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StockScouter likes energy and more in '05
The system that beat the indexes with energy and maritime stocks in 2004 still likes energy. But it's detecting opportunities in finance, credit services, home building and basic materials.
By Jon D. Markman
When 2004 opened, the price of crude oil in New York stood at $32.52 a barrel: relatively high but nothing spectacular. A lot of people were talking about energy stocks as a potential value play for the year, but the idea didn't have a lot of resonance. When oil and gas appeared in the media, it was still a bit of a peculiarity -- not a mainstream idea.
And yet after nine months had gone by, energy prices were at the forefront of most every American's conversation about the economy. The price of a barrel of crude had shot through $35, $40 and $45. Ultimately, it topped out at $55, before declining in recent weeks to the low $40s.
In that context, it is interesting to note that the MSN StockScouter rating system -- which blends measures of fundamental value and earnings growth with an assessment of potential popularity to confer a 1-10 rating on 6,000 stocks -- got the move almost exactly right.
The 20-stock portfolio that I assembled for this column based on the top choices of the system exactly a year ago was heavily overweighted with both energy producers and oceangoing transporters. As a group, the portfolio rose 32.1% in 2004. (For the full list and rationale, see "StockScouter likes oil, shipping for 2004.")
Stocks that paid off in 2004
The top three stocks in that portfolio were all energy-shipping companies: General Maritime (GMR, news, msgs), +127%; Stelmar Shipping (SJH, news, msgs), +124.8%; and Tsakos Energy Navigation (TNP, news, msgs), +92.6%. The fourth, Lan Airlines (LFL, news, msgs), +63.5%, is the flagship airline of Chile, whose economy was red hot thanks to the stunning revaluation of its mineral wealth. All but five of the 20 stocks ended the period higher than the broad market, as represented by the 8.5% return of the Standard & Poors 500 Index ($INX). And only four ended the period in the red: an auto parts maker, a fuel-cell maker, an airline and a silver miner.
Was it an easy call? Not really. General Maritime had already more than doubled in 2003 and didn't do much at the start of 2004; after five months, it was essentially flat. It looked like the analysts at J.P. Morgan might be right in their forecast that lower oil prices and transportation prices would trip up energy and shipping investors in 2004 -- leading to a big decline in earnings for the group. Then in mid-May, General Mar picked up steam and stuck Morgan in the eye, more than doubling as energy prices soared and the supply of oil tankers proved to be constrained.
Looking at 2005
The 2005 list of top 20 StockScouter stocks is again populated with energy companies, but there is a bit more diversity as well. To generate the names, I screened the MSN Money database for stocks rated 10 whose fundamental, value and technical characteristics were rated A or B (that is, in the top 20% of all stocks). Plus, the stocks had to rate at least a C for insider trading or ownership trends. That yielded about 100 stocks. I then focused on the ones supported by at least two market "tailwinds," which is to say that the system considers their market capitalization, sector or place along the growth/value continuum to be in favor.
Here's the list:
| StockScouter 20 for 2005 | | Company | StockScouter rating | Size | Industry | 12/31/04 close | | Exploration Company of Delaware (TXCO, news, msgs) | 10 | Small | Independent oil & gas | $6.32 | | Hornbeck Offshore Services (HOS, news, msgs) | 10 | Small | Shipping | $19.30 | | Magnum Hunter Resources (MHR, news, msgs) | 10 | Small | Oil & gas drilling & exploration | $12.90 | | AmSurg (AMSG, news, msgs) | 10 | Small | Hospitals | $29.54 | | Asset Acceptance Capital (AACC, news, msgs) | 10 | Small | Credit services | $21.30 | | XTO Energy (XTO, news, msgs) | 10 | Mid | Independent oil & gas | $35.38 | | Medallion Financial (TAXI, news, msgs) | 10 | Small | Credit services | $9.70 | | Mikohn Gaming (MIKN, news, msgs) | 10 | Small | Gaming activities | $10.19 | | LL&E Royalty Trust (LRT, news, msgs) | 10 | Small | Diversified oil and gas investments | $6.26 | | M.D.C. Holdings (MDC, news, msgs) | 10 | Mid | Residential construction | $86.44 | | Enzo Biochem (ENZ, news, msgs) | 10 | Small | Medical laboratories & research | $19.47 | | Greenhill & Co. (GHL, news, msgs) | 10 | Small | Investment brokerage -- regional | $28.70 | | Cognizant Technology Solutions (CTSH, news, msgs) | 10 | Mid | Business software & services | $42.33 | | Engineered Support System (EASI, news, msgs) | 10 | Mid | Aerospace/defense products & services | $59.22 | | eBay (EBAY, news, msgs) | 10 | Large | Internet software & services | $116.34 | | FactSet Research Systems (FDS, news, msgs) | 10 | Mid | Information & delivery services | $58.44 | | Investors Financial Services (IFIN, news, msgs) | 10 | Mid | Asset management | $49.98 | | McAfee (MFE, news, msgs) | 10 | Mid | Security software & services | $28.93 | | Capital Lease Funding (LSE, news, msgs) | 10 | Small | REIT -- office | $12.50 | | Cemex (CX, news, msgs) | 10 | Large | Cement | $36.42 |
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Among the faintly obscure, our Scouter favorites for 2004 include AmSurg (AMSG, news, msgs), an operator of ambulatory surgery centers; Mikohn Gaming (MIKN, news, msgs), a maker of board games and slot machines for casinos; Greenhill & Co. (GHL, news, msgs), a boutique investment bank; and FactSet Research Systems (FDS, news, msgs), a provider of financial data to the investment industry.
Among the better known are: - Cognizant Technology Solutions (CTSH, news, msgs), a fast-growing Indian software outsourcer.
- eBay (EBAY, news, msgs), the world's biggest virtual yard sale.
- McAfee (MFE, news, msgs), a provider of security software to consumers and businesses.
- Engineered Support Systems (EASI, news, msgs), a provider of logistics assistance and communications devices to the U.S. and friendly foreign military services.
A diverse list
There's something for everyone. If you think that the economy is going to heck in a handbasket, consider Asset Acceptance Capital (AACC, news, msgs). It buys defaulted or charged-off accounts at a significant discount from credit originators like retailers, telecom companies and credit card issuers. Then it works some kind of magic to encourage deadbeats to pay up. Let's say, for instance, you bought a high-definition TV from Sears (S, news, msgs) on a layaway plan, then ignored all those pesky bills as they came in. Sears would work hard to get you to pay, then send you to collections. If you still failed to pay, Sears might "charge off" your obligation as a bad debt, then sell the obligation to Asset Acceptance. The company is growing about 18% a year now, a pace that could accelerate in a worsening economy.
If you're optimistic that the recent record pace of mergers and acquisition will continue, on the other hand, consider Greenhill. The small New York firm specializes in M&A work and thus offers a direct play in an area that many observers believe will prove to be the hallmark of the market in the first half of the year.
Likewise, Investors Financial Services (IFIN, news, msgs) offers a wide range of services to asset managers, such as custody, mutual fund administration and currency exchange; it just broke through its all-time high and appears poised for further gains if investors continue to be optimistic about trading volume.
Energy makes up a quarter of the list, with five names. One of the least known is Hornbeck Offshore Services (HOS, news, msgs), which leases offshore supply vessels to offshore oil and gas drillers in the Gulf of Mexico and a few other places in the world. Hornbeck also has tugs and barges that are used to transport energy products in the Caribbean, particularly between the United States and Puerto Rico. The company is expected to grow earnings more than 20% a year over the next couple of years, but it is presently valued as if that won't happen. If bulls get the upper hand, look for Hornbeck to ship much higher.
I'll monitor all of these names over the next year. If you'd like to create your own screen for the top StockScouter names, click here.
Fine print
Thanks for the many hundreds of e-mails suggesting surprises for 2005. I'm collecting them all and will publish a column later this month listing the best reader ideas. . . . To learn more about Greenhill, click here . . . . To learn more about Hornbeck Offshore, click here; learn about its ship design, specifically, here. . . . Learn more about Asset Acceptance here; the company lists job openings around the country here. . . . AmSurg explains to doctors how to create a single-specialty surgical center here.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication he did not hold any positions in the stocks mentioned in this column.
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