2 Stocks on the Breakout Path

09/06/2012 7:45 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Below are two stocks that dominate the sectors they are in, and have built their companies to move boldly into the future, regardless of economic conditions, observes Richard Moroney of Upside.

Chemed (CHE) is being upgraded to Best Buy. The company owns VITAS Healthcare, the largest US provider of end-of-life care, and Roto-Rooter, the No. 1 provider of plumbing services. To sustain growth, the company uses its strong cash flow to purchase plumbing franchises and acquire hospice facilities.

Chemed earns a Quadrix Overall score of 95 (out of 100), and four of its six category scores rank among the top 25% of our research universe. The consensus projects Chemed will earn $5.43 per share in 2012, up 14%.

Shares have rallied near a 52-week high, but seem cheap relative to growth potential. At 13 times trailing earnings, the stock trades at a 14% discount to its five-year average P/E and 40% below its ten-year multiple.

On August 3, management raised its quarterly dividend 12.5% to 18 cents per share, payable September 4. The shares now yield 1.1%. Chemed, capable of reaching $75 over the next 12 months, is a top pick.

Meanwhile, Dillard’s (DDS) opened its doors in 1938, when William Dillard borrowed $8,000 from his father and started a shop in Arkansas. CEO William Dillard II, son of the founder, now oversees more than 280 Dillard’s locations and 18 clearance centers in 29 states.

The apparel retailer has grown rapidly in recent years, reflecting improved marketing initiatives and better cost controls. The company has shed underperforming stores and kept a lid on inventories. In fiscal 2012 ended January, Dillard’s reported a profit of $464 million, versus a loss of $241 million three years earlier.

July-quarter earnings per share nearly doubled to 63 cents, topping the two-analyst consensus of 48 cents. Same-store sales increased 3%, while merchandise gross margin rose nearly 1%. For fiscal 2013 ending January, the single analyst estimate calls for per-share profits of $6, up 43%. Revenue is expected to increase 7%. Dillard’s is a Best Buy.

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