Value Line Low Total Return Screen (6/21/2013)

Companies of Interest

Both CVS (CVS) and Walgreen (WAG) have low total return forecasts of 8.5% during this week’s update. But this week’s nod/tribute is to those of you who have suggested that it was feasible that Rite-Aid (RAD) with its lowest-in-field quality ranking had a viable chance of recovering and cited a change in management that has steadily been working to improve conditions over the last few years. Although still a work in progress, profitability appears to have found thin black ink. Rite-Aid is now at $3.00 up from lows of $0.20 (+1400% since 2009) and some turnaround speculators have been rewarded.

The three companies with the highest fundamental and technical rankings are; Telefonica (TEF), Gentex (GNTX) and Qualcomm (QCOM).

Materially Stronger: Arris Group (ARRS), LKQ (LKQ), Rite Aid (RAD)

Materially Weaker: F5 Networks (FFIV), Nokia (NOK), Frontier (FTR), Cincinnati Bell (CBB), Telephone & Data Systems (TDS), U.S. Cellular (USM)

Market Barometers

The median Value Line low total return (VLLTR) forecast is now 6.2%, down from 6.3% last week.

In a normal distribution, the mean plus or minus one standard deviation covers 68.2% of the data. If you use two standard deviations, then you will cover approx. 95.5%, and three will earn you 99.7% coverage. The median low total return forecast since 1999 is 8.5% with a standard deviation of 3.5%. This means that approximately 70% of the time the low total return forecast will be between 5-12%. 96% of the time, the overall low total return forecast will be between a low of 1.5% and a high of 15.5%.

The excursions “north” of 20% (i.e. March 2009) lie outside the 99.5% probability range, because a three standard deviation swing to the upside would be 19%. This is one of the reasons that March 2009 was a back-up-the-truck, perhaps once in a lifetime buying opportunity.

Bottom Fishing (6/13/2013)

In this month’s cover story, we took a closer look at one of the screening methods used by Hugh McManus. In a nutshell, he searches for high-quality companies trading near a selected low price. The current price is compared versus a selected low price which is dependent on the company’s growth rate. The higher the growth rate, the further back Hugh goes in history to compare.

The following results illustrates why he’d avoid Apple (AAPL) and keep in mind that he’s generally disinterested unless this ratio (price-to-selected low price) is less than 25%.

Position screen 20130613

Apple (AAPL)

With products that are pervasive and ubiquitous and the #1 ranking in our MANIFEST 40 most widely-followed stocks, it’s time for Apple to join the Solomon Select tracking portfolio. We’ve waited patiently for the stock price to drop from $705 to $400 and the fundamentals are still very much intact. Our anecdotal analysis of price disruptions on the heels of relative strength breakdowns and breaches in momentum suggests that the worst may be over.

On a CNBC appearance yesterday, Jeff Gundlach confessed that DoubleLine is now “long” Apple after rocking the investing world with his expectation of $300-something while it was soaring in the upper $600s 9-10 months ago.

Growth, Profitability, Valuation

The Manifest Investing sales growth forecast for AAPL is 14.2%.

We’re using 23.2% for the projected net margin. Value Line has a 3-5 year projected net margin of 26.6%.

The median P/E for the period 2008-2017 is 15.2×. We’re using 14x for the projected average P/E.

At the time of selection (5/31/2013), the stock price is $449.73, the projected annual return is 20-21%. The quality RANKING is 98 (Excellent) and the financial strength rating is 90 (A+).

The company has historically held no long-term debt but recently committed to low-interest rate bonds as an offset vehicle (tax optimization) to ‘proxy’ a repatriation of offshore cash reserves to fund buybacks and dividends for shareholders.

Points of View

Morningstar has AAPL with a fair value of $600 for a price-to-fair value ratio of 74% and rates the company a “buy.” S&P rates the company a “strong buy” at fair value of $473.20, or a P/FV of 94%.

Value Line Low Total Return Screen (6/7/2013)

Companies of Interest

All things considered (e.g. return forecast, quality, sentiment, momentum) Total (TOT) still ranks as a favorite among this group of study candidates. S&P agrees, checking in with a fair value of $51.40 and a “buy” rating. yields a “bullish” point-and-figure rating with +42.4% price pressure. There is modest potential for P/E expansion and neutral with respect to margin enhancement.

Materially Stronger: American Vanguard (AVD), Conoco Phillips (COP), Ferro (FOE)

Materially Weaker: Walter Energy (WLT), Suncor Energy (SU), Kronos Worldwide (KRO), SBA Communications (SBAC), Viasat (VSAT)

Market Barometers

The median Value Line low total return forecast (VLLTR) is now 6.4%, down from 6.5% last week.