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Ascendere Weekly Ranking Update: October 22, 2010 Example

Ascendere Weekly Ranking Update: October 22, 2010 Example

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Published by Stephen Castellano
Updated weekly rankings of "high-quality" and "low-quality" stocks.
Updated weekly rankings of "high-quality" and "low-quality" stocks.

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Published by: Stephen Castellano on Oct 27, 2010
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Ascendere Associates LLC October 22, 2010J. Stephen Castellano Page 1 steve@ascenderellc.comAscendere Associates LLCwww.ascenderellc.com J. Stephen Castellanosteve@ascenderellc.com 
Ascendere Weekly Ranking Update: October 22, 2010
Every week, we include in this report a list of the highest quality and lowest quality stocks as defined by four key factors: 1) Relative Value; 2) OperatingMomentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality. At the end of each month, we take roughly 1/3 of the stocks on this list to constructour various long/short and long-only model portfolios,which are rebalanced monthly. But as you can read below, there are several other ways to use this data. This week, 62 stocks make the "high-quality" list, with 18 additions and 18 deletions. 42 stocks make the "low-quality" list, with 6 additions and 7 deletions toour "low-quality" list. In our opinion,
American Express (AXP)
is the most important new "high-quality" stock this week.
Three ways to use this newsletter:
Build our own hedge fund
 Use data in this report at discretion or as an enhancement to our model portfolio strategy newsletter.2)
Anticipate sell side research ratings changes
 It is not uncommon to find these stocks presaging changes to sell side price targets, ratings or conviction lists. See our"Nostradamus"report. 3)
Generate relevant long-term ideas for further study
 Buy and hold still does work. We do the heavy lifting and find you "high-quality" stocks; you provide the incremental research time and effort.
Examples of some recent sell side actions
Our 10/15 newsletter highlighted The Chubb Corp. (CB) and on 10/22 Credit Suisse raised its price target on CB to $61 from $56.
On 10/8, we highlighted Freeport McMoRan (FCX) and since then we have counted at least five price target increases by the sell side.
On 9/24, Assured Guarantee (AGO) appeared in our Weekly report as a "high-quality" stock idea, and a week later on 10/1 we purchased it for ourportfolio. On 10/20 Zacks listed it as a #1 Rank Pick, but by that time it has already run up by more than 20% in our portfolio.
Ascendere Associates LLC October 22, 2010J. Stephen Castellano Page 2 steve@ascenderellc.com
Highlighted Stock Ideas
"High-Quality" Stocks
61 "high-quality" stocks make our weekly ranking update report this week, flat with the 61 reported last week. However, there are 18 new names to the list and18 deletions. Rankings can be volatile during earnings season as new fundamental data is gradually updated.We define quality as relative to four key factors: 1) Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality.About 1/3 of these stocks make it to our model portfolios that turnover monthly, but we think some of these stock ideas could work well with average 12-monthholding periods as well. Our opinion is based on a backtest we conducted back to 12/31/2004, which showed that 12-month returns from stocks on refined listaveraged about 11%, with the highest 12-month returns averaging +95% and the lowest 12-month returns averaging -42%. Deeper fundamental analysis of stocks on this list might reveal some of the stronger, longer-term ideas.Of the 18 new "high-quality" stock ideas this week, five of them stand out to us. These include RenaissanceRe Holdings Ltd. (RNR), American Express Company(AXP), Gilead Sciences Inc. (GILD), Union Pacific Corporation (UNP) and Telecom Argentina S A (TEO).
RenaissanceRe Holdings Ltd. (RNR)
is a "global provider of reinsurance and insurance to cover the risk of natural and man-made catastrophes." This $3.8bmarket cap company is trading at 1.05x tangible book value and 7.6x the consensus calendar-year 2011 EPS estimate of $7.95, and is yielding 1.6%. It reports3Q10 results on Thursday morning, October 28, 2010. The company states in its 2009 annual report that the most important metric by which it measures shareholder value is tangible book value per share plus the change in accumulated dividends. This company has a history of raising dividends each year by $0.04per share; its latest annualized dividend is $1.00, up from $0.96 in 2009. The stock has traded between 0.81x to 2.11x tangible book over the last 7 years, and in2008 and 2009 traded at an average tangible book value of 1.21x and 1.19x. RNR stock got our attention because it is only two of the 18 new adds that scoredthe best possible score in 3 out of 4 factors, and the second highest score for a fourth. Based on forward looking estimates, it looks like operating momentummay have peaked in the June 2010 quarter, but given its rising stock price though still low P/BV multiple and rising analyst revision momentum, we wonder if analyst revisions will continue. Perhaps earnings estimates are too low because of overly-high estimates for the cost of Gulf of Mexico cleanup? This is onestock that deserves further study.
American Express Company (AXP)
is a "go-to" stock in the Financials sector, the same way that Freeport McMoran (FCX) is a go-to stock in Materials. Whenportfolio managers speak of financials, they always want to know about AXP. We have not been able to say anything good about American Express for a longtime, but this may be changing. AXP, a $47b market cap company, is trading at 3.2x book value, 11.0x times the calendar 2011 consensus EPS estimate of $3.55,with an annualized dividend of $0.72 and yield of 1.8%. The stock sold off 3% this past Friday following its 3Q10 report the night before. Revenue and earningsbeat consensus, helped in part by rising card usage, lower defaults, and a release of bad debt reserves. That sounds like positive developments to us, but anumber of analysts expressed concern about higher expenses and increasing risk of a decline in its merchant discount rate and ongoing pressure related to theCredit Card Accountability, Responsibility and Disclosure Act.These risks are real, but perhaps embedded enough in current valuations, likely ongoing analystrevision momentum and relatively low but still likely positive operating momentum. In our opinion, AXP as of today, looks like one of the best relative FinancialSector stocks out there and deserves a look as both a short-term and long-term holding idea.
Ascendere Associates LLC October 22, 2010J. Stephen Castellano Page 3 steve@ascenderellc.com
We are glad to see
Gilead Sciences Inc. (GILD)
back on our "high-quality" list after a six-month hiatus. On April 21 of this year, GILD sold off nearly 10% to $40.76after reporting a good quarter but reduced guidance, compelling us to write a "screaming buy" report on the shares. The crux of our argument was that despitea near-term peak in operating momentum and long-term uncertainty with its drug pipeline, given its strong ROIC profile and a PE multiple of 11.8x our "ultraworst case estimate" of $3.45 for calendar year 2011 EPS, GILD was severely undervalued.Apparently as punishment for making a call that was probably contrarian to most of the 22 sell side analysts covering this stock, it declined another 22% over the course 4 months to $31.83 on August 31, 2010. Since thenthe stock has recovered back to $39.11. The stock continues to trade at absurdly low levels -- 9.7x a consensus EPS estimate of $4.04. As a result, we give GILD ascore of 5 out of 5 for Relative Value, and Fundamental Quality scores a high-five as well. Analyst Revisions are moving positively again, and we give this metric ascore of 4 out of 5.GILD reported a better than expected quarter on October 19, driven by strong HIV treatment sales and its ongoing stock repurchase plan. The Wall Street Journal noted that GILD is trading in line with Merck & Co. (MRK) and Eli Lilly & Co. (LLY). Given Gilead's strong ROIC profile and plenty of  breathing room to get a new pipeline prior to major patent expirations in 7 years, GILD's low valuation continues to be one of the most absurd things we haveseen in a long time and, as such, is managing one of the few major share repurchase programs that has ever made any sense. With Analyst Revisions trendingup again, and a management intent on buying back its undervalued shares, this stock may continue attracting momentum investors.If you liked CSX Corp. (CSX) last week, you will love
Union Pacific Corp. (UNP)
this week, according to our relative ranking models. Last week, CSX Corp. madeour "high-quality" list, but this week it was knocked off as a result of relatively better financial reports from Industrial sector companies, including Union PacificCorp. At $42.6b, UNP's market cap is nearly twice as large as CSX and now sports a better cumulative factor score than CSX. UPN trades at 13.7x the calendaryear 2011 EPS estimate of $6.29 and pays a $1.32 annualized dividend for a yield of 1.4%. UNP is trading at a slight premium to CSX, but this is justified by itsstrong analyst revision momentum, which scores a 5 out of 5. UNP reported a strong quarter following the market close on October 21, with 3Q10 EPS of $1.56beating Street consensus of $1.50, driven by better than expected prices and cost control. This prompted a number of positive analyst revisions to estimatesand price targets. UNP's debt stands at $9.8b, cash is $1.4b, and its debt-to-capital ratio is decent at 31%. Debt-to-capital would only move up to 39% if itacquired CSX, though we note we have no inkling of the possible synergies between the two or any of the antitrust issues that might be raised. But what bettertime to make an acquisition, just prior to a possible upturn in the economy and during growing evidence that freight traffic is recovering? If the PE spread everwidens significantly more between the two companies, a M&A analysis might be worth some time. Until then, UNP looks like a solid industrial stock, replacingCSX relative to last week.This week the ADRs of 
Telecom Argentina SA (TEO)
also catch our attention, showing highest scores for Relative Value, Operating Momentum and FundamentalQuality. The company is trading at only 7.8x the consensus 2011 EPS estimate of $2.97 per ADR and has net cash on its balance sheet. It is a mystery to us howany capital intensive company like a telecom can have net cash, but those are the numbers. TEO is growing revenues and earnings at an impressive clip despitereports of a saturated mobile and fixed line telecom market due to value added services. Perhaps Verizon and AT&T ought to pay a visit to TEO; maybe they willlearn something. This company deserves further study.
Moving Off the "High-Quality" List
Of the 18 companies moving off the list, notably are Assured Guarantee (AGO), The Chubb Corporation (CB) and CSX Corp. (CSX). We highlighted CB and CSX lastweek, but updated financial reports and associated rankings have pushed these stocks off the list again on a relative basis. Assured Guarantee has moved upabout 25% MTD in anticipation of benefitting from mortgage putbacks, but analyst revision momentum has declined beneath our cutoff point relative to otherFinancials. For additional deletions, see our table below.

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