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10 Stocks That Even the Pope Could Love

You won't find any businesses in this portfolio that violate the principles of the Catholic Church.

Comfort the sick; feed and clothe the poor; provide shelter for the homeless. Pope Francis, who begins his first visit to the U.S. on September 22, has focused on issues of social justice since being named to the Catholic Church’s top slot in 2013. But even before Francis became pope, several mutual funds applied the teachings of the church to their selection of stocks and bonds. In light of the pope’s visit, we’ve taken a look at the stock holdings of three Catholic values fund families—Ave Maria, LKCM Aquinas and Epiphany FFV (FFV stands for Faith and Family Values)—which all base their investment choices on the ecumenical constraints of the church. That means barring investments in companies that facilitate abortions or produce pornography, among other things.

Even with these exclusions, Catholic values funds have plenty of companies to choose from. So we took a look at their top holdings in search of attractive stocks. Here are 10 that savvy investors—and even the pope—could love. (Share prices and related figures are as of September 18.)

Health care

Spun off from Abbott Labs in January 2013, drugmaker AbbVie (symbol ABBV, $61.22) is owned by two of the three fund companies that specialize in Catholic causes: LKCM’s Aquinas Growth (AQEGX) and Epiphany FFV (EPVNX). AbbVie is best known for its blockbuster autoimmune drug, Humira, which is used to treat arthritis, Crohn’s disease and psoriasis. The stock, which has climbed 74% since AbbVie began trading as a separate entity, has hit a rough patch lately, partly due to worries that the company could lose protection for some of its Humira patents next year. But analysts say that Humira won’t be easy to replicate and, in any case, AbbVie has an impressive list of new medications, treating everything from fibroid tumors to hepatitis C and leukemia, working their way through its labs. Thanks in part to the recent pullback—the stock has dropped 13% since mid-July—the shares sell for just 13 times estimated year-ahead earnings. Plus, the stock yields a healthy 3.3%. By comparison, Standard & Poor’s 500-stock index sells for 16 times estimated year-ahead profits and yields 2.2%. UBS analyst Marc Goodman rates AbbVie a buy, with a one-year price target of $81.

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AbbVie’s former parent, Abbott Labs (ABT, $43.33) is a top holding in both Ave Maria Growth (AVEGX) and Ave Maria Rising Dividend (AVEDX) funds. When Abbott spun off its brand-name drug enterprise in AbbVie, it kept its generic pharmaceutical and medical device businesses, which have continued to grow rapidly. Because of the strong dollar, Abbott expects earnings to dip slightly this year. But analysts see profits rebounding by 11.5% next year. The stock trades for 19 times estimated year-ahead earnings and yields 2.2%. William Blair analyst Margaret Kaczor believes the company’s profit estimates are conservative and that the stock is likely to outperform the market over the next year.

St. Jude Medical (STJ, $67.31), which makes heart devices, is among the top holdings of the Ave Maria Catholic Values Fund (AVEMX). St. Jude, fresh off a restructuring aimed at consolidating its manufacturing and supply-chain operations, is expected to post flat earnings in 2015, then see profits rise by 9% next year. But what makes the shares especially compelling, says William Blair analyst Ben Andrew, is St. Jude’s planned $3.4 billion purchase of Thoratec, a company that makes medical devices designed for patients with advanced heart failure. Andrew says the deal gives St. Jude entrée to a business with annual sales of $1 billion. That will boost St. Jude’s revenues, he says, and revive the stock, which has slumped 13% since mid-July.

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Other well-regarded health care stocks that find a place in these ecumenical funds include CVS Health (CVS, $99.03), which runs drugstores and provides pharmacy-benefits management services; CVS’s benefits management rival Express Scripts (ESRX, $83.92); and medical testing giant Laboratory Corp. of America (LH, $119.40).

Food and clothing

Coca-Cola Corp. (KO) and Costco (COST) are key holdings in the Epiphany funds, but the shares are tough to recommend at today’s prices. Coke and Costco shares sell for 19 and 26 times projected year-ahead earnings, respectively. But neither company’s earnings are expanding quickly enough to justify those P/E ratios. On the surface, Yum Brands (YUM), $80.15), which owns the KFC, Pizza Hut and Taco Bell restaurant chains, also looks expensive, trading at 21 times estimated year-ahead earnings. But the stock looks more defensible in light of analyst projections that Yum will deliver double-digit-percentage earnings gains this year and next. Yum is a big player in China, which accounts for 52% of its annual revenues. UBS analyst Keith Siegner says Yum’s sales in China are picking up despite the country’s slowing economy, and he thinks the stock could reach $116 within a year.

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The Ave Maria Growth and Rising Dividend funds own shares in cut-rate clothing retailer Ross Stores (ROST, $49.12). The stock, which is down about 13% since midAugust, is now reasonably priced, says William Blair analyst Daniel Hofkin. Investors are worried about Ross’s rising inventory levels and relatively modest earnings projections. But Hofkin says that Ross boosted inventory this summer because it was able to get closeout merchandise at bargain prices. The company has a long history of successfully unloading its opportunistic buys. Indeed, Hofkin expects the rising inventory level to simply lead to stronger sales in coming quarters.

Housing

The stocks of home-improvement retailers Home Depot (HD, $115.12) and Lowe’s (LOW, $68.19) are owned by the Aquinas Growth and Ave Maria Rising Dividend funds, respectively. Although the stocks aren’t cheap—Home Depot sells for 20 times year-ahead earnings, while Lowe’s sells for 19 times projected earnings—UBS analyst Michael Lasser says both are attractive because the companies are experiencing growth spurts. Analysts on average expect Home Depot’s earnings to increase 16% in the fiscal year that ends in January and 15% in the following fiscal year, and they project that Lowe’s earnings will rise by 22% in the January 2016 fiscal year and 20% the following year.

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