Strong Hands: A Trio of Best Buys

11/10/2015 9:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

In volatile markets, you may be tempted to look for bargains among the stocks down the most. But history suggests you should also consider stocks that have held up the best, explains Richard Moroney, editor of Upside.

Stocks that outperform in downturns are said to be “in strong hands,” according to a well worn Wall Street maxim, which also posits that such stocks are likely to lead the market higher in the initial stages of the next upswing. The three stocks below are all rated as Best Buys.

Aaron's (AAN) sells furniture, electronics, and appliances. In April 2014 it took a big step in building its online presence by paying $700 million for Progressive Finance, a company that manages a virtual rent-to-own platform for retail partners.

Rising analyst estimates project Aaron’s to grow per-share profits by 13% for 12-months ending June, compared to the average of 11% growth for the S&P 1500 consumer-discretionary stocks.

The stock has surged 28% over the past six months, while the S&P SmallCap 600 Index has declined 10%. Yet shares look reasonably valued at 15 times estimated year-ahead earnings, below its sector average of 18.

JetBlue Airways (JBLU) shares have surged 13% in the past month. The strong-share price action is accompanied by robust operating momentum and increasingly bullish analyst estimates.

In the first half of 2015 JetBlue’s per-share profits nearly quadrupled on 10% revenue growth; cash from operations surged 65%. Rising profit estimates project 133% growth in the September quarter, followed by 89% growth in the December quarter.

There is good reason for analysts’ optimism. As of June 30, JetBlue had hedged about 15% of expected fuel needs for the second half of 2015. That means it should reap most of the benefits of lower oil prices, down about 25% since the end of June. 

The idea for what eventually became Selective Insurance (SIGI) came to its founder nearly 100 years ago when his horse ran away and wrecked his carriage.

Shares of the property-and-casualty insurer have run wild in their own right. Selective scores above 90 for both Performance and Value in Quadrix, the only stock in the S&P 1500 Index to do so.

At 12 times trailing earnings, the stock trades 12% below the median for S&P property-and-casualty insurers and 44% below its own five-year average.

The company’s combined ratio—a measure of profitability for insurers that divides the sum of losses and expenses by earned premiums—has improved in recent years, a trend management expects to continue in 2015.

As a result, the company’s return on equity has steadily marched higher to exceed industry norms.

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