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20 best bets for 2004's second half
Riding a 9.5% gain so far this year, StockScouter has sniffed out stocks with the best potential for outperformance in the months to come.
By Jon D. Markman
Coal, oil, gas, diesel engines, recycled steel, paper and industrial sealants sound like a wing of a West Virginia trade show. But they are also the meat and potatoes of a global economic recovery and the principal areas of focus over the next six months for StockScouter, the proprietary stock-rating system on MSN Money.
Over every six-month period since the StockScouter system was developed three years ago, its top-rated picks have powerfully outperformed the market. In 2003, the models Top 50 portfolio rose 52% as a group. So far this year:
- The 50 top-rated stocks listed in my Jan. 7 column (StockScouter likes oil, shipping for 2004") are up 4.5% as a group.
- The 20 stocks highlighted as the best bets in that column are up 9.5% -- led by a 79% advance in Tsakos Energy Navigation (TNP, news, msgs), a 55% gain in General Maritime (GMR, news, msgs) and a 50% move in Stelmar Shipping (SJH, news, msgs).
- Over the same time span, the Dow Jones industrials ($INDU) and Nasdaq Composite ($COMPX) are down 1%, the S&P 500 Index ($INX) is up 1%.
Second half has a different look
StockScouters top 20 stocks for the second half of the year are listed below. They are similar to stocks listed for the first half of the year in their focus on energy, though there are no shipping stocks and a much greater emphasis on industrial production this time around. Also, there are many more midcap and large-cap stocks listed as potential outperformers in the second half than in the first half of 2004, when smaller stocks were the prime focus.
| StockScouter's top stocks for 2004's second half | | Name | June 29 price | Market Cap | Sector | | Gentiva Health Services (GTIV, news, msgs) | $16.44 | $415 million | Consumer non-durables | | Metal Management (MTLM, news, msgs) | $19.59 | $459 million | Basic industries | | Veritas DGC (VTS, news, msgs) | $22.63 | $756 million | Energy | | EnPro Industries (NPO, news, msgs) | $23.16 | $480 million | Capital goods | | Tesoro Petroleum (TSO, news, msgs) | $27.01 | $1.7 billion | Energy | | Massey Energy (MEE, news, msgs) | $27.73 | $2.1 billion | Energy | | Burlington Resources (BR, news, msgs) | $35.58 | $14 billion | Energy | | Arch Coal (ACI, news, msgs) | $36.16 | $1.9 billion | Energy | | Boise Cascade (BCC, news, msgs) | $37.48 | $3.3 billion | Basic industries | | American Standard (ASD, news, msgs) | $39.76 | $8.5 billion | Capital goods | | Toll Bros. (TOL, news, msgs) | $41.54 | $3.1 billion | Consumer durables | | O'Reilly Automotive (ORLY, news, msgs) | $46.18 | $2.5 billion | Consumer durables | | Mettler-Toledo Int'l (MTD, news, msgs) | $49.32 | $2.1 billion | Capital goods | | Kerr-McGee (KMG, news, msgs) | $53.85 | $5.4 billion | Energy | | Cummins (CMI, news, msgs) | $62.93 | $2.7 billion | Capital goods | | Meritage (MTH, news, msgs) | $68.07 | $895 million | Consumer durables | | Toro (TTC, news, msgs) | $69.45 | $1.6 billion | Consumer durables | | Valero Energy (VLO, news, msgs) | $72.16 | $9.2 billion | Energy | | ConocoPhillips (COP, news, msgs) | $75.65 | $51 billion | Energy | | Toyota Motor (TM, news, msgs) | $81.73 | $147 billion | Consumer durables |
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Serious sector and size bets are a hallmark of StockScouter, as the model looks for stocks that are likely to go up the most over the next six months with the least amount of volatility and are also in sector, market capitalization and style groups favored by investors at the time of selection. In 2001 and 2002, the emphasis was on small-cap housing and regional bank stocks. In 2003, the focus was on small-cap regional banks, real estate investment trusts and energy. (Many of the financial names on that list were merged out of existence in the great rush among banking super-regionals to consolidate their industry.)
Unknowns and old standbys
Its common for StockScouter to draw a bead on relatively cheap, unglamorous companies that are well outside the mainstream of brokerage and media attention. Some examples:- Metal Management (MTLM, news, msgs) is one of the nations largest metal recyclers, taking scrap steel, aluminum, copper, brass and titanium and processing it into new forms. Analysts have regularly raised estimates over the past six months as scrap steel prices have risen. On June 14, the company reported net sales of $1.1 billion for its latest fiscal year, a 41% increase from the prior year; earnings before interest, taxes, depreciation and amortization was $100.4 million in the period, up 83% from the level of a year before. Still, the company sports a P/E ratio of only 8. The company also sharply reduced debt.
- EnPro Industries (NPO, news, msgs) develops and manufactures sealing products, bearings, compressor systems, vacuum pumps and heavy-duty diesel and natural gas engines. Formerly a division of aerospace conglomerate Goodrich (GR, news, msgs), it also makes specialized tooling at more than 30 manufacturing plants around the United States. Its price/earnings multiple is 12 despite a growth rate north of 14%. Jefferies analyst Farukh Z. Farooqi, one of the few brokerage researchers covering the stock, has raised estimates repeatedly in recent quarters as sales have risen much more strongly than expected. Management said in its last earnings conference call that the fundamental outlook for its business has much improved, and business in the next six months would be at least as strong as in the past six months.
- Massey Energy (MEE, news, msgs) mines, processes and markets high-quality Central Appalachian coal. Leveraging a portfolio of about 2.2 billion tons of this primo high-heat, low-sulfur stuff in 30 underground and 13 surface mines in West Virginia, Kentucky and Virginia, it has generated tons of cash flow as demand has ramped from the power and steel industries. Sales in recent quarters has been brisk, yet the valuation is still relatively low as many investors dont believe the improving story will last and wont give the company credit for overcoming operational difficulties in the past. Wachovia analysts believe the company is on track to surprise investors by avoiding production misses this year that weighed on the stock last year. Massey is the largest coal supplier to the steel industry, and, with demand strong, pricing has improved and boosted margins.
- American Standard (ASD, news, msgs), a brand name for a change, is most famous for bathroom and kitchen fixtures sold to home buyers. But it also makes air-conditioning systems and vehicle control systems for the industrial market. Earnings have held steady in the 12% to 18% range for years, yet the company sells fairly cheaply at a forward price-earnings multiple of 20. Cash flow is strong, and its worth noting that the stock has risen in all but one year of the past seven, making it one of the most consistent names on the board. Last week, management surprised traders by pre-announcing that the current quarters results would come in above expectations.
Of course, StockScouter doesnt know the specifics of any of these stories. It just knows that these companies shares have valuations, ownership, growth and technical trends that are among the top 1% of all companies in the world. Over the next six months, well see if it can maintain its record.
Fine Print
I use this screen to come up with the top-rated StockScouter names. After running the screen, export the results to Excel and eliminate all the stocks whose tailwinds -- sector, market capitalization or style -- are listed as out of favor. Focus on the names that have the most in favor, or, alternatively neutral tailwinds. . . . Visit here to learn more about American Standard. Visit here to learn about Massey Energy. Visit here to learn about EnPro Industries. Visit here to learn about Metal Management.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at sm@jonmark.com; put COMMENT in the subject line. At the time of publication, Markman had positions in no stocks mentioned here.
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