3 High-Quality Stocks for a Slowdown in US Economic Growth

Applied Materials tops the list

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According to the National Association for Business Economics, the U.S. economy is headed toward the longest expansion we have seen over the last decade.

Compared to the October survey, a higher fraction of business economists are forecasting a period of slow economic growth for 2019. As a result, it would not be a bad idea for investors to increase the number of high-quality stocks in their portfolios.

The typical traits of a high-quality stock are a strong balance sheet, highly skilled managers and robust cash flow. Therefore, in order to search for high-quality stocks, I have screened the market based on the following parameters:

  • A high GuruFocus financial strength rating, which measures the robustness of a company’s balance sheet.
  • A high score for the GuruFocus profitability and growth rating, which measures the productivity of a company's operations as well as management's ability to increase sales, margins and profits.

These stocks are either beating the S&P 500 index in terms of higher dividend yield or are close to it. As of Jan. 25, the dividend yield of the index was 2.02%.

For the 52 weeks through Jan. 28, semiconductor company Applied Materials Inc. (AMAT, Financial) declined 29% to $39.2 per share. The share price is below 200-day simple moving average line, but above the 100- and 50-day lines.

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The market capitalization is $37.4 billion. The price-book ratio is 5.63 versus an industry median of 1.85. The price-sales ratio is 2.33 versus an industry median of 1.67. The price-earnings ratio is 11.98 versus an industry median of 19.55. The forward price-earnings ratio is 10.76 versus an industry median of 18.55. The 52-week range is $28.79 to $62.4. The 14-day relative strength index is 68.85, suggesting shares are neither oversold nor overbought.

The recommendation rating is 2.1 out of 5 and the average target price is $47.73 per share.

GuruFocus assigned a financial strength rating of 7 out of 10 and a profitability and growth rating of 9 out of 10.

The return on equity, which is a measure of management's effectiveness, stands at 42.96% compared to an industry median of 7.07%.

Applied Materials has generated over $3.8 billion in cash flow over the last 12 months of operations. Of that, $1.82 billion was levered free cash flow.

The free cash flow has grown 2.5% over the last 12 months, 51.1% over the last five years and 21% over the last 10 years of trading through the three months ended Oct. 28, 2018.

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The Santa Clara, California-based semiconductor company closed the year with earnings of $4.45 per share on $17.25 billion in revenue. For fiscal 2019 and 2020, analysts are projecting net earnings of $3.37 and $4.38 per share on revenue of $15.21 billion and $17.12 billion. Over the next five years, analysts forecast net earnings will grow an average 10.77% per annum.

Applied Materials is paying a quarterly dividend of 20 cents per ordinary share. The next payment will be on March 14. In order to benefit, investors must be on the company’s record no later than Feb. 21. The ex-dividend date is Feb. 20. The company has paid dividends since June 2005. The forward dividend yield is 2.04% versus an industry median of 2.03%.

Following a 25% drop for the 52 weeks through Jan. 28, Skyworks Solutions Inc.'s (SWKS, Financial) share price was $72.5 in early trading on Monday for a market capitalization of $12.87 billion. The share price of the Woburn, Massachusetts-based semiconductor company is still slightly above the 50-day simple moving average line, but well below the 200- and 100-day lines.

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The price was 20.6% above the 52-week low of $60.12 and 60% below the 52-week high of $115.98. The price-book ratio is 3.17 versus an industry median of 1.85, the price-sales ratio is 3.43 versus an industry median of 1.67 and the price-earnings ratio is 14.44 compared to an industry median of 19.95. The forward price-earnings ratio is 10.52 versus an industry median of 18.55. The 14-day relative strength index is 61.58. The stock is neither oversold nor overbought.

The mean recommendation is 2.5 out of 5 and the average target price is $87.29 per share.

GuruFocus assigned a financial strength rating of 10 out of 10 and a profitability and growth rating of 9 out of 10.

The ROE is 22.71% compared to an industry median of 7.07%.

The operating cash flow for the trailing 12-month period through the third quarter was $1.3 billion. The average annual growth was 3.3% over the last five years.

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Approximately 45% of the operating cash flow is free cash flow. This has grown at a rate of 22% and 25.5% over the last five and 10 years of operations through the quarter ended Sept. 28, 2018.

Skyworks Solutions is paying its shareholders a quarterly dividend of 38 cents per share for a forward dividend yield of 2.1% versus an industry median of 2.03%.

For 2019 and 2020, analysts are forecasting earnings of $6.96 and $7.63 per share on revenue of $3.74 billion and $3.99 billion. The company produced $3.87 billion in revenue in 2018, which dropped a net profit of $7.22 per share.

Annual net earnings are predicted to increase 11.2% on average for the next five years.

Lear Corp. (LEA, Financial) was trading around $158.8 per share in early trading on Monday, reflecting 6.6% upside from the previous close. The share price has decreased 19% over the past year and is below the 200-day SMA line but above the 50- and 100-day lines. The 52-week range is $114.45 to $206.36. The market capitalization is $10.2 billion.

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Lear has a price-book ratio of $2.39 versus an industry median of 1.45, a price-sales ratio of 0.49 compared to an industry median of 0.78 and a price-earnings ratio of 8.11 versus an industry median of 15.55. The forward price-earnings ratio is 8.53 versus an industry median of 10.89.

The recommendation rating is 1.9 out of 5 and the average target price is $172.46 per share.

GuruFocus has assigned a financial strength rating of 7 out of 10 and a profitability and growth rating of 8 out of 10. Lear has a ROE of 11.03% versus an industry median of 4.09%.

The company has produced $1.6 billion in cash flow over the last 12 months of operations. The chart shows operating cash flow is progressing well. The free cash flow has increased at a rate of 47.2% annually over the last five years.

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Lear allocates a portion of free cash flow to dividend payments. The company is paying a quarterly cash dividend of 70 cents per ordinary share for a forward dividend yield of 1.76% versus an industry median of 2.41%.

The Southfield, Michigan-based auto parts distributor is increasing the annual sales turnover. Revenue of $21.15 billion produced earnings of $18.19 per share in 2018. The top and bottom lines increased 13.6% and 7% from 2017.

For full-year 2019, consensus is for 2% sales growth to $21.57 billion, which is expected to back higher earnings of $18.47 per share. Analysts are also forecasting net earnings will grow 7.11% on average every year over the next five years.

Disclosure: I have no positions in any securities mentioned in this article.

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