Mastercard (MA) and its rival Visa (V), which didn’t make the list solely due to the lack of a full five years of trading history, continue a record of strong growth. This is the largest company to meet the criteria by far. Last month, it held its 2012 Investment Community Meeting, where it highlighted the drivers of its growth as increased personal consumption expenditures, a move electronic payment from cash and check and its gain of market share in electronic payments. International represents 60% of sales, and the company sees strong opportunities in emerging markets, like China and Brazil. MA guided for annual EPS growth of at least 20% from 2013-2015 on double-digit revenue growth.
Finally, Discovery Communications (DISCA) calls itself the “world’s #1 nonfiction media company,” with networks that include Discovery Channel, TLC and Animal Planet. The company has been buying back a substantial number of shares (15% of the company since 2010).
Screening is a tool to identify stocks to study more closely for potential investment. In this case, we have identified 12 stocks in a variety of industries that appear to have the potential to breakout of consolidation patterns or have just broken out. Whether the market continues to rally or not, some of these stocks may continue to perform well.
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: Long MIDD in one or more models at Invest By Model
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