Focusing On Top Scorers
The Quadrix stock-ranking system isn't the only tool we use to analyze stocks. But it's the most versatile, and the most effective.
Stocks on our Focus List, which contains our favorite 10 to 17 selections for year-ahead gains, currently average a Quadrix Overall score of 94. The Overall score takes into account dozens of statistics in six categories and assigns a percentile ranking (0 to 100, with 100 the best) to help us identify stocks likely to outperform. For more information about how Quadrix works and how well it works, visit www.DowTheory.com/Go/Quadrix.
Quadrix's effectiveness has helped drive the Focus List's superior performance. Since the start of 2003, the Focus List has gained 92.8%, versus 53.5% for the S&P 500 Index. Since we created the Focus List on Dec. 24, 1994, it has quadrupled (up 309%), versus a 194% return for the S&P 500. Those returns assume fully invested portfolios and exclude dividends and transaction costs.
While we generally limit our new Buys to stocks with Overall scores of 80 or higher, we will sometimes hold onto stocks that dip below that level if we see large upside potential and expect the scores to rebound. However, we especially like the very highest scorers.
The top scorers — those with Overall ranks of 89 or higher — tend to outperform lower-ranking stocks. And even among that high echelon, the higher the score, the better.
We divided the S&P 1500 Index into 33 equal-numbered baskets based on Overall score. In a back-test of 12-month returns since the end of 1994, the highest-scoring group (average Overall score of 98) averaged 18.7% returns, nearly six percentage points above the average stock in the index and a full 1.7 percentage points above the next-highest basket (average Overall score of 95).
Not surprisingly, our Focus List contains five stocks that fit into that top-scoring basket, plus another four that qualify for the next tier down. The table below lists all of our Focus List Buys with their Quadrix scores, and the following paragraphs discuss four of the top scorers on that list.
Aetna's ($47; AET) maximum Overall rank of 100 is supported by scores above 85 in four of six Quadrix categories. The Overall score has exceeded 95 for 13 straight month-ends and 97 in each of the last eight months.
The health insurer's utilization rates remain low, its pricing environment stable. Aetna spent $1.6 billion on acquisitions last year and said it would consider purchases in that same range this year. The deals have expanded Aetna's membership, though the company should also benefit from higher enrollment in Medicare Advantage as baby boomers age.
Stock buybacks are projected to lower the share count more than 3% this year. Aetna has reduced its share count in 31 straight quarters; in that nearly eight-year period, the share count has fallen 43%. At nine times trailing earnings, shares trade 14% below their five-year average and 21% below the median for managed-care stocks in the S&P 1500 Index. Aetna is a Buy and a Long-Term Buy.
In 2011, AGCO ($52; AGCO) delivered record earnings per share (up 93% from 2010), sales (up 27%), and cash provided by operations (up 65%). Reflecting that momentum, shares have rallied 52% since the end of September and 16% since we added the stock to the Focus List in November. But AGCO still looks cheap at 12 times trailing earnings, 39% below its five-year average, and 10 times estimated profits for 2012, 9% below its peer-group median.
AGCO, a maker of tractors and combines, is expected to grow per-share profits 13% this year on 12% higher revenue. U.S. farmers, buoyed by record crop prices last year, are preparing to plant corn, soybeans, and wheat on 227 million acres in 2012, up nearly 3% from 2011 and the largest amount of land since 1984, according to a Bloomberg survey.
Management does not anticipate making any additional acquisitions this year, focusing instead on integrating GSI Holdings, a $940 million deal that moved AGCO into the grain-storage-equipment business. Earning an Overall score of 98 or higher at the end of each of the last five months, AGCO is a Focus List Buy.
Apple ($509; AAPL) has a knack for dredging new revenue streams. Its iPhones, originally aimed at consumers, are also being adopted by corporations. Halliburton ($36; HAL) will deploy 4,500 iPhones to its workers in the next two years, dislodging Research In Motion's ($15; RIMM) Blackberry. The iPad, already used in commercial airline cockpits, could soon become a staple in classrooms as Apple pushes into the $8 billion textbook market. The U.S. Air Force could also buy up to 18,000 iPads for its flight crews.
Apple hopes to enter another new place: our living rooms. The company is reportedly discussing a TV partnership with Canadian telecommunications companies, including Rogers Communications ($38; RCI). One analyst sees an Apple television boosting profits for fiscal 2013 ending September by $5.40 per share; the consensus is $47.16.
The stock earns a maximum score of 100 Overall. But at 14 times trailing earnings, Apples shares hover near their lowest P/E in at least 10 years. Apple is a Focus List Buy and a Long-Term Buy.
Developing markets continue to drive Intel's ($27; INTC) growth in personal computers. And the deluge of digital information keeps powering corporate demand for semiconductors, with sales to data centers up 17% in 2011 and accounting for 19% of company revenue.
Coming off back-to-back years of 24% sales growth, Intel sees revenue advancing at high-single-digit rates this year. The 2012 consensus calls for just 5% sales growth, giving the shares upside if Intel hits its internal target. Potential catalysts include the rollout of ultrabooks and the debut of Microsoft's ($30; MSFT) Windows 8 operating system later this year.
But Intel must still prove it can crack the code for the mobile-device market. After all, annual shipments of smartphones eclipsed those of personal computers (including tablets and e-readers) for the first time last year, according to research firm Canalys. So far, Intel has had little success getting its chips into smartphones. But newly forged alliances with Motorola Mobility Holdings ($40; MMI) and Lenovo Group will give Intel the chance to prove the worth of its products. Scoring above 80 for Overall in 24 straight months, Intel is a Focus List Buy and a Long-Term Buy.