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- Don D., California
Stock Screen: Conservative Stocks - September 12, 2012
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 Summary & Index section of The Value Line Investment Survey, that cull out stocks earning the 1 (Highest) Safety Rank and the 2 (Above Average) 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 issues. A couple of interesting stocks that recently made these elite lists include: Nike, Inc. “B” (NKE) and Celgene Corp. (CELG).
Nike, Inc. “B”
Nike is the largest seller of athletic footwear and apparel in the world. It designs, develops and markets products that are produced mainly outside the United States. Running, training, basketball, soccer, sport-inspired casual shoes, and kids’ shoes are currently the top-selling footwear categories, but Nike also makes footwear designed for baseball, cheerleading, football, golf, lacrosse, outdoor activities, skateboarding, tennis, volleyball, walking, wrestling, and other athletic and recreational uses. Nike’s shoes are designed for athletic use, but a large percentage of them are worn for casual purposes. Products are sold “Direct to Consumer” through Nike-owned retail stores and nike.com, as well as through third-party retail and web outlets. The company's wholly owned subsidiaries include Cole Haan, Converse, Hurley, and Umbro.
Nike reported strong top-line sales at its 2012 fiscal year end (closed May 31st). Despite macroeconomic pressures at home and in international markets, the shoe giant realized strong sales due to its formidable portfolio. However, investors seemed displeased with the lackluster share-earnings results, which led to some selling. Adding to investor unease was news that the company plans to divest both the Cole Haan and Umbro brands. These divestitures will likely lead to lower sales growth moving forward.
However, we are of the view that these shares hold merit for conservative investors. The core Nike brand covers a broad customer base both in the sporting and fashion arenas. Also, expansion of the product lineup and other acquisition-related activities will probably be pursued in the near future. The recent stock-price decline may signal a good entry point for those with an eye on longer-term gains. The solid Financial Strength of the company, coupled with a high Safety score are encouraging.
Celgene Corp. engages in the development and commercialization of therapies to treat cancer and immune-inflammatory diseases. It offers a plethora of therapies, with current sales being dominated by Revlimid (67% of 2011 sales, treats cancer of white blood cells responsible for the production of antibodies), Vidaza (15%), and Thalomid (7%). It also has an extensive pipeline, which includes immunomodulators, oral anti-inflammatory agents, kinase inhibitors, small cell lung cancer treatments, ABI compounds, and cellular therapies.
Celgene has had some short-term challenges of late. At the forefront was the company’s recent European withdrawal of expanded labeling utilization for Revlimid. The drug is already approved in Europe, as a treatment in the relapsed/refractory space, but it was seeking to have the drug’s utilization expanded to multiple myeloma. However, the overseas regulatory board found the Phase III data not to be convincing. The company subsequently withdrew its FDA submission until sometime next year.
Despite the setback, Celgene intends to conduct further trials and resubmit new data in the near future. Another bright spot was the FDA’s acceptance of Pomalidomide for review, a possible drug geared toward the treatment of relapsed/refractory multiple myeloma. A regulatory decision could possibly be attained by early next year. And with other ongoing clinical trials, Celgene will likely attain further commercial success in the 3- to 5-year time frame.
The drug company is financially well positioned to conduct several clinical trials with plenty of cash on hand and an Above Average Financial Strength rating. Furthermore, the solid Safety rank suggests there is less risk here than most equities under our review.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.