Stocks

Shopping in the Dow 30 Aisle

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Diamond (DIA) Expectations

The last few years have been pretty good to the Dow 30 stocks — after spending the first ten years of this century in the dog house. The trailing 5-year annualized return is 15.0% versus the Wilshire 5000 at 16.8%. So the other 4970 stocks have actually continued to outshine the Dow 30.

One of the things we’ve noticed is that the renaissance of many of these stocks has persisted — with continuing improvement in profitability, etc. — while many companies are under more margin pressure and “deceleration.”

Here’s a quick look at our 5-year forecasts for the Dow 30 as well as the Value Line low total return 3-5 year forecast. We’ve also included a quick look at Morningstar and S&P price-to-fair value (P/FV) metrics. (100% = fairly valued … <100% is potentially attractive)

In keeping with some of the Groundhog shopping, we also display the 1-year outlooks based on analyst consensus and S&P target prices.

Nutshell: Microsoft (MSFT) and General Electric (GE) are consensus favorites. S&P thinks JP Morgan (JPM) is a steal. There’s an IBM (IBM) bandwagon at Morningstar. Value Line is skeptical about the long-term forecast for Disney (DIS), Cisco Systems (CSCO) and Home Depot (HD). S&P doesn’t want Coca-Cola (KO) … not even with a 10-foot pole. Morningstar thinks United Health (UNH) is overvalued, too. S&P is scratching their heads over Exxon Mobil (XOM) and Chevron (CVX) … and we’ll stay tuned to see what conclusions are reached by Team Stovall.

Djia consensus 20150206

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Erosion of 2015 Expectations

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Eddy Elfenbein of Crossing Wall Street

Crossing Wall Street Update (2/6/2015)

We have to love a newsletter update that starts out quoting all things Schlossian.

“When it comes to investing, my suggestion is to first understand your strengths and weaknesses, and then devise a simple strategy so that you can sleep at night.” – Walter Schloss

A number of you have written me about the massive adjustments made to several of the energy stocks this week. No, you’re not imagining things. Expectations have been transformed — very notably for 2015 as year-end projections plummet. This week’s EXTENSIVE roll call of stocks that are “Materially Weaker” is not a hoax, either. We’re elated (and a little bit proud) about our energy sector message a few months ago when we suggested things seemed a little too good to be true and urged caution.

During the update, I was reminded of days when Ken Kavula and I would wince while crunching updates. Eddy captures that moment here:

The surging U.S. dollar and collapsing oil prices have dramatically changed the outlook for corporate earnings growth. Guidance from companies hasn’t been this poor since the depths of the Financial Crisis. At the end of the Q3, Wall Street had been expecting Q4 earnings of $32.24 (that’s the index-adjusted number). Now it looks like it will be about $27.64. That’s a big cut. At the end of Q3, the Street was expecting full-year earnings for 2015 of $136.07. That’s now down to $119.76. That’s a 12% cut in four months. Stock prices haven’t responded nearly as much. — CWS Market Review: February 6, 2015

Stock prices follow earnings. Rinse. Repeat.

Cycles are massively challenging. Memories are short. Trend trajectories are temptation embodied because collectively, we’re a bunch of optimists.

Cy Lynch has cautioned us many times in the past about cyclical hyperventilation and vulnerability from the likes of Value Line, Morningstar and NAIC/BetterInvesting. (Sam Stovall and his S&P minions seem to have a better handle on peak and trough chasing.) Step through a case study of Carbo Ceramics (CRR) and it comes clear. While soaring on wings of bubbles, it’s hard to remember the last trough and hard to believe in inevitable future troughs.

MANIFEST 40 Profitability Expectations

The condition that Eddy is talking about is pretty vivid when looking at the average net margin forecast for the MANIFEST 40. Keep in mind that this is a collection of relatively higher and more stable stocks … your favorites. But as we’ve shared from Barry Ritholtz (http://www.ritholtz.com) in the past, this time of year is historically packed with EXUBERANCE. Profit margin forecasts are elevated during the first quarter and generally erode as we tear calendar pages down.

It’s not easy to refer to the 2015 forecast as exuberant … as the collective forecast is starting the year close to recessionary levels last seen in 2008-2009.

Stock prices follow earnings.

Of course, the thrust of this is reduced expectations for stocks in 2015. As we’ve said many times lately, we don’t believe in 1-year crystal balls for individual stocks (or broader markets or baskets) but there can be an element of self-fulfilling prophecy to some of this. For the MANIFEST 40, the 1-year analyst consensus price targets and the average 2.1% current yield combine to produce a 1-year total return forecast of 10.9%. Using S&P 52-week target prices, the total return forecast is 9.7%. Nothing to “panic” about, particularly with our core stocks … but these forecasts are generally much more optimistic as the year starts … until the reliable Ritholtz earnings erosion removes a suitable amount of exuberance.

MANIFEST 40 Most Widely Followed Stocks (Tracking Dashboard)

A Few Of Our Favorite Screens

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 Rt banner 20150131

These Are a Few of our Favorite Screens

For the January Round Table, we spent some time with a few screening resources in the quest for some good ideas for further study. We’ll collect them here and tabulate the overall results, using a version of the coach’s poll for collegiate sports (20-16-12-8-6-4-2-1 for votes) and see what percolates to the top of the charts.

Screens Featured

The Top 25

Knighthunt4

Ivory Soap Screen

This screen is based on a recognition that the two most important characteristics of any investment are (1) the return forecast and (2) the quality of the company. The MANIFEST Rank is an index that combines the two characteristics with essentially equal weighting. Here are the top eight results of a current screen based solely on MANIFEST Rank > 99.44

Ivory screen 20150129

Triple Play Screen

This is one of the more popular screens that we’ve covered over the years. It generally works best after a bear market has raged for a while.

It focuses on some of the primary drivers for higher long-term return forecasts. The three things we’re looking for are:

  • Elevated return forecast … generally because of a (hopefully) temporarily hammered stock price.
  • Potential for P/E Expansion … a higher P/E in the future than the current P/E.
  • Margin Enhancement … projected profitability in the long-term forecast that is higher than current levels.

Using one of the current leaders for this screen, we note that Qualcomm (QCOM) has a low return forecast of 9-10% according to Value. Keep in mind that the average low return forecast for the Value Line universe is 3-4%.

We also see a future P/E of 16.0x versus current levels of 13-14×.

Value Line expects “flat” net margins in the 33-34%. The reason this triggered in our database is that the analyst consensus is more optimistic than Value Line when it comes to future profitability for Qualcomm.

For more on this Triple Play screening approach, check out the archived presentation at: https://www.manifestinvesting.com/forums/14/topics/2778

Triple play screen 20150129

Gateway Champions

This screen is inspired by our repeat group champions, the Broad Assets investment club of St. Louis. Broad Assets repeated as champion last year and is running 2nd this year as Groundhog VIII comes to a close in a few days. We featured the concept behind this screen in our Victory By Escape Velocity? cover story from May 2014.

Nutshell: If you really believe that stock price follows earnings, it makes all the sense in the world to look for those conditions.

In this case, we focus on year-over-year (2015 over 2014) earnings estimates and focus on the companies with the strongest upside. We also limit the field to companies that have shown increasing earnings for each of the 4-5 years displayed. (All year-over-year figures > 0%)

Lannett (LCI) continues to have strong expectations, but it will be interesting to see what Broad Assets does with LCI in the future as 2016 EPS estimates are finally plateauing. We also note the presence of Balchem (BCPC), a long time favorite of another St. Louis club — Mutual of St. Louis and our friends Jay and Ray.

Gateway groundhogs 20150129r

Schloss Screen

The American Association of Individual Investors (AAII) features a number of screens based on famous investors and methods including one of our time-honored all-time favorites, Walter Schloss.

Screening Criteria

  • Companies that trade on the over-the-counter market are excluded
  • ADR stocks are excluded
  • Companies in the financial sector are excluded
  • Stock has been traded for at least seven years
  • Current share price is less than the latest quarterly book value per share
  • Current share price is within 10% of its 52-week low (Hugh McManus has to like that one)
  • Percentage of insiders owning shares is higher than the median insider ownership percentage for the entire database
  • Long-term debt from the most recent quarter and fiscal year equals zero

Schloss vl screen 20150129

Piotroski Screen

Joseph Piotroski, associate professor of accounting at Stanford University’s Graduate School of Business, undertook a study of low price-to-book value stocks to see if its possible to establish some basic financial criteria to help separate the winners from the losers.

The result, a favorite screening method among AAII members, is the top-performing screen since inception nearly 20 years ago.

Low Price-to-Book-Value

Piotroski’s work starts with low-price-to-book-value stocks. Price-to-book value was a favorite measure of Benjamin Graham and his disciples who sought companies with a share price below their book value per share. While the market does a good job of valuing securities in the long-run, in the short-run it can overreact to information and push prices away from their true value.

Measures such as price-to-book-value ratio help to identify which stocks may be truly undervalued and neglected.

Motley Fool CAPS

Most frequently chosen Outperform Ratings by the CAPS All-Stars (successful stock pickers) that have 5-Star ratings on 1/29/2015.

Fool caps screen 20150129

Modified McManus

Hugh likes to shop for high-quality companies when they are trading near their 52-week lows. He keeps a fairly short list of qualified accumulation targets for his personal portfolio. We covered this screening concept here: Gone Fishing … Patiently

What makes this version of the list “modified” is that we’ve applied his shopping methods to the 6000+ companies in the Value Line database, limiting qualifiers to Financial Strength ratings of B+ (or better) and a return forecast (VL 3-5 Yr Proj Ann Tot Return or PAR) to double digits, in general, or better. (Data Source: Value Line Investing Analyzer)

Modified mcmanus 20150130

Great Buffalo

One of our favorite sources of ideas are successful/active fund managers. One of our favorite small company mutual funds is Buffalo Growth (BUFSX) shepherded by Kent Gasaway and his team.

The accompanying table (exported from Morningstar/Premium Version) provides a summary of buy/accumulate decisions made over the last quarter by the Buffalo team.

KYTHERA Biopharmaceuticals (KYTH) is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel prescription products for the aesthetic medicine market.

Case Studies and Analysis Demonstrations

The stocks featured during the January Round Table:

  • Caterpillar (CAT)
  • Google (GOOG)
  • MSC Industrial (MSM)
  • QUALCOMM (QCOM)

The audience selected QUALCOMM (QCOM) from the candidates.

Sell Transaction

MWI Veterinary Supply (MWIV) was “sold” from the tracking portfolio during the session. MWIV is being acquired by Amerisource (ABC) for $190. Ken Kavula selected MWIV back on 11/29/2011 for $64.79, so $1000 became $2969 — an annualized return of 40.5% and a relative return of +22.9% versus the Wilshire 5000.

Archived Recording of January Round Table

The recording of this event is now available on the event page:

https://www.manifestinvesting.com/events/163-round-table-january-2015

It can also be found on YouTube at:

http://youtu.be/38J1L6uYT5c

If you enjoy this session, please leave us a comment or click Like on the YouTube page.  Thanks!

Round Table (January 2015)

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The stocks featured during the January Round Table:

  • Caterpillar (CAT)
  • Google (GOOG)
  • MSC Industrial (MSM)
  • QUALCOMM (QCOM)

The audience selected QUALCOMM (QCOM) from the candidates.

Sell Transaction

MWI Veterinary Supply (MWIV) was “sold” from the tracking portfolio during the session. MWIV is being acquired by Amerisource (ABC) for $190. Ken Kavula selected MWIV back on 11/29/2011 for $64.79, so $1000 became $2969 — an annualized return of 40.5% and a relative return of +22.9% versus the Wilshire 5000.

Rt banner 20150131

The Stocks We Follow (December 2014)

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 MANIFEST 40 Update

“We have always believed that the collective decisions made by our community of like-minded, long-term investors are worth huddling over … a place where ideas are born.”

This managed “tracking portfolio” of your collective favorites has outperformed the Wilshire 5000 by +3.3%. The absolute rate of return for the trailing 9 1/4 years is 9.6%.

Our MANIFEST 40 is a celebration of collective excellence in stock selection, strategy and disciplined patience. We continuously monitor the 40 most-widely followed stocks by our community of subscribers at Manifest Investing. We think it’s more than a fair assumption that many of these are in your real money portfolios … and for that, we’re optimistic and grateful. This managed “tracking portfolio” of your collective favorites has outperformed the Wilshire 5000 by +3.3% (relative rate of return, percentage points). The aggregate absolute rate of return has been 9.6% during a period when the annualized rate of return for the general stock market has been 6.3%.

Capturing Attention: Chargers

Schlumberger (SLB) moved from #39 to #34 and continues to attract interest despite the current challenges in the energy sector. Buffalo Wild Wings (BWLD) returns to the MANIFEST 40 at #36 as chicken wings, beer and sporting events continue to deliver for investors.

The results of $100 positions investing in any of the Top 40 companies can be viewed at any time at:

http://www.manifestinvesting.com/dashboards/public/manifest-40

Strongest Performers

The three top performers in the MANIFEST 40 since inception, based on annualized relative rate of return, are Cognizant Technology (+27.4%!), PRA Group (25.8%) and Apple (24.8%).

The charter members of the MANIFEST 40: Microsoft (3), Stryker (4), AFLAC (5), Johnson & Johnson (6), General Electric (7), Cisco Systems (8), Walgreen (11), FactSet Research (14), Oracle Corp (18), PepsiCo (17), Teva Pharmaceutical (16), Intel Corp (21), Medtronic (22), Danaher (26) and Wal-Mart (31).

We’ll continue to pay the most attention to these community favorites. Keep up the good hunting!

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MSC Industrial Direct (MSM)

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This month’s stock feature is a company that is never too far from our radar screens. Frankly, I’m a little surprised that MSC Industrial (MSM) has not been selected over the past ten years. Sometimes the best long-term investments aren’t the sexiest. Nuts and bolts matter.

MSC Industrial Direct (MSM) markets industrial products to small- and mid-sized customers throughout the United States. It distributes a full line of industrial products, such as cutting tools, abrasives, measuring instruments, safety equipment, fasteners, welding supplies and electrical supplies. It’s about building and/or fixing things and hence, the health of the general economy matters. Many investors have been rewarded by investments in companies like Danaher, Fastenal, W.W. Grainger and Snap-On and this company is no exception. MSM is worthy of inclusion among these reliable favorites.

The low total return forecast is 12% at Value Line. The stock price could languish a little if the global recession persists.

MSC Industrial (MSM): Business Model Analysis. Continuing with our testing and work-in-progress, we take a look at the judgment milestones for MSC Industrial. The long-term top line and bottom line trends speak for themselves. Based on a growth forecast of 9-10%, projected profitability in the 10% net margin range and a reasonable P/E ratio of 19-20x in the future, the return forecast is 15-16%.

Growth, Profitability, Valuation

Value Line projects long-term sales growth at 9.5%. We’ll use 9.7% for the sales growth forecast based on the regression from 2010-18.

Based on the historical trends, it’s feasible to envision a 10% net margin. The trailing 6-year average is 9.7%. Value Line has a projected net margin of 10.4% in their long-term forecast.

The historical P/E (trailing 6-year average) has been 19.3×. Value Line has a projected average P/E of 22×. At the time of selection (1/12/2015), the average projected annual return for MSM is approximately 15-16%.

The quality RANKING for MSM is 88 (Excellent) with a financial strength composite (percentile ranking) of 97. Earnings stability is 83.

Morningstar has a fair price estimate of $95 (price-to-fair value of 78%) and S&P checks in with a fair value estimate of $83.60 (P/FV of 88%.)

A Main Street Walker

The company has a history of sound decisions. Value Line analyst Simon Shouclair (1/16/2015) points out that “Cash deployment pays off for shareholders. Indeed, MSM has not only raised its dividend, the company has been doling out some substantial special distributions in recent years, including a sizable $3.00 per sh outflow in October 2014. Share repurchases have also helped to boost shareholder value.”

A company that invests in itself when its return forecast is superior is more music to our ears. “Although the untimely stock has been battered of late, patient investors should note the wide total return potential out to late decade.”

Ahhh. Untimely. Battered. Patience. And that’s our time horizon mentioned. Music to our ears, again. There should be little mystery as to why we included the company among of selections for the 2015 Crossing Wall Street Challenge.

Building and fixing Main Street is a great idea.

General Electric (GE)

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It has been a while since we took a closer look at General Electric (GE), the 7th most widely-followed stock by Manifest Investing subscribers. The company is anything but a stranger to this community of investors.

It’s also safe to say that it’s been a source of considerable angst and frustration for many of us.

Company Description

General Electric Company is one of the largest & most diversified technology and financial services companies in the world. With products ranging from aircraft engines, power generation, oil and gas production equip., and household appliances to medical imaging, business and consumer financing, and industrial products, it serves customers in more than 100 countries.

Business Model Analysis

Even successful giants are vulnerable to the impact of a deep recession and GE turned out to be no exception. During the 2007-2009 financial crises, GE Capital served as a catalyst that deepened the damage. Because GE Capital was essentially a venture banking enterprise nested within the industrial giant — and accounted for over 50% of revenues — when the financial markets imploded, the impact was fairly severe and maybe even life threatening. That’s the only way to account for a price drop from $42.20 to $5.70 (-86.5%) for this blue chip leader.

Outlook

The Value Line low total return forecast for General Electric is now 13% — as the long-term low price forecast was bumped from $30 to $35 in the current update.

Analysts appear to be optimistic about the Alstom acquisition and fairly certain that the global condition will ultimately improve. Infrastructure matters. This urgently includes the United States as the electrical system condition is well on its way to resembling those bumpy pothole-ridden atrocities we used to call roads. The only difference is that when the electricity system fails — it takes a lot of critical stuff with it. General Electric is crucial to restoring the necessary reliability of our electrical supply.

“We like this blue chip from a number of perspectives. The year ahead will probably only bring returns in line with the overall market; however, out to 2017-2019 we think this equity has room to run. Too, with the dividend north of 3%, income investors have a strong play here.” — Value Line (1/16/2015)

The growth forecast is based on emphasizing the last 2-3 years of actual data in combination with the Value Line forecasts. This industrial giant is retooling, exiting a few businesses while bolstering others. The Alstom addition is an example. For this reason, we focus on the right hand side of the business model trends — and find 4-5% top line growth feasible.

Value Line has a 3-5 year projected net margin of 15.3% and this is a big part of the 14.7% total return forecast for the analyst section of the study. While achievable, we’d be more comfortable with a profitability forecast in the 12-13% range based on the historical profile.

A projected average P/E ratio of 15.0x for a blue chip leader is solid.

General Electric’s exposure to capital-intensive industries makes for a rough road during corrections and recessions. Bringing home an EPS stability of 76 is quite an achievement. The “dent” made in the company the 2008-2009 recession manifests in the Financial Strength rating. (It used to be higher) Overall, General Electric still ranks in the top 10th percentile of all companies when it comes to quality — and we’d be unsurprised to see the overall quality rating increase in years ahead.

It’s been a bumpy road. (Understatement alert) But business results have been steadily improving. 2015 may be yet another flat spot in the stock price trend if oil prices continue to fall — and global recessionary conditions persist.

Ge chart 20150115

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Dipped In Magic Waters of Technology

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Dipped In The Magic Waters of Technology

With certain apologies to Field of Dreams and Terence Mann (James Earl Jones)

Terence Mann: People will come. They’ll come to Las Vegas for reasons they can’t even dream (yet). They’ll land at McCarran not knowing for sure why they’re doing it. They’ll arrive at the Convention Center as innocent as children, in a childish (but pure) quest. It is money they have and solutions they seek. They’ll wander and discover. They’ll find geeks and gizmos and remember days before the Star Trek stuff started taking shape and forming reality. They’ll cheer their heroes. It’ll be as if they dipped themselves in magic waters. The memories and dreams will be so thick they’ll have to brush them away from their faces. People will come. The one constant through all the years has been technology. America has rolled by like an army of steamrollers fueled by the next generation of locomotive engine. Technology has transformed time. It’s a part of our past — and a glimpse of our future. It reminds of us of all that once was good and things yet to come. People will come. People will most definitely come.

For those less familiar, this week is the Consumer Electronics Show in Las Vegas. It is the world’s largest trade show of its kind. The International CES (Consumer Electronics Show®) is the world’s gathering place for all who thrive on the business of consumer technologies. It’s where business gets done: on the show floor, in and around our conference program, in impromptu connections and in planned meetings and special events. Follow on Twitter via #CES2015.

We’ll be covering the show and providing investment-related feedback on a number of companies, including but not limited to: QUALCOMM (QCOM), Masimo (MASI), 3D Systems (DDD) and many more …

Coming Events and Attractions

Our expanded coverage of the update stocks this month continues as part of our quarter long test drive of this feature and the studies and shared ideas it delivers. Please tell us what you think and feel free to join in the Forum discussions for the deeper dives on some of the stocks.

We’re working to schedule the January Round Table. It will likely be on Saturday morning, January 31 at 10:30 AM ET. The January Round Table will be part of a series of webcasts during Groundhog Weekend — more information to follow.

Speaking of our 10-year anniversary and ALL THINGS GROUNDHOG, we’ll be firing up another year of superior stock selection as we launch Groundhog Challenge 2015 on February 2, 2015. It’s not too early to start thinking about your winners for 2015. Remember we welcome both individual investors and groups (investment clubs) … the ground rules are simple pick a minimum of FIVE and a maximum of TWENTY investments and we lock them in from 2/2/2015 through 2/2/2016.

Companies of Interest: Value Line

The average Value Line low total return forecast for the companies in this week’s update batch is 5.0% — a little higher than we’ve seen in the last few weeks.

Fundamentals continue to erode slightly. This update did have a slight exception, with modest boosts to expectations for companies like Bristol-Myers (BMY), Lilly (LLY), Merck (MRK) and Teva Pharma (TEVA) along with various other drug-related stocks. Pfizer (PFE) was a notable exception — with a slightly reduced long-term forecast.

Materially Stronger: Abbvie (ABBV), Lilly Eli (LLY)

Materially Weaker: Cameco (CCJ), Genworth Financial (GNW), Pan American Silver (PAAS), Barrick Gold (ABX)

Pfizer (PFE) dropped from $35 to $30 for the 3-5 year low price forecast.

Teva Pharma (TEVA) went from $55 to $60 for the 3-5 year low price forecast.

Standard Coverage Initiated:

Discontinued:

Stocks to Study

The following update stocks are ranked in the top 10th percentile of all companies we follow (MANIFEST Rank > 90)

Crossing Wall Street Challenge (2015)

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Eddy didn’t get quite enough “Christmas Miracle” to extend his 7-year winning streak of beating the S&P 500 with his Buy List. But it was close. The 2014 Buy List landed at 11.8% for the year versus 13.7% for the S&P 500. Not exactly a disaster. And more importantly, his 9-year (since inception) absolute return is 10.8% vs. 8.0% — a relative return of +2.8%.

Nothing wrong with that.

You can find commentary (and continuous updates) on Eddy’s selections for 2015 here and here.

Start Your (2015) Engines!

We’ll track the 2015 Challenge on the customary dashboards:

Shopping In The Best Places With Our Friends

Walking Main Street is our entrant in this Challenge. Walking Main Street 2014 closed out the year on 12/31/2014 at a portfolio value of $1,175,729.94 — for an annual total return of 17.6% — outpacing the S&P 500 by +3.9%.

Where did we go hunting for our (20) stocks for 2015? Like we said, we like to shop in the same places as our like-minded long term investors. Therefore, we start with the MANIFEST 40, the forty most widely-followed stocks by Manifest Investing subscribers. We sort that by MANIFEST Rank, our combination ranking that includes a dash of return forecast and a dash of quality for a recipe that recognizes the top two characteristics for any investment. We also want to stick to stocks in the top quintile (MANIFEST Rank > 80) as we build for 2015. This yields about (24) stocks.

We then turn to lessons we learn from friends. In this case the inspiration comes from our two-time defending Group Champions in our annual Groundhog stock picking challenge — the Broad Assets investment club of St. Louis.

Why? Because they (and we) believe that stock prices follow earnings. We’ve added the year-over-year change to our shopping list, shown on the accompanying chart as “2015 EPS Delta”. This is nothing more complicated than comparing the analyst estimates for 2015 versus the year-end results for 2014.

Doing this disqualifies companies like Qualcomm (QCOM), Microsoft (MSFT), Coach (COH) and Exxon Mobil (XOM). These are all excellent companies that may have a turbulent year ahead of them. For a typical/traditional long term portfolio we’d look the other way, but this is a one year contest. We believe that stock prices ultimately follow earnings and we also believe/know that the rhinos often overreact to short-term turbulence, in many cases punishing stock prices over the coming year if they believe earnings are cloudy or in jeopardy.

The average 2015 EPS Delta is 12.9% for our universe of stocks.

In that spirit, we went looking “outside” the MANIFEST 40 for a few stocks to substitute for the disqualified ones. We found a group of stocks with solid return forecasts and quality that have good or above-average 2015 EPS Delta expectations: Fossil (FOSL), Mesa Labs (MLAB), Priceline (PCLN) and MSC Industrial (MSM).

After adding these, the overall 2015 EPS Delta for our (20) stocks is 14.3%.

A few stocks were disqualified with return forecasts too close to (or less than) the median return forecast (MIPAR) of 6%. The companies included in this batch were: FactSet Research (FDS), Johnson & Johnson (JNJ), CVS Health (CVS) and Costco Wholesale (COST). Again … nothing wrong with any of these … but we’re looking for outsized return forecasts.

Copa Holdings (CPA) merits a look with the news about Cuba … and T. Rowe Price (TROW) checked in with a very honorable mention.

Industry Analysis: Pharmacy Services

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Industry Study: Pharmacy Services

Many of you are well acquainted with the “strong nudges” suggested by our friend Ken Kavula when it comes to the subject of “Buy The Best!” Ken is reinforcing — in his strongest professional educator voice — the importance (and path to opportunity) of studying a stock in the context of its industry or peers. This was among the strongest encouragements that a nation of investors heard from George Nicholson, Jr. CFA — widely regarded as the grandfather of the modern investment club movement. Another professional investor, David L. Babson, contributed a series of columns to Better Investing magazine, starting in 1960 and continuing for a few decades. One of his favorite industries was Specialty Chemicals and he believed that virtually every investor should have a stake in this industry … suggesting that if “chemistry is life” then it follows that industry leaders in this realm ought to be candidates for long-term portfolios. We’ll kick off this series with a look at Pharmacy Services, because we think Mr. Babson would concur that this is an area to discover, shop/study and own … for as long as it makes sense to do so.

“The Pharmacy Services Industry has historically been viewed as a safe haven for investors seeking steady growth and preservation of capital. However, things have changed a bit in recent times, owing to the aging of the American population and an altered industry landscape. These stocks now have more of a growth profile than they had in the past. There is much opportunity for expansion, with billions of dollars in business up for grabs. But there is also greater competition, coming from every direction, as even non-traditional channels are looking to get in on the act… an evolving industry…” — Value Line

The companies in this industry are generally either large drug chains — Walgreen (WAG) and CVS Health (CVS) — or pharmacy benefits managers, or PBMs — Express Scripts (ESRX) — … or some combination of the two. In many cases it’s a classic brick-and-mortar story where the corner drug store is battling the “Amazons” of online/mail-order prescriptions. And of course, those “corner drug stores” have their own web segments and/or alliances in the drug supply chain.

Pressure to stay competitive has prompted some in the industry to think outside the box and use acquisitions to gain access to a bigger scope of business.

Prescription growth rate is a indicator of a promising field of opportunity for the combatants in this industry. Demographics point to a rise in the number of Americans aged 65 and older over the next two decades. Increasingly, Baby Boomers will require medical care and pharmaceuticals, auguring well for the industry’s sales and earnings prospects. The largest pharmacy services providers are best positioned to reap the coming rewards. We repeat … field of opportunity.

Growth

As shown in the accompanying graphic, the industry growth rate is approximately 5%. The step change in industry sales between 2011 and 2012 is the acquisition of Medco by Express Scripts.

Profitability

It’s a battle in progress out there. It might even be a war. The industry profitability seems capable of restoring to the 3% level, with a nod to the 3.5-4.0% contest being waged between WAG and CVS. It’s interesting to look back at Monsters Being Created and how these industry giants have fared since our September 2008 cover story.

Projected P/E Ratio

The industry average P/E ratio is approximately 15.0x for companies as they reach maturity. CVS Health and Walgreen rate a premium nod as they continue to dominate the profitability roost.

Return Forecasts and Quality Perspective

The accompanying Instant Industry Study has been sorted by Quality (Descending). We generally find it most rewarding and better sleeping conditions to shop at the top of the list. The return forecasts (Projected Annual Return, or PAR) are fairly subdued. The average return forecast is currently 6% — so these aren’t much to write home about. This is mainly due to a strong five year run where the Drug Retailers index has gained approximately 21-22% (annualized) over the last five years.

So … patience is a good idea to wait for one of these industry leaders to display an attractive return forecast — either via a stock price reduction and/or a boosting of fundamentals to strengthen the expectations.