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7 Stocks for 2017

- By James Li

On Jan. 20, the "Strong Stocks 2017" Screener listed seven companies with high value potential for 2017, including Allegiant Air Co. (ALGT), Biogen Inc. (BIIB), CGI Group Inc. (GIB), Hawaiian Holdings Inc. (HA), Novo Nordisk A/S (NVO), Open Text Corp. (OTEX) and Universal Health Services Inc. (UHS). These companies have high business predictability, strong gross margins and solid 10-year revenue growth.


All-in-one Guru Screener identifies strong companies

With the All-in-One Guru Screener, you can generate a list of companies that meet your investing criteria. The Screener contains over 150 predefined filters arranged into nine tabs: fundamental, valuation ratio, profitability, growth, valuation rank, price, dividends, gurus and insiders. You can also generate customized filters through the "Customized" tab.

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Over the past few months, I researched what characteristics strong companies have by studying the value strategies of Peter Lynch and Warren Buffett (Trades, Portfolio). Based on the research, I generated a screener with the following filters:

  • The company has a market cap of at least $500 million and does not trade on the over-the-counter market.

  • The company's GuruFocus business predictability rank is at least four stars. Several of the most-popular value screeners require a four-star predictability rank.

  • The company has a gross margin of at least 40%. Such companies, as Buffett states in his four-criterion approach, have durable competitive advantage.

  • The company's operating margin growth rate is at least 2%. Ideally, the company should have expanding operating margins.

  • The company's 10-year revenue growth rate is at least 10%. Peter Lynch prefers stalwarts, companies whose 10-year revenue growth rate is between 10% to 20%. The Screener also includes the fast growers.

  • The company's price-earnings to growth and yield (PEGY) ratio is less than 2. While Buffett values companies based on the price-earnings to growth (PEG) ratio, the Screener also factors in the company's trailing dividend yield.

  • The company's free cash flow yield is at least 5%.



The "Screener" contained seven companies as of Jan. 20.

Allegiant Air

Allegiant Air offers low-cost passenger air travel to residents of small, underserved cities in the U.S. The Las Vegas-based airline has strong growth potential, with a profitability rank of 10 and a predictability rank of 4.5 stars.

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Allegiant reported solid passenger traffic results for December 2016, fourth-quarter 2016 and full-year 2016, suggesting strong business operations. The number of passengers for full-year 2016 increased about 17.6% from full-year 2015 while available seat miles increased 16.5% over the year. On Jan. 10, the airline announced 17 new routes that will begin service by end of May 2017, which further increases the company's growth potential for the new year.

Among the gurus who own shares in Allegiant, Jim Simons (Trades, Portfolio) owns 1,186,800 shares. Simons increased his stake in Allegiant by 2.40% during third-quarter 2016.

Biogen

Biogen, a Massachusetts biotech company, develops and markets therapies for neurological, autoimmune and hematologic disorders. The company has strong value potential with a financial strength rank of 7, a profitability rank of 9 and a predictability rank of five stars.

On Jan. 17, Biogen announced a settlement and license agreement with Forward Pharma A/S (NWP) (1FPA.F), where Biogen will receive an "irrevocable license" to Forward Pharma's intellectual property upon approval of the Danish company's shareholders. In return, Biogen will pay $1.25 billion in cash plus any royalties generated from the American company's net sales for sclerosis treatments covered with a Forward Pharma patent and have dimethyl fumarate ("DMF") as an active pharmaceutical ingredient. Biogen CEO Michel Vounatsos praised the license agreement, which is expected to "strengthen [Biogen's] intellectual property for TECFIDERA, the leading oral therapy for multiple sclerosis."

Biogen's profit margins and returns are near a 10-year high and outperform over 90% of global biotech companies. As the company exhibits strong value potential for early 2017, Ken Fisher (Trades, Portfolio) and Spiros Segalas (Trades, Portfolio) boosted their positions in Biogen. The latter expanded his Biogen stake 30% during fourth-quarter 2016.

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A previous article discusses how Biogen and other health care companies offer solid defensive potential in a significantly overvalued U.S. stock market.

CGI Group

CGI Group, a Canadian information technology services company, provides business consulting services for business transformation, IT strategic planning, business process engineering and systems architecture. The company's profitability ranks 9 out of 10 while its business predictability ranks four stars out of five.

The technology company reported revenues of $10.7 billion, backlog of $20.9 billion, adjusted EBIT of $1.56 billion and net earnings of $1.069 billion for the fiscal year ending Sept. 30, 2016. Revenues increased 3.9% from fiscal 2015 revenues while net earnings climbed 9.3%. CGI reduced their long-term debt by $182.7 million during fiscal 2016 and by $141 million for the trailing 12 months. The company also repurchased about 9.32 million shares during fiscal 2016, including about 7.11 million shares from the "Caisse" for about $400 million in cash. As of September 2016, CGI's three-year average share buyback ratio of 0.7 outperforms 86% of global IT service companies.

As the company has good value potential, Jeremy Grantham (Trades, Portfolio) expanded his CGI position by 116.17% during third-quarter 2016. Grantham has the largest stake in CGI with 709,900 shares.

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Hawaiian Airlines

Hawaiian Airlines offers non-stop air travel to Hawaii from the U.S., the South Pacific, Australia, New Zealand and Asia. The Honolulu airline has a predictability rank of four stars, and its profitability ranks 9 out of 10.

Hawaii's "largest and longest-serving airline" reported a record 11 million passengers for full-year 2016, outperforming the 2015 passenger count by 3.5% and recording 12 straight years of growth. During summer 2016, Hawaiian launched two non-stop routes to Japan, one from Honolulu Airport to Tokyo Narita Airport and one from Kona Airport to Tokyo Haneda Airport.

Even though Hawaiian's operating margin slightly underperforms Allegiant's margins, Hawaiian's operating margin generally increased over the past six years.

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Novo Nordisk

Novo Nordisk, a Danish biotech company, develops pharmaceutical products for its two business segments: diabetes care and biopharmaceuticals. The company has a profitability rank of 9 and a business predictability rank of five stars.

The company has five good signs and no warning signs as of Jan. 20. While the company's predictability rank is on watch, Novo Nordisk still has consistent per-share revenue growth, operating margin growth and EBITDA growth. Additionally, the company's trailing dividend yield is near a 10-year high and its valuations are near a five-year low.

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Open Text

Ontario based Open Text provides software services for finding, utilizing and sharing business information. The company has a profitability rank of 9 and a predictability rank of five stars.

During fiscal first-quarter 2017, Open Text reported total revenues of $492 million and earnings per share of $7.46 based on generally accepted accounting principles. Revenues increased 14% year over year on a constant currency basis. CEO Mark Barrenechea expects the company's fiscal 2017 performance to reflect strong product offerings with innovation and acquisitions, which should result in double-digit revenue growth for the new fiscal year. Open Text expects to close its acquisition of Dell Technologies Inc.'s (DVMT) Enterprise Content Division within 75 days of the September 2016 announcement.

Open Text's stock price is close to a 10-year high as of Jan. 20. On Dec. 21, 2016, the company announced a 2-for-1 share split, which should decrease the stock price from about $63.4 per share to $31.7 per share.

Universal Health Services

Pennsylvania medical care company Universal Health Services operates a variety of hospitals for acute care, surgical procedures and radiation oncology. The company has a profitability rank of 9 and a predictability rank of five stars.

As the company reported solid third-quarter 2016 earnings results, UHS narrowed its full-year 2016 earnings guidance to $7.16 to $7.43. The company has seven good signs, including a Piotroski F-score of 7 and a dividend yield close to a three-year high. During the past six months, four gurus invested in UHS as the company has strong value potential:

  • Lee Ainslie (Trades, Portfolio): add 65.56%, over 4.58 million shares as of Sept. 30, 2016

  • Andreas Halvorsen (Trades, Portfolio): bought 1.929 million shares

  • Jana Partners (Trades, Portfolio): bought 1.274 million shares

  • Larry Robbins (Trades, Portfolio): bought 950,390 shares



See also

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Disclosure: The author has no positions in the stocks mentioned in the article.

This article first appeared on GuruFocus.