Screens According to GARP, Part 3

We will start the week by finishing up my three-part series looking at the best earnings momentum and valuation names within the major industry groups. We started last Wednesday, when I felt it was time to examine large-cap growth-at-a-reasonable-price -- GARP -- names as a way to find safety plus upside in an untrusted rally. Although momentum can be a dirty word to some investors, the reality is that it is simply a different manifestation of low expectations -- and finding names in which investors are underestimating the earnings power is always a winning strategy. The table below showed the output from a recent run of my earnings and valuation screen, divided by industry group. Today we will look at the final tranche of six names. You can see the others here and here. As a reminder, for each sector I listed the top three names, unless the group was devoid of good ideas, in which case I listed only the good ones. Process Industries -- This group is generally chemicals and thus is usually-slow growing, so finding a name with accelerating results is always welcome. Westlake Chemical (WLK) is on quite a tear, with earnings improvement visible for several quarters now. It is a beneficiary of plunging feedstock prices due to natural gas oversupply, with is always welcome in a spread business producing value-added products. Westlake is on a capacity expansion frenzy, adding capacity and reducing bottlenecks at three facilities in Louisiana, with more on the way. Producer Manufacturing -- This group is traditional industrials. Not surprisingly, it is also being influenced by the fracking/horizontal drilling revolution. In this case, Trinity Industries (TRN) is cranking out railcars like crazy, as the cycle enters its fourth year. The growth driver is tank cars to ship oil from the Bakken and other shale plays, since rail is the best near term transport option until pipelines are built out, which could take years. Trinity's results are also being driven by other car types, so while growth is levered to tank cars, it is not completely dependent on it. Retail Trade -- As you can see, sometimes things change. Rite Aid (RAD) was strong for quite some time, but recently missed earnings, so they have been removed from my list subsequent to the first posting. So we just move down the list, both Advance Auto Parts (AAP) and Foot Locker (FL) look fine, but not necessarily compelling. (A 3 means their decile rank shows good upside estimate changes, but they are not best of the best.) AAP benefits from the strong auto upcycle we are experiencing, but can also offer some recession protection since this sector usually benefits when consumers start pinching pennies. Technology Services -- This group is software and internet, and is being led by this decade's 900 pound gorilla, Facebook (FB). The promise of the IPO is being borne out, as the successful pivot to mobile is sustaining its relevance and ability to place advertising. Young people may be abandoning Facebook, but there is plenty of exploitation left in the billion users it does have, and they will continue to buy every hot new technology as long as Zuckerberg is young and in touch. This stock is no longer cheap -- a year ago it was reasonable although not cheap then either -- but when it has earnings momentum, the best strategy is to let it run. Transportation -- The airlines have been hot for some time as consolidation is finally allowing them to price sufficiently well to earn some money. Having said that, in the near term Iraq could upset the situation, as the fighting there drives up the oil price. The names are pretty interchangeable; I own American (AAL) but recently Delta (DAL) was looking better. Tip-toe into these at the moment, as they can probably still be owned but earnings could turn on a dime at $120 crude. Utilities -- Utilities are not typically an earnings momentum group, so I include it here only because I will often own a name just to stay sector neutral. So you can buy one, but be ready to move on as the estimate trend can adjust quickly. NRG Energy (NRG) is today's darling, upside is OK and valuation reasonable. This name does alternative energy projects like solar and wind, which are somewhat dependent on policy decisions.

Screens According to GARP, Part 3

Some names with underestimated earnings power.

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