You know why it is so tough to beat the S&P 500? Because it's always outdoing itself, getting better and better with each change.
The combination of new picks from the S&P mid-cap group that have outgrown their compadres and the deletion of stocks that have shrunk in size or have been acquired at a big premium is a very compelling combination. It's as if the S&P mid-cap is the farm team, the minor leagues, and when that index produces phenoms they get promoted to the Bigs to replace either washed-up, second-rate performers or inductees to the S&P Hall of Fame because they received hefty takeover bids.
We saw the classic example of this just last Friday night when Equinix (EQIX), SL Green (SLG), Henry Schein (HSIC) and Hanesbrands (HBI) replaced Denbury Resources (DNR), Nabors (NBR), Avon Products (AVP) and Carefusion (CFN).
Consider these like trades. Equinix is in one of the hottest portions of the U.S. economy, the data center business. As data as a category grows by leaps and bounds, Equinix has driven to become best in class and while, initially, there was a belief that it didn't have enough that was proprietary, it's proven time and again to be the warehouse of choice and is in incredible demand.
Compare that with Denbury Resources, a totally down-and-out leveraged oil and gas company that is struggling mightily with these lower oil prices. In fact, it is one of those that I would say, if oil doesn't go higher, might have a real chance of not making it in its current structure. Maybe there's some synergy with its stock symbol, DNR -- Do Not Resuscitate. It drops down to the minors, the S&P MidCap 400, the graveyard of the losers and the fertile ground for the next winners in the S&P 500 roster.
Then there's SL Green, one of the best real estate investment trusts in the country and owner of the highest-quality office real estate in the New York Metropolitan area, a vicinity with rapidly rising rates, low vacancies and tremendous employment growth.
The castoff that makes room for SL Green? Nabors. This company, at one time, was the premier land driller in this country. Nabors has some of the best technology and has historically been a favorite of the natural gas industry. It also had 48 offshore oil rigs around the globe. Now, consider these two businesses. Oil companies have been able to cut down the time it takes to drill a well and have driven the drillers to take much lower price on the current jobs, some of the fees being cut by one-third because of the collapse in drilling. The rig count in this country, as maintained by Baker Hughes, has declined for 14 straight weeks and has now fallen an astonishing 46% then the peak just last October.
Worse: offshore rates are collapsing, as you know, from the declines in Transocean (RIG), Seadrill (SDRL), Diamond Offshore (DO) and Ensco (ESV). This one may be among the least desirable in the entire godforsaken industry.
Then there's Hanesbrands. This is one of my absolute favorites, an acquisitive company, having gathered Champion, Maidenform and Playtex along the way, always driving down costs and becoming the preeminent undergarment company. It manufactures the goods itself, which has helped it maintain quality. A recently-executed four-for-one split seems to have fired up the faithful as the stock's been on a tear, up 16% this year. There's plenty of room for more acquisitions and it's got the best growth of any apparel company.
The loser that makes way for Hanes? One of the worst companies I have come across, the totally bedraggled, confused and troubled Avon. I have to admit that when Sheri McCoy came over from Johnson & Johnson (JNJ), I thought the company's woes could be solved. But it sure doesn't seem that way. The last quarter was a distinct disappointment, acknowledged by the CEO to have progress "that was slower than I would have liked." Total revenue decreased 12%, but to be fair, this one is uniquely disadvantaged by the strong dollar because it would have been actually UP 5% ex-currency. Of course, the issue is when you have that much currency movement is that you have to say, "wow, that's still horrendous despite the adjustment." Cash flow of from operations for 2014 declines a massive $180 million and Avon had to pay $68 million to the Justice Department as part of a settlement for Foreign Corrupt Practices Act violations. The company's projections for 2015, plus its $1.6 billion in debt, makes this a nightmare for any portfolio manager.
Then there's the final addition: Henry Schein, perhaps one of the single-most-consistent healthcare concerns in the entire world. It's recording high-single-digit growth as a supplier of dental and vet supplies and it has a moat around its business that Warren Buffett would covet. It's just a terrific company with fantastic management and its last beat and raise was among the finest so far of 2015.
Leaving the S&P? Carefusion, another great company that snared a bid from Becton Dickinson (BDX) that carried a 26% premium. So, before this stock would leave the S&P, it gave a nice boost to the index.
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