Quadrix Finds Best Niches

6/4/2012


Approaching the midpoint of 2012, no S&P 1500 Index sector has performed better than consumer discretionary, where stocks have averaged a total return of 13%. The sector also scores fairly well in Quadrix®, with an average Overall rank of 60 and ranks above 50 in all six of the categories that make up the Overall score.

But today's fickle market can turn on its winners quickly. The average consumer-discretionary stock now sports a P/E of 18.7, above the sector's five-year average of 16.4, stoking concerns that the space has become overheated.

DISSECTING THE S&P 1500 INDEX
Average
Total Return
% Of Stocks With Overall
---- Scores Above 80 ----
Average Trailing P/E Ratio
Sector (No. Of Cos.)
YTD
(%)
12
Mos.
(%)
Recent
(%)
5-Yr.
Avg.
(%)
10-Yr.
Avg.
(%)
Recent
5-Yr.
Avg.
10-Yr.
Avg.
Cons. Discret. (252)
13
5
22
26
28
18.7
16.4
17.5
Cons. Staples (78)
5
5
12
19
17
17.8
16.1
17.4
Energy (91)
(7)
(20)
30
41
46
16.7
15.1
17.2
Financials (263)
9
0
19
15
25
20.5
15.7
15.3
Health Care (154)
9
(4)
25
31
30
17.9
16.9
20.7
Industrials (219)
5
(4)
26
24
24
17.6
17.1
18.9
Materials (95)
6
(6)
18
21
20
15.8
15.8
17.2
Technology (265)
4
(9)
19
28
21
18.0
19.8
23.9
Telecom Services (18)
(5)
(18)
6
18
17
18.0
14.4
16.0
Utilities (65)
0
9
0
5
7
16.2
15.0
15.4
All S&P 1500 stocks
6
(3)
20
24
24
18.1
19.4
20.7
Notes: Quadrix scores are percentile ranks, with 100 the best. Averages exclude returns above 200% and P/E ratios below 0 or above 75.

Nothing can replace a detailed analysis of the forces that shape a sector, such as social and technological changes, foreign influences, and government regulations. But Quadrix and valuation ratios can serve as signposts, directing investors to zig when the market zags, with the ultimate aim of avoiding getting trampled when the herd changes directions.

The energy sector finds itself alone in the back, with stocks averaging a 7% negative return so far this year. Yet energy stocks average a solid Overall score of 59 and a Value rank of 65, the highest among the 10 sectors. Telecommunications and utility stocks also average weak returns so far this year, yet both sectors command P/E ratios well above historical norms. Among the six sectors with the largest percentage of high Overall scorers, only technology averages P/E ratios well below historical norms. Those averages for S&P 1500 sectors don't tell the whole story, as the larger stocks in the S&P 500 (the Forecasts' favorite targets) tend to be cheaper.

At 30%, the S&P 1500 energy sector has the highest proportion of stocks scoring above 80 for Quadrix Overall. But that rate is far lower than the sector's 10-year average of 46%. The consumer-staples, health-care, and utilities sectors also contain fewer high Overall scorers than usual. Conversely, the industrials sector boasts a slightly larger harvest of attractive candidates than in past years. Only 20% of the S&P 1500's stocks score above 80 Overall, below the long-run average of 24%, as a greater proportion of the tiny stocks outside the index are earning strong scores. Fortunately, the largest stocks in the index average unusually strong Overall scores, providing us with appealing investment options.

Both of the key signs — Quadrix and valuation — point away from utilities. The S&P 1500 Utility Sector Index managed a total return of 19% in 2011 — tops among all sectors and its best performance since 2006. Today, utility stocks earn an average Overall score of 35, weakest of the sectors. Not one utility earns an Overall score above 80. The sector averages a trailing P/E of 16, above both its five- and 10-year averages of 15.

INDUSTRIES WITH TOP-SCORING STOCKS
Average
Total Return
Average
Quadrix
Overall
Score
% Of
Stocks
With
Overall
Above
80
No. Of
Stocks
With
Overall
Above
80
% Of
Stocks
With
Overall
Above
90
No. Of
Stocks
With
Overall
Above
90
Industry Within Research Universe
Of More Than 4,400 Stocks
(No. Of Cos. In Industry)
YTD
(%)
12
Mos.
(%)
Banks — Regional (67)
9
5
63
22
15
7
5
Industrial Machinery (40)
9
1
61
33
13
23
9
Oil & Gas — Exploration
& Production (35)
(11)
(20)
61
31
11
17
6
Asset Management (20)
6
(12)
71
45
9
20
4
Construction/Farm Equip./
Heavy Trucks (15)
3
(10)
78
60
9
47
7
Outsourced Data
Processing (25)
9
9
66
36
9
8
2
Retail — Apparel (29)
15
7
63
31
9
10
3
Software — Internet (23)
12
18
63
35
8
4
1
Health Care —
Equipment (37)
10
(7)
56
19
7
3
1
Health Care — Services (22)
3
(18)
60
32
7
14
3
Oil & Gas — Equipment
& Services (25)
(4)
(13)
58
28
7
16
4
Aerospace/Defense (29)
(1)
(6)
64
21
6
10
3
Chemicals — Specialty (22)
10
5
65
27
6
5
1
Consumer Finance (8)
7
1
89
75
6
75
6
Life Sciences (15)
15
(6)
58
40
6
0
0
Chemicals — Diversified (8)
12
(3)
78
63
5
13
1
Health Care — Facilities (10)
(1)
(22)
68
50
5
10
1
Health Care —
Managed Care (12)
(2)
(4)
71
42
5
25
3
Retail — Automotive (10)
5
23
68
50
5
10
1
Industrial Conglomerates (6)
14
10
77
67
4
17
1
Insurance — Life & Health (10)
0
(13)
74
40
4
40
4
Oil & Gas — Integrated (5)
(11)
(17)
81
80
4
60
3
Software —
Applications (32)
10
1
55
13
4
3
1
Software — Systems (14)
15
3
63
29
4
21
3
Telecom Equipment (25)
(6)
(14)
42
16
4
8
2

While sector data offers valuable perspective, different industries within a given sector can have dramatically different characteristics. The table above lists the 25 industry groups with the highest number of stocks scoring above 80 Overall.

Our investment strategy focuses on picking individual stocks rather than making broad sector bets. Even in attractive sectors or industries, some stocks aren't good investments. The table below lists A-rated stocks from the industries in the table above, all of which earn Overall scores higher than the average for their industry. Three of those stocks are reviewed in the following paragraphs.

Aflac ($40; AFL) shares have been hammered by headlines from Europe, even though the insurer is shoring up its investment portfolio by selling off big swaths of its exposure to the region. In May, Aflac said 2013 per-share earnings from operations should rise 4% to 7% — analysts targeted 5% growth at the time — and accelerate in 2014. The stock's trailing P/E of six hovers at a decade low and is 62% below its 10-year average. The stock yields 3.3%, nearly double its 10-year average rate of 1.7%. Aflac has raised its quarterly dividend in 29 straight years, including a 10% increase in October. Earning a Value rank of 99, Aflac is a Buy and a Long-Term Buy.


Apache ($84; APA) has delivered sales growth of 15% or higher in 10 straight quarters. Yet the shares have slumped 7% this year, hurt by a somewhat disappointing March quarter, depressed natural-gas prices, and a slide in oil prices. The stock reflects plenty of pessimism. Its Value score ranks in the top 5% of our research universe. Shares trade at seven times trailing earnings, 45% below their five-year average. Recently, Apache has been securing supply contracts for its slice of Chevron's ($100; CVX) Wheatstone liquefied natural gas project in Western Australia. Apache also appears likely to move forward with a similar project in Canada; the company owns a 40% stake in a $15 billion development in British Columbia that could begin production in 2015 or 2016. Apache is a Long-Term Buy.


MasterCard ($416; MA), a payment processor, scores in the top 25% of our research universe for five of the six Quadrix categories. The exception, Value, is a function of the stock's success. Shares have dipped 11% from the all-time high set in May but remain up 12% for the year and 65% since we first recommended the stock in March 2011. MasterCard continues to see strong volume growth in Europe (nearly 30% of total volume), benefiting from limited exposure to countries hurt most by the debt crisis. The rising consensus calls for 19% growth in per-share profits this year and 18% growth in 2013. MasterCard is a Buy and a Long-Term Buy.

TOP STOCKS FROM TOP INDUSTRIES
Below we present 27 A-rated stocks from industries that contain at least four stocks scoring above 80 Overall. All of the stocks earn Overall scores of at least 80, higher than the average for their industry. Stocks on our buy lists are presented in bold.
----- Quadrix Scores * -----
Company (Price; Ticker)
Momen-
tum
Value
Overall
Sector
Industry
Advance Auto
($74; AAP)
75
76
96
Cons. Discret.
Retail — Auto.
Aetna ($42; AET)
70
92
91
Health Care
Managed Care
Aflac ($40; AFL)
67
99
91
Financials
Life Insurance
AGCO ($42; AGCO)
69
95
95
Industrials
Construct./Farm Eq.
Agilent Tech.
($42; A)
57
74
85
Health Care
Life Sciences
Alliance Data
($128; ADS)
65
48
81
Technology
Data Processing
American Exp.
($57; AXP)
91
64
94
Financials
Consumer Finance
Apache ($84; APA)
65
96
92
Energy
Energy Production 
BlackRock ($175; BLK)
67
74
93
Financials
Asset Management
CA Technologies
($25; CA)
67
78
96
Technology
Systems Software
Chevron ($100; CVX)
60
85
96
Energy
Integrated Oil & Gas
Cisco Systems
($17; CSCO)
83
89
92
Technology
Telecom Equipment
ConocoPhillips
($53; COP)
76
96
90
Energy
Energy Production
Deere ($76; DE)
78
84
94
Industrials
Construct./Farm Eq.
Dover ($59; DOV)
55
72
83
Industrials
Machinery
Express Scripts
($54; ESRX)
65
66
89
Health Care
Health Services
Exxon Mobil
($82; XOM)
59
80
93
Energy
Integrated Oil & Gas
Google ($594; GOOG)
87
55
96
Technology
Internet Software
Halliburton ($32; HAL)
71
91
89
Energy
Oil Equip. & Svcs.
MasterCard
($416; MA)
84
25
86
Technology
Data Processing
MetLife ($31; MET)
70
99
92
Financials
Life Insurance
Microsoft ($30; MSFT)
63
74
97
Technology
Systems Software
National Oilwell
($70; NOV)
71
68
87
Energy
Oil Equip. & Svcs.
Occidental Petro.
($83; OXY)
69
92
96
Energy
Integrated Oil & Gas
TJX Companies
($42; TJX)
94
27
90
Cons. Discret.
Retail — Apparel
UnitedHealth
($56; UNH)
72
71
95
Health Care
Managed Care
Visa ($120; V)
93
28
92
Technology
Data Processing
* Quadrix scores are percentile ranks, with 100 the best.
 

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