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2015's Top Performers: Richard Moroney
01/01/2016 10:00 am EST
In January 2015, we featured our annual Top Picks report, highlighting the favorite stocks from the nation's leading newsletter advisors. Here, we talk with Richard Moroney, editor of Dow Theory Forecasts; his Top Picks over the past year—a drug research outfit and an auto parts play—rose 50% and 34% over the last 12 months.
Steven Halpern: Our guest today is Richard Moroney, editor of Dow Theory Forecasts. How are you doing today, Rich?
Richard Moroney: Good, thanks for having me.
Steven Halpern: We’re doing a special series right now reviewing the best performers from our Top Picks report from 2015, which appeared last January on MoneyShow. Now, you contributed two picks to last year’s report that have both been extraordinary performers. Let's start with ICON plc (ICLR), which is up nearly 50%. Could you remind our listeners what this company does and discuss briefly your original rationale for having picked the stock?
Richard Moroney: Okay, well, our whole approach at Upside and Dow Theory Forecasts is really to get growth at a good price. We’re looking for companies where the operating fundamentals are strong and the stock is still either an attractive value or a reasonable value.
ICON really fit the bill, steady growth in terms of sales for several years and when we added it, growth had accelerated partly because of the cycle of new biotechnology drugs. There are just a lot of drugs under development and ICON is a company that does outsource drug research.
They're the guys who would do everything from testing a drug that’s far along into the approval process on humans to doing more basic research further up the line before approval. It’s a niche company and we still like it.
Steven Halpern: Do they have the risk of whether or not a drug succeeds or are they going to make money just from the testing process?
Richard Moroney: They're going to make money on the testing whether it succeeds or not. Their risk really is customer concentration.
Pfizer (PFE) is a big customer representing more than one-third of their sales and that has periodically led to some volatility in the stock as people handicap whether they might lose some business with Pfizer or whether Pfizer is going to diversify their supplier base.
I would say that is the biggest risk. That is a risk and when two drug companies merge, that can represent a risk if they go with the other player but the truth is that over the longer haul, all this consolidation has actually been good for outsource players like ICON because a lot of those companies are looking to streamline at the same time and they end up getting more business eventually down the road.
Steven Halpern: Now are there any specific developments that have occurred over the past year that might factor into its outperformance? As I mentioned, it’s up almost 50% this year.
Richard Moroney: Well, when we added it, it was a little depressed partly on those Pfizer concerns. I think the strong performance really had a very strong March quarter, June quarter, and the September quarter also was pretty solid, pushing their earnings up 29%.
They are getting hurt by currency so for the September quarter, reported revenue was only up 2% whereas it was 8% excluding currency. I mean, really, the biggest and the story is still intact. There's still an increasing number of new drugs going through the pipeline and the case for outsource guys like ICON is still pretty compelling.
The biggest issue is the stock’s price. Like you said, it’s done well. In our ranking system, it gets a 49 for value so that’s right in the middle, suggesting it’s just a middling value. It’s an outstanding grower, though, still and other fundamentals are pretty solid so it gets an 87 overall.
I think that kind of captures the story there. It is no longer the cheapest stock but it’s a grower in a stock market with endurance of bona fide growers so I think that it’s got 15% to 20% upside.
Steven Halpern: Your second Top Pick for 2015 was Gentherm (THRM), which is up 34%. Can you tell our listeners about the company, and again, review the basis for your original recommendation?
Richard Moroney: Okay, well, again, it’s kind of a niche player and even though Gentherm is mostly in the automotive field, what they do is they make…heated and cooled seats is really their bread and butter.
They're trying to get into different things like heated mattresses and other things but really they're making most of their money on the heated seats that go into luxury automobiles and increasingly all automobiles, so the fact that that’s become like a must-have kind of feature has really helped them.
When we put it on, it was really pretty cheap, in my opinion, for such a solid grower. Again, it’s operating in a cyclical industry, a competitive industry, but they have a niche that allows them to earn pretty good margins, and like you said, it’s been a pretty steady grower.
Steven Halpern: For those who already own shares based on your previous recommendations, are you recommending that they should continue to hold? Would you even consider that somebody should initiate a position or do you think most of the growth in these situations is now past?
Richard Moroney: I would still be a buyer of ICON. I still like that stock. Gentherm I like, but we actually downgraded the stock in August at about 43, not so much for anything really they did wrong, but the score in our quadrants ranking system had dropped down to 79.
Their June quarter was just okay and we had had a pretty good run, and actually, it’s five points higher from where we sold it, so the concern’s kind of passed somewhat and the stock has kind of bounced back, but I would be looking at Gentherm.
I think right now I would probably not be a buyer. I just think they might have a little bit more of a headwind and the stock is just not really a compelling value, so I would say Gentherm would be one to watch and ICON would be one to buy.
Steven Halpern: Now, while I have you on, I’d like to ask one final question, a more general question about the market. Your publication, Dow Theory Forecasts, which has been published since 1946, is famous for its accurate forecasting of long-term bull and bear market trends and has done that over many decades. Based on the Dow Theory approach, what's the outlook now looking out over 2016?
Richard Moroney: Well, it’s a tough one for Dow Theorists to be honest with you. We had that sell-off in August, which in our view represented a bear market signal with both the Industrials and Transports moving to significant lows, and from that point, we had a bounce higher, a move back down, and a bounce back higher again to move above the levels that were reached at the initial rebound in September.
In that regard, we viewed it as that was a bullish development and we went back into a more fully invested posture, not fully invested like we normally are at 95%, but more like 85% to 87%, which is where we’re at now.
Since then, the action in the Transports in December in particular has been quite discouraging and they actually went to a new low, a new more-than-one-year low, reaching the level that they hit in August.
Technically, I still think the primary trend is bullish. The last signal we had was higher highs in both averages, but since then we've had a breakdown and new lows in the transports so we’ve got a situation of divergence and we’re waiting for that divergence to be resolved.
What we’re going to need to see is the Transports get in gear and the Industrials to move to new highs for us to become more bullish. For now, we’re kind of in a wait and see posture, which I don’t think is really that bad of advice.
We’re telling people of the portion of your portfolio committed to equities, hold about 87%, 85% of that in stocks and with the remainder hold a short-term bond fund as a hedge because it’s hard to ignore the chronic underperformance of the Transports and especially the new low that we've recently seen on the Transports so that’s made us more cautious heading into 2016.
Steven Halpern: Again, our guest is Richard Moroney of Dow Theory Forecasts. Thank you so much for your time today.
Richard Moroney: Sure, thanks for having me. Bye-bye.
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