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In this screen, we focused our attention on high-quality stocks that also offer worthwhile price-appreciation potential to 2016-2018. For starters, we restricted our search to equities that get our Highest Rank (1) for Safety. Within our universe of roughly 1,700 stocks, only about 120 meet this criteria. The two key components that determine our rankings are Financial Strength and Stock Price Stability. Notably, investors who put the most emphasis on these qualities are typically willing to sacrifice some long-term total return potential in return for the added downside protection that these equities afford.

Not surprisingly, issues ranked Highest for Safety typically don’t screen well for 3- to 5-year price appreciation potential. As it stands today, roughly 25 offer long-term price appreciation potential that exceeds 50%, the current median for the Value Line universe. Those that made the cut can be found on the list below. Of these, we have chosen to highlight the shares of Royal Dutch Shell “A” (RDSA) and AmerisourceBergen (ABC).

Royal Dutch Shell “A”

Royal Dutch Shell is one of the world’s largest oil producers. The company is incorporated in the U.K., but has its headquarters in The Netherlands. Its current corporate structure has been in place since 2005, when stockholders of Royal Dutch Petroleum and Shell Transport and Trading voted to unify the company. Class A shares, the ADRs of which are reviewed here, represent Royal Dutch Petroleum’s former 60% interest in assets and earnings. These shares pay a 15% Dutch withholding tax on dividends.

Daily oil production at RDS totaled 1.6 million barrels last year, down 2% from 2011. In fact, production of this commodity has changed very little over the past five years, as the company, like many of its peers in the industry, has struggled to gain access to fresh reserves. On the other hand, Royal Dutch has been aggressively expanding its exposure to natural gas over this same stretch. Gas available for sale is 30% higher than it averaged five years ago. The company, though, doesn’t have much to show for this growth on the bottom line. Earnings, for instance, declined modestly in 2012, to $8.48 a share, and we expect only a low single-digit advance this year, to $8.75. One particular challenge has been low natural-gas prices in North America, partly reflecting the rapid expansion in shale-gas development in that region. This, combined with higher construction costs, has been putting pressure on margins.

Over time, the company’s push into natural gas, helped along by an eventual strengthening in pricing—based on our expectations that the global economic expansion will progress onto firmer ground—ought to move the needle on the bottom line. In all, we look for earnings to break out of their current range and reach $11.00 a share by 2016-2018. In the meantime, the consistent stream of income provided by Royal Dutch Shell’s well-covered dividend should appeal to income-oriented investors. In fact, the current yield of about 5.5% is among the highest of stocks that carry our top rank for Safety. This combination of higher earnings and steady income should translate into attractive total returns for the 3 to 5 years ahead, particularly on a risk-adjusted basis.

AmerisourceBergen

Among the other equities that carry our top rank for Safety, investors with an eye on 3- to 5-year price appreciation may also wish to take a closer look at AmerisourceBergen. The company, which is based in Chesterbrook, Pennsylvania, was formed in 2001 by the merger of AmeriSource Health and Bergen Brunswig. It is a full-service wholesale distributor of pharmaceutical products and related healthcare services.

Consistent with the wholesale business, the company’s operations are characterized by high volumes and narrow margins. (The top line should surpass $85 billion in fiscal 2013, which ends on September 30th, though net income will probably amount to less than 1% of this.) AmerisourceBergen has executed very well in this setting, racking up mid-teens annual growth in sales and share earnings over the past five years. The company has been in good form so far in fiscal 2013, as well, and looks to be on track to post gains of 9% and 11% on the top and bottom lines, respectively. 

One thing that investors will be keeping a close watch on in the years ahead is the progress of the company’s recent agreement with Walgreen Co. (WAG) and Alliance Boots. Part of the deal, which was announced in March, includes a 10-year primary pharmaceutical distribution contract with Walgreen, the nation’s largest drug-retail chain. The relationship is expected to add $28 billion to the top line and $0.20 to share net in fiscal 2014, and should generate incremental gains the following year. (In all, we expect share net to climb 16% in fiscal 2014, to $3.60.)

ABC stock has been a strong performer so far in calendar 2013, rising nearly 30% to handily outperform the broader market. Even with these gains, these shares still offer healthy long-term appreciation potential, based partly on our projection that earnings will surpass $5.00 a share by 2016-2018. Meanwhile, the stock provides a moderate level of current income, but won’t be overly appealing to income-oriented accounts. The current quarterly dividend of $0.21 a share represents a yield of 1.6%, about 60 basis points below the median for dividend-paying equities in the Value Line universe. 

 

Company

Ticker

 

 Current PE Ratio

  Dividend Yield

Intuit Inc.

INTU

        

       19.4

         1.3

Kyocera Corp. ADR

KYO

        

       18.7

         1.5

Check Point Software

CHKP

        

       14.8

          -  

Teva Pharmac. ADR

TEVA

        

         7.7

         3.3

Total ADR

TOT

        

         7.0

         6.4

AmerisourceBergen

ABC

        

       17.0

         1.6

Bed Bath & Beyond

BBBY

        

       14.1

          -  

Cardinal Health

CAH

        

       13.2

         2.7

Varian Medical Sys.

VAR

        

       15.8

          -  

Dollar Tree, Inc.

DLTR

          

       17.6

          -  

ConAgra Foods

CAG

          

       14.1

         3.1

Allergan, Inc.

AGN

          

         0.2

Intel Corp.

INTC

         

       12.4

         3.7

Laboratory Corp.

LH

         

       13.9

          -  

Bard (C.R.)

BCR

         

       17.4

         0.8

Motorola Solutions

MSI

         

       14.1

         2.0

PepsiCo, Inc.

PEP

         

       18.1

         2.9

Novo Nordisk ADR

NVO

         

       21.4

         2.0

CVS Caremark Corp.

CVS

         

       14.3

         1.6

Du Pont

DD

         

       14.5

         3.4

Colgate-Palmolive

CL

         

       21.9

         2.5

Royal Dutch Shell 'A'

RDS/A

         

         7.4

         5.6

Wal-Mart Stores

WMT

         

       13.5

         2.6

Emerson Electric

EMR

         

       14.4

         3.0

At the time of this article's writing, the author did not have positions in any of the companies mentioned.