2 Methods for Evaluating 2010’s Top Stocks

There are multiple ways to gauge the “top” stocks of 2010.  Below is two different methods to gauge the top S&P 500 stocks of 2010. The first list contains the top stocks based on year to date price performance, which is the obvious method for gauging the top stocks of the year:

Ticker Company Sector Trend Analysis Performance YTD
CMI Cummins Inc. Industrial Goods Here 142.95%
Q Qwest Communications International Inc. Technology Here 91.94%
HBAN Huntington Bancshares Inc. Financial Here 91.74%
AIG American International Group, Inc. Financial Here 91.03%
ZION Zions Bancorp. Financial Here 89.46%
AKAM Akamai Technologies Inc. Technology Here 89.11%
PCLN priceline.com Incorporated Services Here 85.75%
FDO Family Dollar Stores Inc. Services Here 82.27%
WFMI Whole Foods Market, Inc. Services Here 82.26%
PXD Pioneer Natural Resources Co. Basic Materials Here 81.98%

However, another method for gauging price momentum is to average returns over multiple time periods..  Below is the average quarterly, half year, and 1 year return for stocks in the S&P 500. As you can see, the list produces a different list:

Ticker Company Sector Trend Analysis Performance (Quarter) Half Year Year Sum
CMI Cummins Inc. Industrial Goods Here 20.97% 70.11% 137.86% 76.31%
MWW Monster Worldwide, Inc. Services Here 84.61% 102.83% 36.12% 74.52%
PCLN priceline.com Incorporated Services Here 16.54% 129.81% 76.98% 74.44%
ANF Abercrombie & Fitch Co. Services Here 48.28% 90.77% 66.52% 68.52%
AIG American International Group, Inc. Financial Here 52.92% 66.29% 80.89% 66.70%
NOV National Oilwell Varco, Inc. Basic Materials Here 48.11% 101.37% 49.25% 66.24%
CF CF Industries Holdings, Inc. Basic Materials Here 35.84% 112.97% 45.16% 64.66%
FCX Freeport-McMoRan Copper & Gold Inc. Basic Materials Here 38.66% 103.12% 48.62% 63.47%
MEE Massey Energy Co. Basic Materials Here 70.92% 93.55% 23.38% 62.62%
F Ford Motor Co. Consumer Goods Here 35.77% 66.07% 65.58% 55.81%

No positions

Data Source: Finviz

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2010 Recap and Trading Look Ahead

I’m sure you’ve read an article or two that I’ve posted from Chris Vermeulen, but I have a little more unknown insight into his trading service and it’s records…

This is his 2010 members only trading performance…its audited and 100% verified:

http://www.thetechnicaltraders.com/216-17-3-32.html

But there’s something missing…

The last 5 closed trades and their results:

SPY 0.9%, Nov 12 – Nov 15
GLD 1.2%, Nov 4 – Nov 12
SPY 3.5%, Oct 27 – Nov 5
TBT 2.4%, Oct 21 – Nov 2
GLD (1.1%), Oct 19 – Oct 21

Second: He and his members currently have three open positions with the following gains:  OPEN POSITION 65% OPEN POSITION 28%, OPEN POSITION 9%

Chris has a special set-up for my readers for 75% savings…

CHECK IT HERE

Tuesday Reads

10 Reasons to be Cautious for the 2011 Market Outlook – David Rosenberg (via The Big Picture)

The Ambiguity of Stock Value – Global Macro Monitor

The 10 Best Stocks for a Volatile ’11 – Jim Jubak

Lessons from the Muni Bond Market in 2010 Cumberland Advisors

Some Thoughts on Market Timing (pdf) John Mauldin

A Fed-Induced Speculative Blowoff John Hussman

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Ranking the 2011 Dividend Aristocrats

Standard and Poors recently announced its 2011 Dividend Aristocrat. The S&P 500 Dividend Aristocrats Index is designed to measure the performance of S&P 500 constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 25 years.

The deletions from the 2010 list are:

LILLY (ELI) & CO (LLY )
SUPERVALU INC (SVU)
INTEGRYS ENERGY GROUP INC (TEG)

The additions are:

MCCORMICK & CO INC (MKC)
HORMEL FOODS CORP (HRL)
ECOLAB INC (ECL)

I have the full list available on the right hand side of Scott’s Investments along with the dividend yield for each stock.  Using a simple stock ranking system I have rated each dividend aristocrat based on a 1/3 weighting for yield, 1/3 weighting for payout ratio and 1/3 weighting for projected annual earnings per share (EPS) growth for the next 5 years.  For those interested in how create their own stock ranking system I provide detailed instructions in this article (all that is required is a spreadsheet and a free data source such as Finviz).

There are an almost infinite number of ways to rank stocks; however, for dividend investors yield, EPS growth, and payout ratio are three critical metrics.  I ranked each Aristocrat in order of yield (highest to lowest), 5 year estimated EPS growth (highest to lowest) and then ranked each Aristocrat in order of payout ratio (lowest to highest) and averaged these rankings to create an overall rank.

It is important to note that raw data is but one tool to use in your overall analysis.  For example, payout ratios can fluctuate since it is calculated by dividing dividends per share by earnings per share.  A short-term dip in earnings could inflate the current payout ratio of a stock. Thus, it is important to evaluate not only the current payout ratio of a stock but also whether a companies future earnings growth will continue to fund dividend payouts (and thereby potentially lowering the payout ratio in the future).  In addition, estimated 5 year EPS growth is only that, an estimate provided by analysts. The reality is that the next 5 years will provide both earnings surprises and disappointments for most of the companies on the list.

The following is the result when averaging the ranking of current yield, projected 5 year EPS growth, and current payout ratio among the 2011 Dividend Aristocrats. The stocks are listed in order of their ranking.

Data source: Finviz, no positions

Ticker Company Sector Retirement Portfolios Dividend Yield Payout Ratio EPS growth next 5 years
AFL AFLAC Inc. Financial Here 2.11% 24.65% 12.28%
WAG Walgreen Co. Services Here 1.80% 27.28% 13.56%
DOV Dover Corp. Industrial Goods Here 1.88% 31.86% 16.97%
FDO Family Dollar Stores Inc. Services Here 1.25% 22.48% 14.13%
LOW Lowe’s Companies Inc. Services Here 1.73% 29.87% 14.72%
LEG Leggett & Platt, Incorporated Consumer Goods Here 4.67% 83.00% 13.75%
TGT Target Corp. Services Here 1.67% 21.62% 13.15%
XOM Exxon Mobil Corp. Basic Materials Here 2.41% 30.37% 10.55%
CB The Chubb Corporation Financial Here 2.47% 20.73% 8.38%
MHP The McGraw-Hill Companies, Inc. Services Here 2.59% 34.45% 10.70%
MMM 3M Co. Conglomerates Here 2.41% 36.29% 11.94%
WMT Wal-Mart Stores Inc. Services Here 2.26% 28.97% 10.15%
BCR CR Bard Inc. Healthcare Here 0.77% 13.75% 11.72%
EMR Emerson Electric Co. Industrial Goods Here 2.41% 51.01% 14.04%
ECL Ecolab Inc. Consumer Goods Here 1.39% 28.18% 13.23%
CINF Cincinnati Financial Corp. Financial Here 4.99% 52.02% 10.00%
MCD McDonald’s Corp. Services Here 3.19% 47.91% 10.05%
GWW W.W. Grainger, Inc. Services Here 1.56% 30.62% 13.65%
VFC V.F. Corporation Consumer Goods Here 2.91% 44.82% 10.04%
BDX Becton, Dickinson and Company Healthcare Here 1.95% 29.28% 10.04%
ADP Automatic Data Processing, Inc. Technology Here 3.09% 56.26% 10.23%
CTAS Cintas Corporation Services Here 1.76% 33.00% 10.72%
ADM Archer Daniels Midland Company Consumer Goods Here 1.99% 21.25% 7.80%
STR Questar Corporation Basic Materials Here 3.22% 33.36% 5.40%
PEP Pepsico, Inc. Consumer Goods Here 2.93% 46.57% 9.28%
ABT Abbott Laboratories Healthcare Here 3.71% 56.29% 9.70%
SHW Sherwin-Williams Co. Services Here 1.71% 34.69% 11.65%
CLX Clorox Corporation Conglomerates Here 3.45% 55.81% 9.17%
JNJ Johnson & Johnson Healthcare Here 3.49% 41.71% 6.27%
SIAL Sigma-Aldrich Corporation Basic Materials Here 0.96% 19.81% 9.00%
PG Procter & Gamble Co. Consumer Goods Here 2.98% 48.74% 8.61%
HRL Hormel Foods Corp. Consumer Goods Here 1.98% 28.27% 8.30%
APD Air Products & Chemicals Inc. Basic Materials Here 2.16% 39.69% 9.28%
BF-B Brown-Forman Corporation Consumer Goods Here 1.70% 40.00% 10.85%
SWK Stanley Black & Decker, Inc. Industrial Goods Here 2.02% 141.43% 14.00%
KMB Kimberly-Clark Corporation Consumer Goods Here 4.18% 57.84% 7.63%
MKC McCormick & Co. Inc. Consumer Goods Here 2.39% 39.16% 7.67%
KO The Coca-Cola Company Consumer Goods Here 2.70% 52.67% 8.33%
BMS Bemis Company, Inc. Consumer Goods Here 2.78% 59.40% 8.68%
ED Consolidated Edison Inc. Utilities Here 4.79% 69.30% 4.38%
CTL CenturyLink, Inc. Technology Here 6.25% 91.58% 1.46%
PBI Pitney Bowes Inc. Consumer Goods Here 5.94% 85.93% -4.00%
PPG PPG Industries Inc. Conglomerates Here 2.65% 51.13% 7.50%

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19 Stocks to Bring In the New Year

I update the following portfolio/screen on a monthly basis on Scott’s Investments. October’s list of 22 stocks is here and returned an average of 15.45% for the top 5 stocks on the list versus .59% for SPY. The entire list of 22 stocks last month returned an average of 7.82%, led by Questcor Pharmaceuticals, Inc which returned over 39% for the 1 month period and Deckers Outdoor which returned over 36%.

Last month’s portfolio of 23 stocks returned an average of 6.91% and 7.01% for the top 5 on the list. SPY returned 5.99% during the same period.  The leader for last month was InterDigital (IDCC) returning 26.58%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio 
  • low debt 
  • a history of high return on equity and investment, and 
  • price momentum as gauged by the percentage the stock is trading to its 250 day high. 

This strategy of screening stocks has produced stellar returns since this summer. For example, August’s list returned a whopping 16.17% versus 7.87% for SPY and July’s top 5 stocks returned over 19%.

When the screen results in more than 5-10 stocks I have also started tracking returns of the top 5 stocks at the beginning of each list. The stocks are ranked based on fundamental factors.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either a) abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or write a short option strategy on an equity index or ETF like SPY.

Below are 1, 3, and 5 year test results if an investor were to invest in the top 5 stocks in this screen every 4 weeks. Test results exclude commissions and dividends but include .5% slippage:

This month’s list contains 19 stocks versus 23 last month.  The top stock on the list is once again Metropolitan Health Networks, MDF, which has made multiple appearances on this stock list.  Apple, AAPL, remains on this month’s list. Two new additions of note for this month are two large cap technology stocks, Qualcomm (QCOM) and Applied Materials (AMAT). 

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and results, please see the right hand side of Scott’s Investments.

No positions in stocks mentioned


Ticker Name Trend Rank MktCap Industry
MDF Metropolitan Health Networks, Here 99.27 184.45 Healthcare Facilities
AIT Applied Industrial Technologi Here 99.23 1387.45 Misc. Capital Goods
AMAT Applied Materials, Inc. Here 99.03 18587.59 Semiconductors
LRCX Lam Research Corporation Here 98.49 6408.42 Semiconductors
EZPW EZCORP, Inc. Here 97.5 1399.02 Consumer Financial Services
VSEA Varian Semiconductor Here 95.97 2760.3 Semiconductors
FCFS First Cash Financial Services Here 94.62 958.53 Retail (Specialty)
CNU Continucare Corporation Here 93.29 289.51 Healthcare Facilities
AAPL Apple Inc. Here 89.84 296840.59 Computer Hardware
IDCC InterDigital, Inc. Here 87.41 1897.28 Communications Equipment
TSRA Tessera Technologies, Inc. Here 85.65 1117.22 Semiconductors
TSM Taiwan Semiconductor Mfg. Co. Here 85.11 63849 Semiconductors
SNHY Sun Hydraulics Corporation Here 83.86 638.53 Misc. Fabricated Products
QCOR Questcor Pharmaceuticals, Inc Here 83.42 949.33 Biotechnology & Drugs
DECK Deckers Outdoor Corporation Here 79.51 3225.78 Footwear
NVEC NVE Corporation Here 78.92 272.21 Semiconductors
CTCM CTC Media, Inc. Here 77.07 3580.94 Broadcasting & Cable TV
QCOM QUALCOMM, Inc. Here 70.44 79979.74 Communications Equipment
CKSW ClickSoftware Technologies Lt Here 60.57 241.05 Software & Programming

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Readings

Happy Holidays!

(For Those of You “Working” today, some articles)

Will the January Effect and The Presidential Cycle Combine for a Big January in Stocks? – Mebane Faber

Unintended Consequences (pdf) – John Mauldin

Time to Get Long Munis for a Trade? – Mebane Faber

The Muni Herd Redux – Cumberland Advisors / David Kotok

A Yearend View from Bob Eisenbeis – Cumberland Advisors

Apple, Google, NewsCorp and the Future of Content – John Mauldin’s Outside the Box

Focus on Bank of China, not the Fed – Jim Jubak

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Why Gold is About To Power Higher to Complete a Big Rally

Gold is a great topic to get a reaction. David Banister from Market Trend Forecast is “expecting a pretty strong rally from this recent $1365 area to at least $1,480 per ounce, and eventually a good shot at completing the structure at $1525 ranges.”


The full (free) article is here.

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10 Top Ranked Dividend Champions

I have written extensively on the US Dividend Champion list maintained and updated by DRIP Investing. The list is comprised of stocks which have increased their dividend payout for at least 25 consecutive years. My recent Dividend Champion articles on Scott’s Investments have focused on one or two company metrics, such as payout ratio, yield, or past performance. However, for this article I created a simple quantitative system which combines multiple metrics to give an “overall” rank of the stocks within the US Dividend Champion December list.

This ranking system combines Dividend Yield, Payout Ratio, Price to Earnings Growth (PEG), and price momentum. For those interested in creating a system of their own for free using Finviz and Excel, Open Office, or Google Docs please see a recent article providing step by step instructions.

Historical tests have shown that stocks with higher yields and lower payout ratios as well as those with higher yields and higher price momentum have tended to outperform other stocks.  History very well may not repeat itself; however, I believe it provides a basic foundation for research and further due diligence. Starting with the 98 stocks on December’s Dividend Champion list, the top 10 stocks based Dividend Yield, Payout Ratio, PEG and price momentum are below.  Equal weight was given to yield (the higher the better), payout (the lower the better), PEG (the lower the better), and price momentum (the higher the better).

These certainly are not the only company metrics of importance nor is providing equal weight to each metric the only method for establishing overall ranks.  For example, an investor seeking higher yields and willing to accept higher payout ratios could create a system in which yield is given more weight.

I look forward to any feedback and would be willing to create different systems upon request.

Data source: Finviz
No positions

Ticker Company Sector Retirement Portfolios Dividend Yield Payout Ratio
NC Nacco Industries Inc. Industrial Goods Here 1.79% 27.88%
CINF Cincinnati Financial Corp. Financial Here 5.02% 52.02%
AFL AFLAC Inc. Financial Here 2.12% 24.65%
DOV Dover Corp. Industrial Goods Here 1.92% 31.86%
CB The Chubb Corporation Financial Here 2.50% 20.73%
FDO Family Dollar Stores Inc. Services Here 1.26% 22.48%
NDSN Nordson Corporation Industrial Goods Here 0.89% 15.73%
T AT&T, Inc. Technology Here 5.78% 47.03%
SCL Stepan Company Consumer Goods Here 1.35% 15.31%
XOM Exxon Mobil Corp. Basic Materials Here 2.42% 30.37%

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10 Microcap Value Stocks

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I am a member of AAII (American Association of Individual Investors) and one of their more popular screens is the Shadow Stock Screen.  I conduct a close replication of this screen on a monthly basis.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I use  are:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

This is the eight month of performing the screen.  Last month’s results were 8.77% for one month, led by Fuwei Films (FFHL) which returned an incredible 72.76% for the month. FFHL is headquarter in China and develops and manufactures plastic film.  A strong earnings report in mid-November has helped spurred the strong returns.  


The strategy tends to be high beta – it performs very well in bullish markets and may underperform in bear markets. You can see on the 5 year return chart below that the screen struggled most in 2008 along with the rest of the market (returns on the charts assume .5% slippage but do not account for commissions or taxes; however, free trades are always one option to avoid commissions). I said previously that this is not a strategy I am investing in but it can lead to some under the radar investment ideas with additional due diligence.  One additional option which I have mentioned on other screens is to abandon this type of strategy or move to cash when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average.  Currently the Russell 2000 is above its 200 day moving average. 





The current top 10 stocks are also below.  SRI/Surgical Express (STRC), which provides central processing and supply chain management services to hospitals and surgery centers in the United States, remains near the top of this month’s list behind only FFHL.   I update the screen once per month on my site and track the results for free on the right hand side of the site. Full results for all months can be viewed on the right side of Scott’s Investments under “Micro Value Screen”. The tool used for the screen is stockscreen123. No positions in stocks mentioned


Ticker Name Free Trend Analysis Rank MktCap Industry
FFHL Fuwei Films (Holdings) Co., L Here 96.64 41.07 Fabricated Plastic & Rubber
STRC SRI/Surgical Express, Inc. Here 95.71 28.86 Personal Services
COBR Cobra Electronics Corporation Here 94.42 21.03 Communications Equipment
IMOS ChipMOS Technologies (Bermuda Here 94.34 162.72 Semiconductors
AHC A. H. Belo Corporation Here 86.27 181.02 Printing & Publishing
ADGF Adams Golf, Inc. Here 83.01 35 Recreational Products
DXYN The Dixie Group, Inc. Here 75.28 44.19 Textiles – Non Apparel
SVLF Silverleaf Resorts, Inc. Here 72.64 39.66 Hotels & Motels
VOXX Audiovox Corporation Here 67.61 197.46 Communications Equipment
HAST Hastings Entertainment, Inc. Here 67.08 51.59 Retail (Specialty)


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