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Picking stock winners hasn't been difficult in the past five years, given the market's rebound following the financial crisis of 2008.
But there have been companies left behind, many undeservedly so.
Following our recent discussion of 5 century-old companies that have greatly outperformed the broad market, a reader suggested we identify "10 stocks that are well-run with great balance sheets that have not participated in the bull run-up these past five years."
That was an excellent suggestion, but things can get complicated when you look at a large set of data. "Great balance sheets" is actually a highly subjective term. For example, if a company has a boatload of cash and no debt, that might be a good thing. But a rapidly expanding company might be better served by borrowing heavily to feed its growth.
There are no hard-and-fast rules enabling us to identify companies in different industries and at different growth stages by measurements of balance-sheet health. So in order to highlight strong companies that have been left behind by the bull market over the past five years, we have taken the following steps. Beginning with the S&P 500 (.SPX), we isolated companies with five-year total returns, including reinvested dividends, that were lower than the index's five-year total return of 132% through Monday's close.
This left us with 199 stocks trailing the broad market.
The three worst performers among S&P 500 components over the past five years make up an interesting list of energy names. The weakest has been First Solar Inc. (FSLR), which has declined more than 64%, reflecting the collapse of the solar-panel market. Next is Peabody Energy Corp. (BTU), down 39%, followed by Transocean Ltd. (RIG), with a loss of 35%.
Getting back to our reader's suggestion, rather than measure balance-sheet health by looking at debt-to-equity ratios or quick ratios, we limited the list of underperformers to companies that have increased revenue for five straight years. That brought us down to 19 stocks.
We could then trim the list further by limiting our "underperforming revenue growers" to those that have also increased earnings per share over the past five full calendar years. That's an imperfect way of "combing for quality," but at least any effect of dilution from common-equity offerings or share-count increases brought about by executive compensation will be reflected in EPS.
This approach would leave us with just three companies: Wal-Mart Stores Inc. (WMT), Family Dollar Stores Inc. (FDO) and Bed Bath & Beyond Inc. (BBBY). Investors have made clear their suspicions of big-box retailers as Internet sales boom, punishing consistent earnings growers.
Here's the entire list of 19 underperforming S&P 500 components that have boosted revenue for five consecutive years, followed by commentary on five of them:
|Company||Forward p/e||Total return YTD||Total return 5 yrs|
|Leucadia National Corp. (LUK)||N/A||-10%||16%|
|Darden Restaurants Inc. (DRI)||17.5||-8%||51%|
|Laboratory Corp. of America Holdings (LH)||13.7||8%||51%|
|Target Corp. (TGT)||12.6||-5%||61%|
|Baxter International (BAX)||13.7||8%||70%|
|Urban Outfitters, Inc. (URBN)||15.2||-4%||70%|
|BB&T Corp. (BBT)||11.5||1%||73%|
|Wal-Mart Stores Inc. (WMT)||13.6||1%||76%|
|Coach Inc. (COH)||15.0||-22%||85%|
|Family Dollar Stores Inc. (FDO)||16.8||-11%||89%|
|Patterson Companies Inc. (PDCO)||17.0||-1%||99%|
|IntercontinentalExchange Group Inc. (ICE)||15.0||-10%||100%|
|C. R. Bard, Inc. (BCR)||15.2||5%||104%|
|Bershire Hathaway Inc. - Class B (BRK/B)||18.3||7%||104%|
|Bed Bath & Beyond (BBBY)||11.3||-23%||106%|
|Citrix Systems Inc. (CTXS)||17.4||-6%||111%|
|Express Scripts Holding Co. (ESRX)||12.1||-5%||111%|
|Stryker Corp. (SYK)||14.9||5%||111%|
|Kroger Co. (KR)||13.1||18%||128%|
Please see accompanying article for all list criteria.
Total returns assume dividends are reinvested. Source: FactSet, based on closing prices on May 5, 2014
There's only one bank on the list, which may not be surprising, considering the industry's slimming down since the credit crisis and the sector's remarkable recovery. BB&T Corp. (BBT) of Winston-Salem, N.C., has consistently grown its annual revenue, but has returned just 73% over the past five years. The stock closed at $37.50 Monday, returning 1% this year and trading for 11.5 times the consensus 2015 earnings estimate of $3.25, among analysts polled by FactSet. Based on a quarterly payout of 24 cents, the shares have a dividend yield of 2.56%.
Credit Suisse analyst Craig Siegenthaler on Monday upgraded BB&T to "outperform" from "neutral," while raising his price target for the shares to $46.50 from $43. The analyst, in a note to clients, wrote that the value of the bank's insurance broker subsidiary was "underappreciated" in the stock's valuation. Siegenthaler added that while other banks have been allocating significant earnings to repurchase stock, BB&T "is patiently building excess capital which may eventually be deployed into accretive acquisitions." He listed First Horizon National Corp. (FHN) of Memphis, Tenn., and Synovus Financial Corp. (SNV) of Columbus, Ga., as possible targets for BB&T.
Shares of Leucadia National Corp. (LUK) have returned only 16% over the past five years through Monday's close at $25.57, the worst performance among S&P 500 components that have achieved revenue growth for five consecutive calendar years. The stock is down 10% this year, while the S&P 500 has returned 3%.
Leucadia is headquartered in New York and owns Jefferies Group LLC, the investment bank and broker-dealer, which became a subsidiary of Leucadia in March 2013. Prior to that, Leucadia held a 28% stake in Jefferies for several years.
Leucadia has a diversified set of holdings, with operations in the energy, plastics, timber, mortgage finance and beef-packaging industries, among others.
The company earned $362 million, or $1.06 a share, during 2013, down from $865 million, or $3.58, in 2012. Results for the prior year included $1.18 billion in income and gains related to Fortescue Metals Group. Leucadia sold its interest in Fortescue in 2012.
Leucadia has built its revenue nearly 10-fold through acquisitions, to $10.58 billion in 2013.
Laboratory Corp. of America Holdings (LH) is commonly known as LabCorp, and is headquartered in Burlington, N.C. The company operates clinical laboratories and provides services at 1,700 patient centers worldwide.
LabCorp's stock has returned 52% over the past five years, through Monday's close at $98.25. The stock is up 7.5% this year. The shares trade for 13.7 times the consensus EPS estimate of $7.19. The consensus 2013 EPS estimate is $6.66.
The company has grown its revenue 29% over the past five years, to $5.8 billion during 2013.
LabCorp reported first-quarter earnings of $113.5 million, or $1.31 a share, down from $147.2 million, or $1.56, a year earlier. On an operating basis, excluding amortization, restructuring and other charges, earnings were $210.9 million, or $1.51 a share, declining from $269.5 million, or $1.74, a year earlier. The company estimated its adjusted EPS was lowered by 22 cents because of severe winter weather. Sales were down 1% from a year earlier, to $1.431 billion.
Despite the rough first quarter, LabCorp raised its guidance for 2014 to adjusted EPS ranging from $6.40 to $6.70, from the previous range of $6.35 to $6.65.
Baxter International Inc. (BAX) of Deerfield, Ill., makes products for use by people with various chronic diseases and conditions, distributing through retail channels and also to hospitals and heath-care providers. The stock has returned 70% over the past five years, while the company's annual revenue has grown 24% to $15.26 billion in 2013.
The stock is up 8% this year through Monday's close at $74.51 and trades for 13.7 times the consensus 2015 EPS estimate of $5.44. The consensus 2014 EPS estimate is $5.14. Baxter on Monday raised its quarterly dividend to 52 cents from 49 cents. Based on the increased dividend, the shares have a yield of 2.79%. The dividend has more than doubled since 2008, and the company has been trying to pay out roughly 40% of its earnings.
Baxter reported first-quarter net income of $556 million, or $1.01 a share, up slightly from $552 million, or $1, a year earlier. But figures for both periods included significant after-tax charges related to the acquisition of Gambro AB, a dialysis-equipment manufacturer headquartered in Lund, Sweden. Excluding special charges, earnings for the first quarter rose to $652 million, or $1.19 a share, from $601 million, or $1.09, a year earlier.
Sales were up 15% to $3.95 billion, although the adjusted gross margin declined a bit, to 51% from 51.7%.
The inclusion of Berkshire Hathaway Inc. (BRK/B) on the list may surprise some investors, given CEO Warren Buffett's legendary long-term performance, but the conglomerate's Class B shares have trailed the S&P 500 significantly, with a total return of 104% over the past five years through Monday's close at $126.61.
Berkshire has major holdings in the insurance, railroad, utility and power generation and distribution industries. The company last year partnered with 3G Capital to acquire Heinz Corp.
Berkshire has grown revenue 63% over the past five years to a whopping $175.5 billion during 2013.
The Class B shares trade for 18.3 times the consensus 2015 EPS estimate of $6.93. The consensus 2014 EPS estimate is $6.39. The shares aren't cheap, but that makes sense, considering what a solid, conservative set of businesses the company has put together.
The company's most recent M&A was announced Friday, when Berkshire Hathaway agreed to buy AltaLink, a utility provider in western Canada, from SNC-Lavalin Group Inc. for about $2.9 billion in cash. Nearly all of Berkshire's electric utility business is regulated distribution, and that is a hot market, as discussed in 5 utility companies that are now takeover targets.