Quadrix Stock-Rating Systems Turns 12

12/26/2011


We've been publishing Quadrix scores every week at www.dowtheory.com since the first quarter of 2000. Along the way we've made adjustments and improvements to the rating system — and picked up some tips on the best way to use it. Among the highlights:

Using Quadrix requires discipline. High Quadrix scorers do not outperform every quarter. But, as shown below, U.S.-traded stocks with Overall scores above 80 have delivered an average three-month return of 3.3% in the 46 quarters since March 2000, versus 2.3% for the entire Quadrix universe. Quadrix has outperformed more consistently in down markets, helping top scorers deliver positive average returns in nearly 59% of the 46 quarters.

-------- Stocks With Quadrix Overall Scores of --------
100 to 80
80 to 60
60 to 40
40 to 20
20 to 0
Average quarterly return (%)
3.3
2.6
2.7
2.6
0.5
Standard deviation of returns (%)
11.6
10.3
12.0
15.9
19.3
Return/standard deviation ratio
0.28
0.25
0.22
0.16
0.03
% of quarters with positive returns
58.7
56.5
58.7
56.5
47.8

Aim high. Much of our early Quadrix research focused on the returns of the top one-fifth of stocks, and we still consider an Overall score of 80 an important breakpoint. But we've learned to pay extra attention to stocks with very high scores.

Pay extra attention to stocks with high scores on a large number of Quadrix variables. In back-tests, the percentage of individual Quadrix variables with scores above 80 has been a highly effective supplemental screen. Among our recommendations, Apple ($396; AAPL), CF Industries ($138; CF), and Google ($630; GOOG) stand out on this screen. Among small-company recommendations in our sister publication Upside, standouts include Mitcham Industries ($20; MIND), MTS Systems ($40; MTSC), and WellCare Health Plans ($54; WCG).

A history of consistently high Overall scores is bullish. When shopping among high Overall scorers, you can improve your odds by emphasizing those with consistently high Overall scores over the past 24 months. Stocks with a history of steady Overall scores tend to have more stable scores going forward, which can reduce your risk of buying a Quadrix leader just before its scores (and expected 12-month returns) deteriorate. The following recommendations have earned Overall scores above 80 for at least 24 consecutive month-ends: Apple, AutoZone ($325; AZO), Bed Bath & Beyond ($62; BBBY), Microsoft ($26; MSFT), and UnitedHealth Group ($50; UNH).

Don't be afraid to overweight a top-scoring sector. Much of Quadrix's explanatory power stems from its ability to pick high-potential sectors and industry groups. While you don't want one or two sectors to dominate your portfolio, you should invest extra time in looking for opportunities in top-scoring sectors. Based on the percentage of stocks with Overall scores above 90, energy is the most attractive.

QUADRIX SCORES FOR S&P 1500 SECTORS
Avg. Quadrix Scores
% With Overall
Sector (No. of Cos.)
Value
Overall
Above 80
(%)
Above 90
(%)
Energy (89)
56
61
33
21
Technology (268)
53
60
27
13
Cons. Discretionary (253)
55
60
29
11
Health Care (154)
56
63
26
10
Materials (93)
57
56
19
9
Consumer Staples (77)
46
54
17
8
Industrials (217)
57
61
23
6
Telecom Services (18)
65
52
11
6
Financials (261)
53
47
13
5
Utilities (67)
46
43
4
0

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