Five Mid-Year Favorites

06/30/2014 10:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Each June and December, we identify our top handful of picks for the year ahead; here are our five mid-year capital-gains favorites for the second half of 2014, states Richard Moroney, editor of Dow Theory Forecasts.

Alaska Air Group (ALK) earns a Quadrix Overall score of 99 out of 100. Four of the six category scores that derive the Overall score also top 90, as do both of our sector-specific scores that compare Alaska Air to other industrial stocks.

The airline, which is expanding its selection of flights from Seattle to points east, plans to continue growing its fleet of planes from the 127 it operated at the end of May. Alaska Air has submitted orders for 65 new planes.

Dow Chemical (DOW), which generates nearly two-thirds of its sales outside North America, stands to benefit from the recovering global economy.

Analysts expect at least 20% growth in per-share profits this year and next year as Dow slashes its expenses. In case that growth is not enough, investors can also collect a dividend yield of 2.8% while they wait for price appreciation.

Shares of Foot Locker (FL) have sprinted up 36% from February lows but still seem poised for a longer run. The shoe-store chain trades at just 15 times expected earnings for the current fiscal year, an 11% discount to the median apparel retailer in the S&P 1500 Index and 15% below the median for the broad retail group.

In the April quarter, Foot Locker grew profits per share 22% on 14% revenue growth and 7.6% higher same-store sales. The company’s remodeled stores are outperforming expectations, and Foot Locker intends to continue its remodeling program, including some international stores.

Magna International (MGA) boosted its operating cash flow and free cash flow in eight of the last nine quarters, the product of solid revenue growth and firm cost controls. The maker of automobile parts and systems has returned 32% so far this year and 60% over the last year, yet remains attractively valued.

At 14 times trailing earnings, Magna trades at a 26% discount to the industry median and 8% below its own five-year average. The stock looks similarly cheap based on price/sales, price/operating cash flow, and other valuation ratios.

Schlumberger (SLB) has seen profit growth accelerate in recent quarters; the company’s massive scale and technological superiority should provide a competitive advantage going forward.

Schlumberger generated $688 million in free cash flow in the March quarter and announced plans to execute its $10 billion stock-buyback program (enough to repurchase 7% of its shares) in two-and-a-half years instead of the original plan, which called for five years.

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