The Quest For Quality

2/20/2012


"Quality is not an act, it is a habit" — Aristotle.

Nothing a company does today will truly show its quality. To assess quality, we must consider what a company has done in the past, and the magnitude and consistency of its improvement.

In search of quality investments, we screened for stocks with genuine growth and improving efficiency. We limited our screen to stocks with:

• Higher returns on equity, assets, and investment than their three-year average. Returns reflect how efficiently a company uses its assets and capital.

• Double-digit growth in operating cash flow over the last year, and annualized over the last three years. Why cash flow? Because it reflects a company's ability to squeeze cash out of its business operations, a process crucial to the health of any company. In addition, cash flow is more difficult to manipulate than earnings.

• Consensus projections for double-digit profit growth in the current fiscal year, and annually over the next five years. High growth estimates suggest that Wall Street is confident about a company's prospects.

• Quadrix Quality scores (growth rates and returns on equity, assets, and investment) above 80. To eliminate yesterday's growers fallen on hard times, we also required an Overall score of 80, suggesting the companies look good from other angles as well.

HIGH-QUALITY STOCKS
Below we list nine A-rated stocks that passed our quality screen. We required double-digit growth in operating cash flow and estimated profits and higher returns on equity, assets, and investment higher than the three-year average. Each stock also earns Quadrix Quality and Overall scores of at least 80. Stocks on our buy lists are listed in bold.
Operating Cash
---- Flow Growth ----
Ests EPS Growth
-- Quadrix Scores --
Company (Price; Ticker)
12
Months
(%)
3 Years
(Annual.)
(%)
Curr.
Year
(%)
Next
5 Years
(Annual.)
(%)
Quality
Overall
AGCO ($52; AGCO)
65
36
13
17
88
99
Alliance Data Systems
($120; ADS)
12
31
11
15
94
94
Apple ($509; AAPL)
101
62
54
21
100
100
Bed Bath & Beyond
($60; BBBY)
15
32
27
16
93
93
Caterpillar ($114; CAT)
40
14
22
23
85
97
EMC ($26; EMC)
25
17
14
15
87
92
Halliburton ($36; HAL)
67
11
17
24
87
91
Union Pacific
($113; UNP)
43
13
20
15
90
95
Visa ($115; V)
11
98
19
19
95
92
Note: Quadrix scores are percentile ranks, with 100 the best.

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