4 Stocks to Take the Offensive

06/18/2013 10:15 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Richard Moroney of Dow Theory Forecasts sees a move in the making from defensive into cyclical stocks.

In a market where virtually everything has risen, where should investors look for the next move? By splitting S&P 500 industries into defensive and cyclical camps, we found that cyclicals offer richer fields to plow for new investment ideas.

Below, we review four cyclical stocks that could be positioned for strong gains in the second half of 2013: BE Aerospace (BEAV), Blackrock (BLK), DirecTV (DTV), and Qualcomm (QCOM). Each are long-term buys on our recommended Focus List.

Cyclical industries collectively enjoy better growth prospects for both this year and next year. They look cheap relative to ten-year norms for trailing earnings, current-year estimates, and next-year estimates. Conversely, defensive stocks as a group trade at a premium to historical norms.

As investors become more comfortable with risk, they could seek out cyclical names that appear cheap relative to the rest of the market. And if confidence in the recovery continues to improve, stocks sensitive to business cycles look like an attractive play.

BE Aerospace
This stock's price-to-earnings ratio of 21 exceeds the median of 17 for S&P 500 capital-goods stocks. But the maker of airplane cabin interior products and fasteners is projected to grow per-share profits 24% this year, more than double the expected growth for its peer group.

Sales are expected to climb 10% in the June quarter and 11% in the September quarter, putting the company in position to deliver double-digit sales growth in 12 consecutive quarters. In April, management said profit margins are also expanding on higher product volumes and continued efficiency initiatives.

This company generates revenue from fees tied to the size and performance of its assets under management. As a result, its shares are closely linked to the health of the overall stock market.

The shares have returned 40% so far this year, well ahead of the 23% return posted by the average S&P 500 financial stock. The stock scores a 90 for Quadrix Performance (stock-price action) but just 36 for Value.

At 20 times trailing earnings, shares trade 12% above the median for diversified financial stocks in the S&P 500, though they remain 5% below their own five-year average. The shares yield 2.3%.

Paced by its resilient US business and surging growth in Latin America, DirecTV is successfully navigating a saturated domestic market and foreign-currency headaches.

Analyst estimates call for per-share profit growth to exceed 20% in both the June and September quarters. The shares set an all-time high in May, yet still earn a Value rank of 90 and trade at 13 times trailing earnings, a 23% discount to their five-year average.

DirecTV is reportedly one of at least four parties that submitted a bid to acquire the video Web site Hulu, which generated sales of $700 million last year. In the past, DirecTV has shown restraint in bidding on acquisitions.

Generating a meager 4% total return this year, Qualcomm has missed most of the rally for S&P 500 semiconductor stocks, which averaged returns of 25%. Its trailing P/E ratio of 15 hovers near its lowest point in the past decade. Excluding net cash of nearly $8 per share, the P/E ratio stands at just 13.5.

Although Samsung (SSNLF) has begun using more in-house components for its smartphones, US models of the new S4 smartphone still run on Qualcomm's Snapdragon processor. Rumors also swirl about Apple (AAPL) using the Snapdragon in its low-cost iPhones.

However, surging demand for cheaper devices in emerging markets could eventually push down Qualcomm's profit margins. Per-share profits are projected to climb 22% to $4.53 in fiscal 2013 ending September.

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