In an article this week, Barrons notes that the big drug stocks trade today for just 12 to 14 times projected 2004 profits. The last time the drug stocks saw valuations like these was in 1993-94 when Wall Street feared President Clinton’s health-care proposals would lead to industry price controls.
Pfizer and Merck are two of the stocks mentioned in the article. The consensus earnings projection for PFE over the next 12 months is $2.33. Using Friday’s closing price of $28.50, the forward PE is (28.50/2.33) or 12.2. PFE’s historical 10-year average PE is 32.6.
The consensus earnings projection for MRK over the next 12 months is $2.77. Using Friday’s closing price of $30.50, the forward PE is (30.50/2.77) or 11.0. MRK’s historical 10-year average PE is 22.6.
There seems to be a correlation between stocks that have a good return on equity (ROE) year after year and quality growth stocks.
Here is a screen using AAII SI Pro with the following parameters:
- ROE for each of the last seven years > 15%
- Current PE < 5-year average PE
- (PE / EPS growth) < 1.5
- 5-year (diluted) EPS growth > 10%
- Projected long term EPS growth > 10%
- positive EPS growth for each of last 4 quarters
Using data from October 8, the screen yielded 22 stocks.
17 of the 22 stocks have an U/D ratio > 3.0, total return > 15%, and a relative value < 110. In an equally weighted portfolio, all of these stocks together would have a total return of 20.1%, a PAR of 15.1%, an U/D ratio of 4.7, and a relative value of 89.1.
The attached PDF file contains a PERT chart (sorted by total return) and a trend report (sorted by PAR) with the stocks passing the screen. The PERT chart uses First Call data for projected EPS and 5-year growth.
The National Association of Investors Corporation (NAIC) teaches individuals how to become successful strategic long-term investors. NAIC investors use fundamental analysis to study common stocks and mutual funds. Information about NAIC and its investor resources can be found at http://www.better-investing.org. Volunters throughout the United States work with local chapters to teach individuals and clubs how to invest.
Unfortunately, NAIC has found itself at the center of a controversy and the subject of an investigation by the Finance Committee of the U.S. Senate. The core allegation is that the officers have abused the tax exempt of NAIC to enrich themselves at the expense of the members and the volunteers of the organization. A CNBC investigative report frames the issues. It remains to be seen whether the organization will remain viable as the controversy unfolds.
From Value Line (07-16-2004): Intel shares have fallen quite sharply in trading today following uninspiring news related to the chip behemoth’s second-quarter results. Although sales just north of $8 billion and share net of $0.27 were both roughly in line with expectations, the company’s outlook for the remainder of this year is not quite so favorable. More precisely, management now expects the gross margin to be 60% plus or minus a couple of percentage points, compared with prior guidance of 62%. This primarily reflects increased revenue of lower-margined products such as flash memory chips, chipsets, and motherboards. What’s more, a slight reduction in average selling prices of microprocessors and a slower-than-anticipated reduction in manufacturing costs per unit will also likely hinder profits. As a result of the recent news, we have lowered our 2004 share-net target, from $1.25 to $1.20. Intel shares remain ranked 3 (Average) for Timeliness.
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From the August IAS: Brown & Brown’s second quarter results indicate continued execution of its growth strategy. Total earnings and revenue each increased 15%, including 5% internal revenue growth with the balance coming from acquisitions. EPS expanded 12%. The company also raised $200 million in the debt market at fixed coupon rates of 5.7-6%, which management refers to as “dry powder” for future acquisitions. Going forward, the company is expecting lower internal growth, as the improving economy will fail to compensate for nationwide price declines in the commercial property insurance industry. With internal growth slowing, Brown’s success becomes more dependent on its proven ability to acquire and integrate good companies. BRO (44.75) is a buy up to 39.
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Sysco Corporation, the food wholesaler–not the manufacturer of computer routers, is another solid buy candidate. SYY is a high quality growth company.
SYY made the Forbes’ 2004 list of the 26 best managed companies in America. Value Line gives SYY its highest ratings for both financial Strength (A++) and earnings persistence (100). SYY is a large company with annual sales of more then $8 billion.
The first call consensus EPS five-year growth rate is 15%. The SSG above uses a more conservative EPS growth rate of 11.9%. Using this lower rate, projected average return over five years is 11.3% and the total return (assuming sale at a high PE) is 14.5%. The upside downside ratio is 3.7.
This would be a particularly good stock for our portfolio since it is in an industry that we don’t hold.
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Medtronic is one of two stocks to consider buying during the month of October. (The other is Health Management Associates.)
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Health Management Associates is one of two stocks to consider buying during the month of October. (The other is Medtronic.)
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What is the Portfoilio Evaluation and Review Technique (PERT) Report? (Here is a recent PERT report for Moose Pond Investors.) The following description is borrowed from the NAIC Toolkit manual.
“The PERT report is the first defensive weapon in your portfolio management arsenal. This report deals with two main issues. The foremost is the trend in the companies’ performance; of lesser importance is a current value assessment of the stocks. A third item—of interest, but of least importance—is the stock’s dividend and yield. That information is found in the first and third column of the report, on either side of the company’s name.
“Columns 5 through 8 represent the heart of the PERT Report. They reveal, respectively, the percentage difference in quarterly earnings per share, quarterly pre-tax profits, quarterly sales, and the trailing 12-months’ earnings per share over the same figures for a year ago.
“While quarterly changes are not, in themselves, important enough to warrant taking some immediate action, they are significant alert signals to detect the possible onset of longer-term trends.”