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Stock Screen: Conservative Stocks - December 5, 2011
Value Line offers a number of proprietary measures to help investors identify so-called conservative stocks, the most notable being the Safety Rank. This measure is computed by averaging a stock’s Price Stability score and the company’s Financial Strength Rating. Safety Ranks range from 1 (Highest) to 5 (Lowest) and are distributed roughly in a bell curve, with the greatest number of stocks scoring 3 (Average) and the smallest number at the extremes (i.e. 1 and 5). Thus, selecting stocks that hold the best possible scores (i.e., 1 or 2) would help investors to avoid riskier fare.
Value Line provides screens each week, published in the Index section of The Value Line Investment Survey, that cull out stocks earning the highest Safety Rank and the second-best Safety Rank (presented as two separate screens). This alleviates the need to rummage through on a stock-by-stock basis, trying to find the most conservative fare. A couple of interesting stocks that recently made these elite lists include Unilever PLC (UL) and McKesson (MCK).
Unilever PLC is one of the world’s largest producers and marketers of branded and packaged consumer goods. It conducts business in some 100 countries through around 400 operating companies. The parent holding company, the Unilever Group, operates both Unilever PLC and Unilever N.V. via one Board of Directors and Chief Executive Officer.
The company has completed some key acquisitions over the past year. One of them was Sara Lee’s Personal Care and European Laundry business for 1.2 billion euros. The deal further strengthened Unilever’s skin care and deodorant portfolio, which already includes such commonly used brands as Dove and Axe. More recently, the company purchased Alberto Culver for $3.7 billion. That move added a number of leading personal care brands, including VO5 and Noxema.
Earnings continue to get a boost from emerging markets, which currently account for around 55% of total revenues. Indeed, there have been strong sales growth in such countries as China, India, Mexico, and Argentina, and it appears likely that this trend will persist. On the other hand, economies in Western Europe and North America continue to struggle, which has, of course, squeezed demand for Unilever’s products. We expect more of the same for at least the near term. In all, Value Line analyst, Robert Greene, believes that share net will increase at a respectable rate in the year ahead.
McKesson provides supply, information, and care management products and services designed to reduce costs and improve quality across the healthcare industry. The Distribution Solutions unit (97% of fiscal 2010 sales) distributes drugs and health and beauty care products throughout North America, manufactures automated dispensing systems for retail pharmacies, and provides consulting and outsourcing services to pharmacies and other entities.
The company posted a strong earnings per share advance during the first half of fiscal 2011 (ends March 31, 2012), compared to the year-earlier tally. That partially reflected a strong rise in U.S. pharmaceutical direct distribution and services revenues. The acquisition of US Oncology also helped, as the oncology arena is one of the fastest-expanding segments of the healthcare industry. Another positive has been repurchases of common stock. In fact, over the past six months, McKesson bought back approximately $650 million worth of its own shares. We anticipate continued buybacks in the upcoming quarters, thanks to MCK’s large cash position (nearly $4 billion at present). Generally favorable demand trends have continued during the second half, so Value Line analyst, Erik Antonson, expects full-year share net to advance in the teens, on a percentage basis, for both fiscal 2011 and 2012.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.