4 midyear favorites for capital gains

These stocks offer modest valuations and superior growth potential for the year ahead.

By TheStockAdvisors Jul 1, 2013 8:51AM

Arrow Up (© Nicholas Monu/iStock Exclusive/Getty Images)By Richard Moroney, Dow Theory Forecasts

Many individual investors are overloading their portfolios in seemingly "safe" areas like utilities, telecom, health care and consumer staples. Far more attractive, in our view, are stocks that offer both superior growth and moderate valuations.

Four especially promising picks -- midyear capital gains favorites -- are reviewed here. Each is modestly valued relative to its growth potential and seems capable of exceeding consensus expectations for year-ahead earnings growth.

B/E Aerospace (BEAV)

B/E Aerospace equips the cabins of commercial and business jets with electrical components, fasteners, lavatories, and even coffee makers. The airline industry's shift toward wide-body planes could also give B/E a boost.

B/E shares are not cheap at 20 times trailing earnings. But the stock's valuation reached similar levels last year, and the price-to-earnings ratio topped 24 in both 2010 and 2011. It has topped the consensus profit estimate in at least 28 straight quarters, with shares rallying on the results in six of the last seven quarters.

Express Scripts (ESRX)

Express Scripts, as the largest pharmacy-benefit manager in the U.S., processes almost 1.5 billion prescriptions a year and covers about 33% of the U.S. population.

Free cash flow more than doubled to $4.92 billion in the past year, allowing the company to accelerate repayment of some of the debt used to fund its $29.1 billion acquisition of Medco Health Solutions in April 2012.

At 16 times trailing earnings, the stock trades 28% below its five-year average. The shares also trade more than 30% below their five-year averages for price/sales and price/operating cash flow ratios.

Magna International (MGA)

Magna, an automotive-systems maker for most major auto manufacturers, should benefit from a wave of new vehicle platforms in North America. Magna's business in Europe also showed improvement in the March quarter.

Magna trades at a discount of more than 35% to the median for S&P 1500 auto parts and equipment stocks relative to trailing earnings, sales, and cash provided by operations.

Qualcomm (QCOM)

Qualcomm has traded sideways this year, partly on concerns that competition and a shift toward cheaper smartphones in Asia will crimp profit margins.

But shares seem unduly cheap at just 15 times trailing earnings, their lowest price-to-earnings ratio in more than a decade. In March, Qualcomm boosted its quarterly dividend by 40%, pushing the yield to 2.3%.

Continued robust dividend growth seems likely in coming years, given Qualcomm's conservative payout ratio of 34% and prodigious generation of free cash flow. Net cash totals $7.65 per share, 12% of the stock's price.

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