I am frequently asked what is different about our approach to rating stocks and how have we have fared on stock picks.
The easiest way to answer this is to talk about the benefits of quantitative modeling and to give a few examples of how our long-term approach works.
TheStreet.com Ratings approach utilizes a quantitative computerized model. Every night we load information on thousands of stocks into our computers and generate views of the whole market, not just a sector. These are consistent views that utilize a series of proprietary algorithms we have developed and fine-tuned over several years.
The net result is that we get action signals normally within a day of major price moves or earnings events for more than 6,000 stocks and ADRs. These are not biased signals. We get both upward and downward trend price indicators, and for those stocks that cross our ratings boundaries we issue recommendation changes to buy, hold or sell.
This objective standard creates ratings on published results, consensus earnings estimates, and real price moves -- not rumors. It is also provides a very convenient way to keep track of the relative values of stocks.
I could go on and detail the micro-steps, none of which could be replicated without a Ph.D. in statistics and five years dedicated to the effort, but what really matters is results. With that said, here are five examples of stocks in different sectors that we rated as buys as of April 1, 2006. We also discuss their outcome over the last 12 months and why we still like them.
So here's the director's cut: five top picks that are still attractive:
We issued a buy rating on July 28, 2005, at $28.70. The stock closed yesterday at $109.91 and is still attractive as a play on the metals cycle.
This $10 billion market-cap steel company also produces specialty materials including super stainless steel, nickel and titanium alloys. Last year, about 75% of sales came from the U.S. and 25% from a variety of international regions.
Recent results have exceeded expectations, and the earnings outlook is very positive for ATI, with an $8.23 consensus earnings estimate for 2008, up 12% from the estimated $7.39 for 2007 which was up dramatically from $5.44 in 2006.
The stock set a new high in January when Allegheny announced that it had signed a long-term sourcing agreement with GE Aviation for the supply of premium titanium, nickel-based super-alloy and vacuum-melted specialty alloy products for commercial and military jet engine applications. The total revenue generated from this agreement, plus direct sales to GE Aviation for the period of 2007 through 2011, may exceed $2 billion.
Note that this is a high-beta stock. It has a propensity to lead the market up or down. The 12-month total return exceeded 70% as of April 12, 2007. Expect the company to release earnings on April 25 and to further reinforce its positive environment.
- Precision Castparts (PCP) (Industrials)
We have had a buy rating on this stock for the past two years, during which time the stock has nearly tripled. This is a play on the aerospace and defense industry, which continues to be in full swing as the U.S. continues fighting two wars. While the stock does not have a significant dividend, we do like the overall total return outlook going into next year.
To grow the company, Precision Castparts has completed nearly 35 acquisitions since 1985. Over the last year, the company acquired GSC Foundries, McWilliams Forge and Cherry Aerospace. These acquisitions, which should be accretive to the company's 2007 earnings, expand its casting, forging and fastener product offerings. Also, Precision announced acquisitions during 2006 totaling roughly $700 million.
The company's fundamentals remain strong. PCP has been generating strong cash flow from its operating activities (more than doubled from $212.90 million to $466.80 million in the first nine months of FY06), which has been more than sufficient to fund its capital expenditures.
The stock's 12-month total return exceeded 68% as of April 12. Expect the company to release earnings on May 10.
We have maintained a buy rating on Florida Power and Light for the last two years. Over that period, the stock has gained 50%. FPL's future growth is expected to be driven by new investments in power plants and a growing customer base. This is the premier stock play in the growing Florida consumer and business market.
FPL estimates that its electricity generating capacity should exceed 22,000 megawatts, a 6% rise over the end of 2005. Revenue from industrial customers comprise only 3% of the total customer mix, vs. 19% for the average U.S. utility. This higher generating capacity and lower industrial ratio translate into less exposure to economic cyclicality and higher earnings stability.
Being a clean energy company is good for business. FPL and its parent company, FPL Group, operate one of the cleanest electricity generating operations in the nation, with among the lowest rates of power plant air emissions. This may benefit FPL under congressionally proposed cap and trade programs.
The stock's 12-month total return exceeds 60% as of April 12. Expect the company to release earnings on April 30.
These three stories have all been relative winners in the last 12 months. To provide some balance, here are two stocks that initially took off after the ratings change but have not done as well during the last 12 months.
This stock has earned a buy rating from us for the past two years. After initially breaking out in 2006, the stock has settled down in the $80 range. This mirrors the daily pricing of offshore rigs, which peaked in 2006 as natural gas prices hit new highs.
Diamond Offshore is one of the largest players in the contract drilling space, along with
. The company is expected to post impressive financial performance in the coming quarters, given the surge in day rates for its rigs and a continuing favorable industry outlook.
The most compelling aspect here is still the earnings upside for this driller. Where else do you find an $11 billion market value stock with 55% growth potential? Consensus EPS estimates grow from $8.20 in 2007 to $12.79 in 2008. Even if these numbers get adjusted downward for additional incremental shipyard time, we are still looking at well-above-market earnings growth rates.
Last month, the stocks in this group benefited from the announcement that
Hercules Offshore (HERO)
. This really helped owners of
, who are expecting to see more rational competition as a result of the acquisition.
With significant upside earnings potential and asset-value based downside protection, look for DO to make up for lost ground. The company is expected to release earnings on April 26.
This is another stock we have had a buy on for the last two years. During that time, the stock has doubled. It is a long-term play on health care technology.
Companies in the health care technology industry have tremendous growth potential over the coming years. The drivers of this growth will be the expected jump in the elderly population due to baby boomers heading into their retirement years and also the need of the health care community to fully comply with federal and state regulations (i.e., HIPAA). Demand for more efficient ways to process medical information can only grow; this makes upgrades in patient care technology and health information processing a must.
The ability to streamline the medical process and measure individual or enterprise-wide medical outcomes is essential for health care providers to eliminate errors. Building and supporting management information systems that track patients and program members is CERN's main focus. The company also offers consulting and educational services.
Consensus estimates call for a 25% increase in EPS from $1.70 in 2007 to $2.12 in 2008. The company expects to release earnings on April 20.
As shown here, investing by the numbers using TheStreet.com Ratings can help you spot potential winners to buy, undervalued companies to hold and dogs to sell.
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Rudy Martin is the director of research for TheStreet.com Ratings. In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
In keeping with TSC's Investment Policy, employees of TheStreet.com Ratings with access to pre-publication ratings data must pre-clear any potential trade through the legal department, and are prohibited from trading any security that is the subject of an unpublished rating revision until the second business day after the rating is published.
While Martin cannot provide investment advice or recommendations, he appreciates your feedback;
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