Data, Data, Everywhere
IBD, S&P, Value Line and Zacks
AVT, PCS and TRW
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As I have mentioned a time or three, I love numbers. I can spend hours studying a spreadsheet full of numbers trying to find the magic combination or formula that will produce guaranteed winners in the stock market.
I realize most investors don’t have the time or desire to create their own database and stock rating system, but I think I can help with a few quick ideas.
I have become quite familiar with data and ratings provided by Investor’s Business Daily (IBD), Standard & Poor’s (S&P), Value Line and Zacks. All of these investment services, which are available for an annual fee, provide reliable data plus buy and sell ratings for many companies. Do you want to find more information on any stock? All of these services, and others, some of which are free like MSN, offer forecasts, ratings, data and more. Here is a quick summary of what the four fee-based services offer.
IBD offers the Investor’s Business Daily financial newspaper, charts, ratings, downloadable data and online screening. The company creates several different ratings, and I like the SmartSelect Composite Rating, which takes into consideration earnings and stock price momentum, group momentum and other factors. The Composite Rating is scaled from 1 to 99, with 99 the best Rating. The highest rated stocks are likely to be high risk.
Standard & Poor’s, founded in 1860, is the oldest and probably the most comprehensive investment service for common stocks. The S&P 5-Star rating system ranks stocks according to their total return potential compared to the S&P 500 Index, an index of 500 of the largest companies listed on U.S. stock exchanges. The ratings range from one star to five stars with five stars indicating a strong buy. Stocks rated “strong buy” tend to be conservative. S&P stock reports are available for free on many brokerage sites for account holders.
Value Line has been around for 80 years and offers one-page summaries for individual stocks as well as electronic data services. The Value Line Timeliness Rank measures probable price performance during the next six to 12 months, relative to the other 1,700 stocks covered in their primary service. The top rank of one (ranked one to five) is assigned to the top 100 stocks. Value Line’s top ranked stocks have risen 26.7% per year during the past 23 years. Stocks with strong buy ratings have a tendency to be moderate risk.
Zacks Investment Research was started in 1978 and offers stock reports, buy and sell ratings, and online screening. The Zacks Rank is based on earnings estimate revisions by research analysts throughout the industry. The Rank is divided into numbers one to five with one signaling a strong buy and five, signaling a strong sell. Zacks’ top-ranked stocks have risen 28.1% per year during the past 23 years. Stocks with strong buy ratings are likely to be high risk.
I have found it helpful to find stocks that have high ratings in at least two of these research services. If I am searching for low risk stocks, I look for stocks that have high Standard & Poor’s Stars ratings and high Value Line Timeliness ratings. If, on the other hand, I am seeking stocks with some zip, I select stocks with high IBD and Zacks ratings.
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I pulled up a list of Value Line stocks with Timeliness Ratings of one, and as usual 100 stocks popped up. In Value Line’s view, all 100 stocks will outperform the stock market indexes for the next six to 12 months. Then I downloaded all Standard & Poor’s stocks with S&P Stars Ratings of five, their “Strong Buy” rank. Only 77 stocks came up, but all are considered by S&P to be superior investments.
I use a matching program, created by my loving wife who happens to also be a computer programmer, which compares the stocks from the two services and finds stocks that are the same or a “match” in both services. My program turned up eight stocks with strong buy ratings from both Value Line and Standard & Poor’s. My past experience using this methodology has shown that these eight stocks will perform very well, on average, during the next 6 to 12 months. Included in the list of eight were stalwarts Hewlett-Packard (HPQ) and Wal-Mart (WMT). Also included were Avnet (AVT), Metro PCS Communications (PCS) and TRW Automotive (TRW), which are a tad more risky than HPQ and WMT, but look more attractive to me and are described below.
Avnet (AVT) is a distributor of electronic components, enterprise computer and storage products and embedded subsystems. From suppliers, the company receives electronic components, computer products and software, and resells to manufacturers, sometimes with assembly or other value added by Avnet. The company sells to more than 300 electronic component manufacturers. To retailers, Avnet markets and sells mid- to high-end servers, data storage, software and the services required to implement these products and solutions.
Corporations are fueling demand for storage products and networking gear, as those companies upgrade their data centers to improve efficiency. Avnet’s recent purchase of Bell Microsystems will add substantial sales in 2011. I expect 16% earnings per share (EPS) growth during the next five years. At 9.3 times current EPS, AVT shares are a bargain. The company does not pay a dividend.
Metro PCS Communications (PCS) is a wireless telecommunications provider. The company offers wireless broadband mobile services under the MetroPCS brand in selected metropolitan areas in the U.S. over its own licensed networks or the networks of affiliates.
PCS provides a variety of wireless communications services to its subscribers without long-term contracts, but with paid-in-advance, flat-rate, unlimited usage plans that include all applicable taxes and regulatory fees in the monthly price. PCS’s unique plans are sold at a low monthly fee and are attracting many new customers at the expense of larger providers. The company has eight million subscribers.
Metro PCS’s aggressive marketing of flat-rate wireless plans with unlimited usage is winning new customers at a rapid rate. I forecast 24% EPS growth for the next five years or longer. At 17.2 times earnings, PCS shares are undervalued.
TRW Automotive (TRW) is a world-wide supplier of automotive systems and components to automotive original equipment manufacturers (OEMs). The company’s operations primarily encompass the design, manufacture and sale of safety related products. Products include braking and steering systems, airbags and seat belts, and crash sensors.
TRW is aggressively expanding operations in Brazil and China to meet customer desire. Demand in the U.S. is also picking up, and auto sales in Europe, where TRW has a large presence, should start to see improvement in the second half of 2011. I believe earnings per share will increase 19% per year during the next five years. At 10.4 times EPS, TRW shares are a bargain.
Until next time—be kind and friendly to everyone you meet.
Sincerely,
J. Royden Ward
For Cabot Wealth Advisory
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