Screens According to GARP, Part 1

After focusing on small-cap value for some time, I feel like it is time to turn to large-cap growth-at-a-reasonable-price (GARP) names, since that group can also offer safety plus upside during an untrusted rally. The catalyst is an e-mail exchange with the always insightful Chris Versace, who pointed out that there are always attractive names to own, even if one is positioned cautiously due to concerns about valuation and tepid earnings in the market as a whole. Since earnings ultimately drive stocks, I always look for earnings momentum names where expectations are too low. Those names will see their estimates raised and will report upside surprises. When I can find them at a reasonable valuation, we have the perfect ingredients for capital gains. The table below shows the output from a recent run of my earnings and valuation screen, divided by industry group. Over the next three posts, I will look at the best names in each group, in order to provide you with solid trading ideas. As always, keep in mind that my analysis here is just a summary and should be the start of your research, not the conclusion. The names listed above are the only candidates I would consider if starting today with 100% cash. These are the best of the best, with the strongest upward trend in earnings combined with below-average valuations. I have highlighted the ones I already own in my GARP strategy. The others I am looking at as replacements for other names I already own. Let's look at each industry sector. For each, I listed the top three names, unless the group was devoid of good ideas, in which case I listed only the good ones. Commercial Services The temp agency Manpower (MAN) is the standout here, with a spectacular uptrend in earnings and market multiple. The company survey's U.S. small businesses and is finding the highest hiring optimism since Q2 2008. Europe is soft, especially in France, which is 33% of revenue, but with any stabilization there the U.S. can drive upside from here. Communications This group is large and stodgy, so my eyebrows raise when I see any momentum here whatsoever. Level Three (LVLT) is looking awesome, with the initial expectations of a loss in 2014 swinging to impressive profitability. I do choke on the valuation, which is probably too high for this name, especially with this year's rally already. But the operating leverage here is high, with 60% incremental margins, so small revenue growth will now have large bottom-line impact. Results are being driven by high growth in bandwidth demand, a recovery in the enterprise business (corporate phone systems), and the potential for international growth. Consumer Durables With the giant video game trade show EEE going on in L.A., now is the perfect time to consider Electronic Arts (EA). This notoriously hit-driven and cyclical business is now in an upturn, due to exceptional strength in the sports franchises such as Madden Football, FIFA and NHL Hockey. EA simply blew out numbers last quarter, showing how low expectations are. EPS of $0.48 crushed the $0.11 consensus and guidance for this year was equally solid. Consumer Non-Durables I am skipping Pilgrim's Pride due to the bidding, so will stick with Hanes Brands (HBI), the pantyhose and underwear maker. Earnings momentum is being driven by strength in active wear as it gains shelf space for these products. HBI is more of a margin expansion story, which can drive solid bottom-line upside. Consumer Services Gaming names always seem to top the list in this group, due to the long-term secular growth in the industry, especially being driven by Chinese gambling in Macau. MGM (MGM) is king of the heap at the moment, with great uptrends. But that is tempered by an extremely high valuation. I have to go with Wynn (WYNN), which also is showing upside, but at a more reasonable multiple. With Las Vegas muted, but poised to rebound, and Macau growing like a weed, Wynn could have multi-quarter legs. And every so often it pays a large special dividend. Electronic Technology The Texan, Texas Instruments (TXN), rode into the top position in this group, nudging down NVidia (NVDA), which I already own. Embedded parts are the new black, as they say in the fashion industry, dovetailing with the internet-of-things meme that is driving investor interest. Strong demand in communications, industrial and automotive markets are sustaining the upward revision trend.

Screens According to GARP, Part 1

I'll look at the best large-caps in each sector from my earnings valuation screen.

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