by Dan Burrows | February 7, 2014 10:08 am
The Sochi Olympics might just be the thing to take investors’ minds off a worrisome year for stocks so far. The S&P 500 is off roughly 4% so far this year, and it’s getting more difficult to target quality stocks to buy.
True, after such a hot run in 2013, no one was expecting the same kind of crazy gains this year. Indeed, the consensus forecast has the broader market putting up a gain of 7% to 10%, with most of the year ahead of us.
Unfortunately, even if we do have another up year in the market, what’s happened so far is probably a trading pattern we’ll see more and more in 2014 — weeks of sideways to sliding markets, followed by a slow grinding higher to gains.
No, it won’t be fun, but you can rest easier if you own some high-quality stocks that are not only beating the market for the year-to-date, but have actually put up some solid gains.
Any stock that’s up on the year, has a return on equity of greater than 20% and is actually cheaper than the S&P 500 on a forward earnings basis definitely deserves a gold medal in this crummy market. But screening the S&P 500 for stocks that possess such attributes yields a very short list.
With that, here are three of the most promising gold medal stocks to buy now:
Micron Technology (MU) is up 10% for the year-to-date and has tripled over during the past 52 weeks. However, with a forward price-to-earnings multiple of 9, MU stock still is 40% cheaper than the broader market.
At the same time, MU stock looks to be a high-quality name, with a return on equity (ROE) of 20%. A big acquisition helped this maker of solid-state memory post a 42% sequential improvement in revenue for the most recent quarter, while earnings per share beat the Street by a wide margin.
Higher prices in Micron’s market led Moody’s to raise its rating on its debt, and will help the company swing back to profitability this year.
Don’t laugh at Pitney Bowes (PBI). PBI’s combination of snail-mail services and digital-age software and hardware solutions is driving earnings and revenue growth. Fourth-quarter earnings per share easily beat Wall Street estimates on a decent 1.5% gain in sales.
After rallying sharply in January, PBI stock is up 6% for the year-to-date, and it’s up a whopping 83% in the past year. Yet, PBI stock trades at 12 times forward earnings when the S&P 500 fetches 15. Furthermore, PBI stock has an ROE of 72%, which screams quality.
Company guidance has PBI stock generating earnings of $1.75 to $1.90 a share this year, vs. Wall Street estimates of $1.87, so that’s promising.
PBI stock also offers a nice 3.1% dividend yield, though it should be pointed out that Pitney Bowes halved its payout just a year ago.
Defense contractor Raytheon (RTN) is off to a good start in 2014. RTN stock is up 5% for the year-to-date, putting it well ahead of the broader markets. Take a step back, and the outperformance becomes more impressive — during the past 52 weeks, RTN stock is up 76%, vs. an 18% gain for the S&P 500.
True, fourth-quarter results showed that revenues fell 9% to miss analysts’ estimates, but earnings per share exceeded the Street estimate by 9 cents, helped by strong international sales.
Best of all, RTN stock goes for 12 times forward earnings — a 20% discount to the broader market, while ROE stands at an enviable 20%. Furthermore, RTN stock throws off a respectable dividend yield of 2.3%, so you get a little backside protection, too.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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