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StockScouter stays strong with energy, housing
MSN Money's stock-rating system is well ahead of a flat market so far this year with a 5%-plus return. For July, its favored sectors again include energy and housing stocks.
By Jon D. Markman
As we close the book on another dull first half of the year in the market, its time to score another big win for StockScouter. In the first six months of 2005, the proprietary stock-rating system of MSN Money once again provided readers with a statistically sound path toward market-beating profits by guiding them unswervingly toward energy producers and homebuilders.
Whether you rebalanced StockScouters 50 top-rated stocks every month, bought the 50 top-rated stocks on Jan. 2 and held through June 30, or bought the 20 top-rated stocks that I listed in my column on Jan. 5, you scored an advance of 5% to 7% so far this year.
While that would be a rather average gain in most years, it is a terrific result in 2005. Nearly all of the broad market indexes ended the first half of the year slightly below flat or well in the red.
| 2005 first-half changes for broad indexes | | Index | 2005 2nd qtr. % change. | 2005 YTD % change. | | Dow Jones Industrial Average ($INDU) | -2.18% | -4.50% | | Dow Jones Transportation Index ($TRAN) | -6.14% | -7.84% | | Dow Jones Utilities ($UTIL) | 7.89% | 16.20% | | Dow Jones Wilshire 5000 ($DWC) | 2.05% | -0.56% | | Nasdaq Composite ($COMPX) | 2.89% | -5.49% | | Nasdaq 100 ($IQX) | 0.74% | -7.86% | | Russell 2000 ($RUT.X) | 4.00% | -1.74% | | S&P 100 ($OEX.X) | -0.67% | -2.88% | | S&P 500 ($INX) | 0.91% | -1.49% | | S&P Financial Index ($SPSY) | 3.65% | -3.58% | | S&P Midcap 400 ($MID.X) | 3.96% | 3.69% | | S&P Small Cap 600 ($SPCY) | 3.69% | 1.48% |
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The StockScouter system rates 6,000 stocks that trade on U.S. exchanges from 1 to 10, with 10 being best. Ratings are based on a quantitative assessment of their fundamental growth, valuation, price-trend and insider-buying trends. Our regularly published lists of 20 to 50 stocks take the method one step farther by choosing only the top-rated stocks that also have the greatest number of market tailwinds" propelling them forward. That is, we want stocks that, in addition to simply being strong on their own merits, are in industrial sectors, market capitalization groups or growth vs. value style groups that the market favors.
A pretty strong record
Since we launched StockScouter in June 2001, a portfolio of the 50 stocks rebalanced monthly has recorded a gain of 112%, vs. a negative 1% return of the S&P 500. StockScouter has recorded its big gains because it provides a strictly mathematical approach to company and stock performance. As such, it is not caught up in emotional debates, such as whether an industry should be avoided due to the potential for a sharp sell-off during a period of rapid appreciation. As such, it has steadfastly recommended that investors stay in energy and homebuilding stocks for the past year and a half, and it continues to do so.
Although it may seem obvious now that energy was the place to be this year, that wasnt so in January. Back then, the price of crude oil was coming down hard off its late-November peak around $55 per barrel -- and spent the first week of 2005 sliding toward $40. But just as forecasts calling for crude to plunge toward the $30-per-barrel area were reaching a crescendo in mid-January, the price started to inch higher. Except for a modest correction from March to May, light sweet crude in New York has kept on advancing -- to the $60 level and beyond.
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Theres no telling what the next month or two will hold, of course. At higher crude oil prices, it becomes more economical to search for and produce more oil, which could depress prices by adding to supply. Also, higher prices tend to suppress demand, which also conspires to cut prices. Both results would push down the stocks that StockScouter has flagged for investors to consider.
Despite its success, our system is not backing off its bet just yet. For the next six months, the StockScouter system is putting a third of its focus into energy, recommending 18 oil-and-gas exploration or services plays among its 50 choices. It also recommends seven residential-construction plays: four homebuilders, two construction-materials providers and one real estate investment trust. Here are the first 20; companies in the energy complex are bolded.
Click here for the full list of 50.
| Energy's big share of StockScouter picks | | Company | SS Score | June 30 close | | American Campus Communities (ACC, news, msgs) | 10 | $22.65 | | Armor Holdings (AH, news, msgs) | 10 | $39.60 | | Alamosa Holdings (APCS, news, msgs) | 10 | $14.00 | | American Vanguard (AVD, news, msgs) | 10 | $20.90 | | Aviall (AVL, news, msgs) | 10 | $31.79 | | Brunswick (BC, news, msgs) | 10 | $43.56 | | Beacon Roofing Supply (BECN, news, msgs) | 10 | $27.43 | | Bright Horizons Family (BFAM, news, msgs) | 10 | $40.78 | | BJ Services (BJS, news, msgs) | 10 | $53.07 | | Minas Buenaventura (BVN, news, msgs) (Buenaventura Mining) | 10 | $22.98 | | Cal Dive International (CDIS, news, msgs) | 10 | $52.94 | | Chesapeake Energy (CHK, news, msgs) | 10 | $23.08 | | Chico's FAS (CHS, news, msgs) | 10 | $34.90 | | Cabot Oil & Gas (COG, news, msgs) | 10 | $35.49 | | Conn's (CONN, news, msgs) | 10 | $24.56 | | Callon Petroleum (CPE, news, msgs) | 10 | $15.02 | | Copart (CPRT, news, msgs) | 10 | $24.00 | | CARBO Ceramics (CRR, news, msgs) | 10 | $78.66 | | Denbury Resources (DNR, news, msgs) | 10 | $39.69 | | Diamond Offshore Drilling (DO, news, msgs) | 10 | $53.92 |
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Before going on to highlight some of the new names, let me note that among Scouter's best energy bets for the past year and a half have been the companies that transport energy rather than produce it. A top pick in January was Hornbeck Offshore Services (HOS, news, msgs), which delivers supply vessels to drillers operating in the Gulf of Mexico. Its up about 43% in 2005. Eighteen months ago, as you can see in this January 2004 column, the system picked two other shippers -- General Maritime (GMR, news, msgs) and Tsakos Energy Navigation (TNP, news, msgs) -- that have clocked 150% and 114% gains, respectively, through July 1.
In that context, StockScouters new recommendation of Cal Dive International (CDIS, news, msgs) is interesting. It does have its own oil-and-gas holdings, but its primary role is in marine contracting: It provides construction services, including robotics and manned diving, to offshore energy producers in the Gulf of Mexico and North Sea.
Likewise, CARBO Ceramics (CRR, news, msgs) makes products that help oil-and-gas producers get the most out of their out of their wells by fracturing rock strata. It also sells fracture-simulation software and fracture-design services, as well as mapping and diagnostics. More traditional energy plays on the list are Oklahoma City-based driller Chesapeake Energy (CHK, news, msgs), whose executives have been avid buyers of their stock every time it dips from its peaks; and Natchez, Miss.-based Callon Petroleum (CPE, news, msgs), which focuses on properties in the Gulf of Mexico and onshore in Alabama and Louisiana.
Yet there is more to StockScouters picks this month, as the system considers a broad range of tailwinds to be in favor. It likes companies in basic industries, capital goods, consumer durables, retailing and utilities, for instance; both value and growth styles; and tiny, small- and medium-sized companies. The only groups it is neutral about are large-cap stocks of all stripes, technology, health care, banks and transportation companies.
Among its more interesting real-estate recommendations is American Campus Communities (ACC, news, msgs), which came public last summer. It acquires, develops, builds and leases student-housing properties at colleges around the United States. Through the end of last year, it reported owning 13,000 beds outright and managing another 11,300 for third parties. American Campus pays a 3.7% yield and earned $6.5 million over the last year on almost $68 million in revenue.
Potential bargains
While many of the stocks that appeal to StockScouter are not too far from their one-year highs, there are plenty that have traded flat for the past few months. Among them are Brunswick (BC, news, msgs), the Lake Forest, Ill.-based maker of motorboats, marine engines, bowling balls and billiard balls. Shares peaked in December -- and again in April -- at about $49.70. Since then, they have traded down to the low $40s. This is the type of mid-cap company that finds a place in the portfolios of fund managers who specialize in growth at a reasonable price. Brunswick is expected to grow earnings 20% this year and next year, yet trades at a price/earnings multiple of 13. The multiple is that low because investors are often skeptical about companies that regularly acquire other firms, as Brunswick does; the practice muddies the water for accounting analysis.
Moving up and away from the water, another fast-grower that the system appreciates is Aviall (AVL, news, msgs), which supplies parts and supply-chain management to the aviation industry and government. Like Brunswick, this profitable, Dallas-area-based small-cap is growing earnings at a steady clip -- greater than 20% in the past couple of years -- and yet carries a very reasonable price/earnings multiple of 18. The mutual fund with the largest holding in the company is the well-regarded Columbia Acorn A Fund (LACAX). Formerly the Liberty Acorn Fund, this has done a great job over the years of finding and nurturing strong, small businesses.
Aviall traded as low as $4.50 in 2000 but has moved up since to the mid-$30s. As an example of the kinds of deals it seeks, the company announced in January it had a contract from General Electric (GE, news, msgs) to service its GE CF6-50 and CF6-80A aircraft engines over their lifetimes a deal expected to add $5 billion to Aviall revenues over the course of 25 years or more.
Each StockScouter forecast is intended to last six months, but we rebalance the official portfolio monthly to ensure that we are constantly holding the freshest names. As a result, the system is good both for those who wish to trade relatively often or for those who prefer to refresh their list of stocks just once every six months. To continue to find the latest names, check MSN Moneys Market Dispatches columns on the first trading day of each month.
Fine print
To see the latest top-rated picks at any given time, click here. ... This link provides 50 of the systems top 200 names. When all 200 are ranked similarly, then the top 50 ranked alphabetically are listed. To see all 200 stocks ranked 10, use Stock Screener. To see all top-rated stocks in various market cap and sector categories, click here. ... To see the top-ranked plus the ones with the most in-favor tailwinds, click here. If no tailwind categories are in favor, the screen will come up blank. Right now, there are around 56 names.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Greenbook Investment Management. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.
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