Loading...
 

In this screen, we focused our attention on high-quality stocks that also offer worthwhile price-appreciation potential to 2016-2018. For starters, we restricted our search to equities that get our Highest Rank (1) for Safety. Within our universe of roughly 17,000 stocks, only about 120 met this criteria. The two key components that determine our rankings are Financial Strength and Stock Price Stability. Notably, investors who put the most emphasis on these qualities are typically willing to sacrifice some long-term potential in return for the added downside protection that these equities afford.

Not surprisingly then, issues ranked Highest for Safety typically don’t screen well for 3- to 5-year appreciation potential. As it stands today, less than 20 offer appreciation potential that exceeds 50%, the current median for the Value Line universe. Those that made the cut can be found on the list below. Of these, we have chosen to highlight Check Point Software Technologies Inc. (CHKP) and Intel Corporation (INTC - Free Intel Stock Report).

Check Point Software Technologies Inc.

Check Point, which was founded in 1993, develops, markets, and supports Internet security solutions. The company is headquartered in Israel, but generates 45% of its revenues in the Americas, mostly in the United States. Its offerings include firewall and virtual private network solutions. Demand for its products and services has risen at a healthy clip in recent years, with sales surpassing $1.3 billion in 2012, more than double the 2006 tally. Earnings increased at a slightly faster rate than average last year—roughly 17% per annum over this stretch—and Check Point appears poised to build on this success in 2013.

We expect results for the March quarter, which are scheduled to be released on April 22nd, to show revenue and earnings growth of 7% and 13%, respectively. Similar gains are likely for the full year, as well, with the top line climbing 10%, to nearly $1.5 billion and share net forging ahead 13%, to $3.35. A pick-up in licensing revenues and solid gains in the software updates maintenance and subscription segment ought to help drive the results.

Meanwhile, Check Point stock has faltered in the past year, but we think it can be a rewarding holding for patient investors. Granted, the Internet security space does include some formidable competitors. As such, management will need to effectively invest in research and development to defend market share. Given this, however, demand for the company’s services should continue to build in the 3 to 5 years ahead, as companies and consumers look to protect themselves from the constantly evolving threats presented by malicious Web-based software.

The company’s strong finances also augur well for its long-term prospects, in our view. Check Point has no debt on its balance sheet. Meanwhile, cash has been building up, and now surpasses $1.5 billion (or about $7.50 a share). The company has deployed some of its cash to repurchase stock, and this activity may well continue. Check Point doesn’t pay a dividend, but it appears to have ample financial resources to undertake such an initiative if it chooses.

Intel Corporation

Another high-quality stock that has produced underwhelming returns in recent years is Intel Corp. The company is a leading manufacturer of integrated circuits. Its products, including microprocessors, microcontrollers, and memory chips, generate annual revenues north of $50 billion, the vast majority of which originate outside the U.S.

Sales at the semiconductor giant have stagnated in recent years, and we expect only modest gains in 2013 in the face of lackluster demand from the personal-computer market. Too, the near-term earnings outlook is unexciting, with share net likely slipping 8% this year, to $1.95.

Longer-term, the prospects for modest growth in the personal-computer market will likely continue to present a challenge for Intel. Still, we expect revenues to get back on the growth track in 2014, and remain on the upswing over the pull to 2016-2018. By then, annual earnings figure to be approaching $3.50 a share. A stronger global economy should help in this regard. Too, attractive growth opportunities exist for chipmakers beyond the PC market, and this one’s size and financial strength should put it in good position to capitalize on these. In sum, we are fairly optimistic about the 3 to 5 years ahead for Intel, and think that it has a good chance to deliver worthwhile price appreciation for its shareholders over that stretch. In the meantime, the company pays out a healthy dividend, which provides a yield of roughly 4.0%.

 

Company

Ticker

AmerisourceBergen

ABC

Bard (C.R.)

BCR

Bed Bath & Beyond

BBBY

Cardinal Health

CAH

Check Point Software

CHKP

Dollar Tree, Inc.

DLTR

Du Pont

DD

Edwards Lifesciences

EW

Intel Corp.

INTC

Intuit Inc.

INTU

Kyocera Corp. ADR

KYO

Laboratory Corp.

LH

Microsoft Corp.

MSFT

Paychex, Inc.

PAYX

PepsiCo, Inc.

PEP

Royal Dutch Shell 'A'

RDS/A

Teva Pharmac. ADR

TEVA

Total ADR

TOT

Varian Medical Sys.

VAR

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.