Six Growth Stocks for a Successful 2011
This U.S. advisory has a stock-picking system that has worked well in the past, and it highlights its six top picks for gains in the coming year.
Everybody's got a system!
Lots of investors - professional and private - claim to have a system for achieving success in the stock market.
But what is a system, really? A winning secret? A series of key economic indicators? A hunch?
What it ought to be is a plan for the future based on something that has worked in the past.
On the cusp of a New Year, let's examine the system of one U.S. advisory whose methods have a distinguished pedigree.
Dow Theory Forecasts traces its approach back to the original scientific market analyst, Mr. Charles Dow. Over the years it has developed a system that it patented as Quadrix.
In brief, this system measures stocks by a series of benchmarks - Momentum (recent operating performance), Quality, Value, Financial Strength, Earnings Estimates and Performance (stock-price action).
Sounds like a lot of work. But that's the whole point of an advisory, to take a good deal of the homework off your back. And this advisory simplifies things a little by pointing out three overall guidelines it follows for stocks.
From these, it builds its Focus List, 10 to 20 stocks it considers the best buys for the next 12 months. As we enter 2011, it highlights six of those stocks that get particularly high marks.
There are three characteristics this advisory wants to see in stocks.
The first, not surprisingly, is a high score on its Quadrix system (in which the ratings are by percentile, with 100 the top mark).
The second is attractive valuations. "We don't go for deep value stocks, which tend to be cheap for a reason," it explains, "but instead seek growth at a good price."
Third is "the potential to outperform." The market tends to reward stocks that exceed expectations for revenue or profits, "and we look for companies with growth catalysts not fully reflected in the share price."
Pass these three tests and you make it onto the advisory's Focus List. And that list has done pretty well, if the advisory does say so itself.
Since the beginning of 2004, Focus List stocks, fully invested, have returned 51.4 per cent excluding dividends and transaction costs. On the same basis, the S&P 500 Index returned 11.6 per cent.
The Focus List was initiated in 1994 and it has gained 286.2 per cent - that's 8.8 per cent on an annualized basis - in those 16 years.
Since 1998, the advisory has put some ballast in the portfolio in the form of cash or a short-term bond fund. With this extra stability, it has returned a total of 328.8 per cent.
Today there are 13 stocks on the Focus List. The advisory features the six top picks for capital gains in 2011.
One of this advisory's favourite stocks for a long stretch has been insurance company Aflac (NYSE: AFL). This firm made its name a household word by having it quacked by a duck in its TV commercials.
But the strength of the company, says the advisory, lies with "its solid operating momentum and a modest valuation." Sales rose 13 per cent in the first nine months of this year and cash flow was up 10 per cent.
It is growing faster in Japan than in America, but should benefit as small companies in the U.S. begin to hire again and assume more insurance. Wall Street sees earnings advancing by 14 per cent in the next quarter.
With a modest forward price/earnings (PE) ratio of 9, the shares trade at $56.09 and yield 2.1 per cent on the $1.20 dividend.
A company whose name is not on everyone's lips is Altera (Nasdaq: ALTR; NYSE: RCI), which makes programmable logic devises, semiconductors that let customers change designs quickly and cheaply.
"Altera's quick adoption of new technology should help it gain market share in the coming year," says the advisory. It has topped consensus profit estimates by at least 6 per cent in each of the last four quarters.
It trades at $35.94 and yields 0.7 per cent on a dividend of $0.24.
The name Apple (Nasdaq: AAPL) certainly needs no introduction. Unlike the other stocks on the list, it is not quite a bargain, either. The shares recently hit an all-time high of $326.66 (they're at $323.66 today) and trade at 21 times trailing earnings.
Yet the P/E ratio is 29 per cent below the stock's five-year average. And the iPad "is striking a chord with individuals and businesses alike," adds the advisory. Apple has yet to offer a dividend.
"Evidence of the U.S. recovery rattles along CSX (NYSE: CSX) tracks, winding through states east of the Mississippi River," says the advisory lyrically. The company's earnings "chugged" 16 per cent higher in the first nine months of 2010, it adds.
This rail and intermodal transport firm expects slow and steady economic growth next year, and Wall Street expects its profits to jump 18 per cent.
CSX earns a lofty Quadrix score of 94 and trades at $64.46 with a reasonable forward P/E ratio of 13.6 and a yield of 1.6 per cent on its dividend of $1.04.
DirecTV (NYSE: DTV) has high expectations from Wall Street - it's predicted this digital entertainment giant will have its per-share profits soar by 33 per cent this quarter. And it should keep up the pace right into 2011.
The company is looking for high growth from South America, where it is the largest pay-TV group. By 2013, the company's total sales should reach $30 billion.
The forward P/E ratio is 13 and the shares trade at $40.09, down about four dollars from its November high, with no dividend.
Resources have one representative among this list of six. Newmont Mining (NYSE: NEM) is one of the world's largest gold producers. It has pulled back from its all-time high in September, the advisory points out.
The company produced 4.86 million ounces of gold in the nine months ended September, a three per cent increase from the year before. Its copper production jumped higher, by 37 per cent.
Profit estimates for the final quarter of the year and for 2011 are well up - 24 per cent for next year. The stock trades at a 16 per cent discount to its three-year average P/E ratio. The price is $61.08 and the yield is 1 per cent on the dividend of $0.60.
Whatever system you apply to your portfolio, the New Year is a good time to give it a thorough review and make sure it has a track record you can trust."
Source: www.DailyBuySellAdviser.com a free website maintained by the Investor's Digest of Canada, 133 Richmond St., W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137. This site features a digest of leading advisory letters from Canada and around the world. Readers can also receive Buy, Sell and Hold advice on 1,000 Canadian companies plus earnings estimates. You will also get the "Strongest Recommendations of the Month." To get the "Key Ratios" on over 1,100 Canadian companies (1.) Go to www.DailyBuySellAdviser.com. (2.) Click on "Special Reports" in the navigation bar at the top of the page. (3.) Click on "Key Ratios" for detailed analysis on Canadian companies.
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