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DOW THEORY

FORECASTS

®

Vol. 76, No. 42, October 19, 2020

St oc k M ark e t Tre n ds & Se c urit ie s R e por t s Sin c e 19 4 6

Time for a close-up

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Earnings roll call Bank results ■ For the September quarter, J.P. Morgan Chase ($100; JPM) grew earnings per share 9% to $2.92, well ahead of the consensus of $2.24. Revenue increased 3%, also topping expectations. Growth was driven by J.P. Morgan’s investment bank, where sales climbed 21%. Average loans crept 1% higher, while average deposits jumped 30%. The bank set aside $611 million for potential loan losses, compared to $10.47 billion reserved in the June quarter, a signal that management believes it’s now wellpositioned for any further fallout from the current recession. Urging lawmakers to pass additional fiscal stimulus, CEO Jamie Dimon said J.P. Morgan may have set aside $10 billion more than necessary for soured loans if the economy continues to recover but may need to boost reserves by an additional $20 billion if the U.S. enters a doubledip recession. J.P. Morgan is a Buy and a Long-Term Buy. ■ J.P. Morgan’s September-quarter results were stronger than other large U.S. banks. Bank of America ($24; BAC) reported 16% lower earnings per share on an 11% drop in revenue, while setting aside Continued on page 6

We didn’t pick the name Focus List for its aesthetics. Focus provides clarity and detail at the expense of a panoramic view, which is kind of the point of the Focus List. Our Buy List features 29 stocks, all of which boast superior potential for year-ahead total returns. The Focus List, currently at 18 stocks, represents our favorites from among the Buy List. Academic research suggest that portfolios of 25 to 30 stocks provide adequate diversification. Our in-house research suggests that by sticking to high-quality stocks, such as those with strong Quadrix® scores, you can achieve excellent diversification with somewhat fewer stocks, perhaps 20 to 25. The Focus List sacrifices some diversification for a portfolio size most investors can comfortably manage. Today, however, we take an even tighter

focus. In the following paragraphs, we review seven stocks that, at this moment, represent our top selections from the Focus List. Seven stocks does not a portfolio make, so don’t treat this list as allinclusive. But if your portfolio doesn’t already contain these names, give serious thought to adding the ones you lack.

The lucky 7 Akamai Technologies ($113; AKAM) grew per-share profits 17% in the 12 months ended June and 22% annually over the last three years. The company’s revenue and profits kept rising throughout the pandemicdriven economic downturn, in large part because the company facilitates the delivery of content and services Continued on page 4

FOCUS LIST OUTPERFORMS OVER LONG HAUL Since inception * † 373.3%

904.8% 663.7% Focus List

S&P 500 Index

Since its inception in late 1994, the Focus List has returned 904.8%, or 9.4% annually, versus 663.7%, or 8.2% annually, for the S&P 500 Index. So far this year, the Focus List has performed 13.8%, versus 8.7% for the S&P 500. Returns exclude dividends and transaction costs.

Since 2003 † 299.1%

Year-to-date † 13.8% 8.7% Focus List

S&P 500 Index

Note: Returns assume fully invested portfolios and exclude dividends and transaction costs. * Initiated Dec. 23, 1994. † Through Oct. 14.

Dow Theory Forecasts is an independent investment adviser and makes no commissions on the stock transactions of its subscribers.

Time for a close-up Continued from page 1 over electronic networks — services that remained in demand as hundreds of millions of people worldwide stayed home, relying more than ever on computers and smartphones. Going forward, we expect network security to drive most of Akamai’s growth, offsetting a decline in demand for traditional content delivery. As hackers become more sophisticated and cybercrime picks up, the need for security services should also increase. Many of the largest users of data rely on internal delivery systems, while cloud-computing giants increasingly compete with Akamai to distribute content. How ever, Akamai is no stranger to technological advancement, reshaping itself multiple times over the last 20 years as the world changed around it. Analysts project sales growth of 9% this year and 6% next year, with per-share profits rising 14% this year and 7% next year. At 23 times trailing earnings, Akamai trades at a 14% discount to its industry median. Akamai is a Focus List Buy and a Long-Term Buy. Analysts target growth of 9% in sales and 8% in per-share profits for Charles River Laboratories ($245; CRL) this year, followed by 10% sales growth and 18% profit growth in 2021. Next year’s estimates are on the rise, but may still understate Charles River’s operating momentum. The company said drug research started picking up in June as laboratories started opening again. Charles River’s focus on the early stages of drug development keeps it out of the way of most of its largest competitors, which typically work with human trials. Investments in manufacturing infrastructure and cellular research have broadened the company’s addressable markets in recent years. In addition, the company 4

kept operating its laboratories through the pandemic, in the process grabbing share from rivals. While Charles River likely won’t keep all of those new clients, we do expect the company’s availability to yield some new permanent business and open up new cross-selling channels. Charles River is a Focus List Buy and a Long-Term Buy. Bolstered by massive demand for videogames as the world hunkered dow n at home, Electronic A rts’ ($133; EA) per-share profits rose more than 400% in the June quarter on 21% sales growth. EA’s CEO, Andrew Wilson, summarized the company’s competitive position succinctly in the June-quarter earnings call: “We sit at the intersection of two fundamental secular trends that have become increasingly clear. First, social interactions in our world are moving from physical to digital. And second, the consumption of sports and entertainment is moving from linear to interactive. We’ve seen both of these trends accelerate during the COVID-19 period.” Wilson’s words refl ect our optimism about EA, which boasts competitive advantages in a fast-growing market segment. The company has a history of introducing plenty of popular new games every year. EA also controls a number of massive franchises, such as Madden football, FIFA soccer, and The Sims, all of which are seeing large increases in player usage. The stock is a Focus Buy and a Long-Term Buy. Facebook ($272; FB) may not be bulletproof, but it certainly seems to recover quickly from even the most grievous wounds. Over the last couple years, the company has faced antitrust scrutiny, lawsuits over privacy practices, criticism over how well it monitors user posts, worries that it has grown too large and powerful, plus the recent advertising slow-

Dow Theory Forecasts, October 19, 2020

down. Yet the shares have returned 13% over the last three months and 32% so far this year, building on a 2019 return of nearly 57%. The company should return to operating growth in the December quarter, with analysts projecting a per-share-profit gain of 6% on 14% higher sales. The consensus projects profit growth of 26% in 2021 and 25% in 2022, supported by respective sales growth of 24% and 20%. Such robust gains seem particularly impressive when you consider that Facebook is on pace for $80 billion in annual revenue this year. Few megacaps can expand at that pace. In order to support such growth, Facebook continues to launch new services on its social-media platform an d aggres s i v el y grow membership in foreign markets. The company benefits from its innovation in messaging, video, and chat-focused applications. Facebook doesn’t need to create the new apps, but its massive user base — more than 200 million unique users in August — pretty much ensures that new ideas will gravitate toward Facebook. Facebook is a Focus List Buy and a Long-Term Buy. Microsoft ($221; MSFT) continues to reposition itself in growth markets. After struggling for years to move beyond its perceived dependence on personal computers, the company now operates in a variety of high-growth markets, most notably cloud computing, where it lags only Amazon Web Services in market share. Over the years, Microsoft has moved away from selling one-shot software packages in favor of licenses, creating a more stable revenue stream from the legacy Office business-software package. Cloud software and services accounted for about 14% of revenue in fiscal 2020 ended June but are expected to grow at an annualized rate

FOCUS FAVORITES

of more than 40% for the next two to three years. Other sources of growth include LinkedIn (7% of revenue, with annual growth expectations of about 15%) and the Xbox gaming platform (9% of revenue, with the potential for annual growth of more than 20%). Like EA, Xbox is benefiting from secular trends favoring videogames. In September, Microsoft announced a deal to acquire the parent company of game developer Bethesda Softworks for $7.5 billion. The consensus calls for profit growth of 12% in fiscal 2021 and 14% in fiscal 2022, with estimates for both years up over the last 90 days. Microsoft is a Focus List Buy and a Long-Term Buy. Progressive ($100; PGR) earns a 97 Overall in Quadrix, reflecting ranks of 80 or higher in five of seven category scores. Scores of 92 for Momentum and 98 for Quality spring from strong, consistent growth in sales, profits, and cash flows. Helped by a decline in driving (and thus accidents) during the times of stayat-home orders, Progressive grew pershare profits 30% in the June quarter

and 43% in the March quarter. Growth continued in the September quarter, with profits up 41%, but analysts expect profits to decline in 2021, a victim of extremely tough comparisons and low interest rates on investments. The insurer trades at 14 times trailing earnings, 8% below its own three-year average and 2% below its industry median, despite superior growth potential. Progressive generates above-peer underwriting margins, helped by technological advancements in risk assessment. While the coronavirus-driven tailwinds will eventually stop blowing, Progressive has managed to push through premium increases in recent months despite broad market pressures. We expect premiums to continue rising in the year ahead. Progressive is a Focus List Buy and a Long-Term Buy. The consensus calls for Thermo Fisher Scientific ($467; TMO) to boost sales 21% and pershare profits 39% in the second half of 2020, helped by a surge in demand for medical equipment and supplies from researchers seeking treatments and vaccines for the coronavirus.

In the June quarter, Thermo Fisher generated $1.3 billion in coronavirusrelated revenue, sparking per-shareprofit growth of 28%. Of course, at some point the COVID-19 train will lose steam. Most prognosticators expect a vaccine to become available in the fi rst half of 2021, with some projecting a firstquarter release. Analyst targets reflect that return to normalcy, estimating sales growth of 7% and profit growth of 11% in 2021. However, estimates for both sales and profits have been climbing for several months, and nobody can cite a true precedent for the current situation. In addition, Thermo Fisher has aggressively launched new products and marketed additional products and services to clients initially driven to the company by the coronavirus. We thought highly of Thermo Fisher’s mix of products and services before the pandemic, and if it can hold onto some of the recent market-share gains after the coronavirus research spending dissipates, the consensus could prove conservative. Thermo Fisher is a Focus List Buy and a Long-Term Buy.

THE FOCUS LIST

Company (Price; Ticker)

Div. Yield

StockMarket Value (Billions)

– Growth, Last 12 Months – –––– Quadrix Scores –––– Per––– P/E Ratio ––– 12Share Operating On NextFactor Reranked Sales Profits Cash Flow Trailing Yr. Est. Overall Sector Overall Sector

Akamai Technologies ($113; AKAM) Alphabet ($1,563; GOOGL) Apple ($121; AAPL) Applied Materials ($64; AMAT) Booz Allen Hamilton ($82; BAH)

0.0% 0.0 0.7 1.4 1.5

$18.4 1,067.4 2,072.7 58.4 11.4

9% 17% 12 -11 6 12 9 16 10 14

2% 9 16 -5 11

23 34 37 17 25

21 28 31 14 20

79 68 76 92 79

67 61 16 89 32

71 47 76 95 83

Technology Communications Technology Technology Technology

Canadian Pacific Rail. ($322; CP) Charles River Labs. ($245; CRL) Electronic Arts ($133; EA) Facebook ($272; FB) ICON ($208; ICLR)

0.9 0.0 0.0 0.0 0.0

57.4 12.2 38.3 774.4 10.9

3 12 19 20 2

13 18 35 2 0

16 41 27 1 81

18 34 22 33 32

16 29 22 27 27

84 81 77 76 74

85 58 76 86 31

57 66 67 55 59

Industrials Health care Communications Communications Health care

Kirkland Lake Gold ($51; KL) Lam Research ($374; LRCX) Lennar ($67; LENb) Microsoft ($221; MSFT) Progressive ($100; PGR)

1.0 1.4 1.5 1.0 0.4

18.4 54.3 25.4 1,671.4 58.4

80 4 4 14 13

74 10 28 21 30

63 -33 223 16 10

16 23 12 38 14

12 16 8 30 18

94 85 100 74 97

77 53 30 51 90

92 89 99 65 83

Materials Technology Cons. discretion. Technology Financials

Thermo Fisher Scientific ($467; TMO) Trimble ($51; TRMB) UnitedHealth Group ($322; UNH)

0.2 0.0 1.6

184.7 12.7 305.9

6 -3 5

14 4 33

6 3 79

35 25 18

27 24 17

89 77 88

78 52 94

69 72 86

Health care Technology Health care

Focus List average

0.5

358.5

13

18

30

25

22

83

63

74

Note: Quadrix scores are percentile ranks, with 100 the best.

Dow Theory Forecasts, October 19, 2020

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