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Stock Screen: Low-Risk Stocks for Worthwhile Total Return – September 3, 2010
Conservative investors can readily find low-risk stocks. Of course, there is a tradeoff between risk and return, and low-risk securities often produce commensurately low returns. With this in mind, we screened the Value Line data base for stocks that combine below-average risk with worthwhile total return (price appreciation and dividends) potential over the long haul. First, we limited the field to equities with Above Average Safety ranks, which are stocks that, in our opinion, have less than normal total risk. Next, we required price appreciation potential to 2013-2015 of at least 75%. Then, we specified that the remaining equities must have a current dividend yield of at least 3.2%. From that list, we excluded any issue with projected three- to five-year average annual dividend growth of less than 7.0%.
In order to tie the growth and income criteria together, we also required an average annual total return over the next three to five years of 18%, which is favorable given the returns currently available. Finally, we eliminated all holdings with subpar prospects for market performance over the next six to 12 months (those ranked Below Average for Timeliness). This step was taken to screen out stocks that are most at risk of underperformance in the near term, in spite of their otherwise attractive investment attributes.
Given our stringent criteria, it is not surprising that our screen only produced six names. Although small, this is an elite group of stocks that appears suitable for patient investors who seek worthwhile total returns, but are also averse to excess risk. This list should be particularly useful in today’s market, given the volatility that has been prevalent as investors deal with the uncertain prospects for economic growth.
Subscribers can see the complete results of our screen, including Value Line’s proprietary with Timeliness and Safety ranks, by clicking here. As always, we strongly urge investors to consult the individual analyses in Ratings & Reports before committing to any of the issues that appear in this screen. All data is from The Value Line Investment Survey dated August 27, 2010.
Intel Corporation (INTC – Free Analyst Report) is a leading manufacturer of integrated circuits. In addition to primarily supplying manufacturers of personal computers, the company serves a multitude of other global markets, including communications, industrial automation, military, and other electronic equipment. Intel’s product line consists of microprocessors, with the Pentium series being the most notable. It also manufactures microcontrollers and memory chips, and the company sells computer modules and boards, and network products.
Intel is coming off of its best quarter ever, earnings $0.51 a share in the June period. The Enterprise (corporate sector) was the primary factor behind the strong bottom-line showing, while a richer product mix also contributed. Management expects the momentum to continue and increased its guidance. Meanwhile, the company’s agreement to buy security software maker McAfee (MFE) and the wireless division of German chip maker Infineon should aid its long-term growth.
However, Value Line urges investors to proceed with caution, and notes that although the global economy appears to be recovering, there are signs that the rebound might not be as strong as was initially expected. In addition, if end-market demand sags due to economic concerns, inventory in the distribution channel may become a burden, which has been a key factor behind the semiconductor industry's recent struggles. Also, management's gross margin guidance of 67% for the September quarter may be a bit optimistic, given recent trends.
Sanofi-Aventis (SNY) is the fourth-largest drug company in the world and the largest in continental Europe. In 2009, pharmaceuticals accounted for 88% of total sales, with vaccines making up the balance. The company’s main drugs are Lantus for diabetes, Plavix and Lovenox for thrombiosis, Aprovel and Multaq for cardiovascular disorders, Taxotere for cancer treatment, and Ambien for the central nervous system.
The company has been occupied with a bid for drug maker Genzyme (GENZ), which turned down the most recent buyout offer from Sanofi. The latest bid is valued at $18.5 billion, or $69 per share. We think Sanofi will need to come up with a more lucrative bid, probably in the per-share range of $73-$77 before Genzyme's board of directors will seriously consider the offer.
Meanwhile, Value Line analyst Alan House expects Sanofi to perform well in the near term, and feels that it is well positioned in some attractive segments of the healthcare market, namely Diabetes, Emerging Markets, and Human Vaccines. This should help counteract some generic competition for Plavix, and possibly Lovenox. House also expects the company to continue to reduce costs, which should help the operating margin stabilize, despite the generic competition.