Quadrix Mints Gold For Focus List

8/20/2012


Here at the Forecasts, we're still basking in the spirit of the Olympics, a two-week celebration of the familiar and the bizarre. One of the odder competitions is the modern pentathlon, which rolls into one contest seemingly disjointed skills: fencing, swimming, riding, shooting, and running. And the nature of the pentathlon means that the medals don't always go to the athlete with the longest legs or the biggest muscles.

From an investment standpoint, a quantitative approach can keep stock-picking from devolving into a beauty contest. Our Quadrix rating system is itself a form of competition, with stocks battling each week against a field of about 4,500 peers in six events: Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance. These six categories pit stocks against the rigors of dozens of individual factors, ranging from valuation ratios to sales growth to interest coverage. And like the pentathlon, a stock need not win every event to be named an Overall champ.

Quadrix helps lead investors to the score that matters most: stock returns. And following our Focus List — our champs for year-ahead gains — has proved a winning strategy. Excluding dividends and transaction costs, the list has gained 14.8% on a fully invested basis this year through Aug. 14, topping the S&P 500's 11.6% and the S&P 1500's 11.3%. Since 2003, the Focus List has gained 98.3%, versus 59.6% for the S&P 500.

Of course, stocks, like athletes, don't perform in a vacuum. Therefore, we must consider their surroundings, the sector trends that can lift them higher or become potential roadblocks. In the tables below we analyze market sectors in five key areas: operating momentum, value, track record, outlook, and stock performance.

Sector analysis
The following tables show how sectors within the S&P 1500 Index stack up in five important areas: operating momentum, value, track record, outlook, and performance. Sectors in bold look especially attractive in a given area. All data represent the median stock in the sector.
Operating momentum
-------- 6-Month Growth --------
S&P 1500 Sector
Oper.
Cash
Flow
(%)
Sales
(%)
Per-Share
Earnings
Quadrix
Momentum
Score
Consumer Discretionary
3
7
13
54
Consumer Staples
8
5
8
50
Energy
0
15
15
47
Financials
12
4
13
55
Health Care
5
8
5
53
Industrials
14
6
14
52
Materials
28
5
5
49
Technology
3
5
0
41
Telecom Services
4
4
8
54
Utilities
NA
(8)
(1)
44
 
Value
S&P 1500 Sector
Trailing
P/E Ratio
Discount
To 5-Yr.
Average
(%)
Dividend
Yield
(%)
Quadrix
Value
Score
Consumer Discretionary
16.5
3
0.8
54
Consumer Staples
16.6
(8)
2.1
46
Energy
13.0
0
0.2
62
Financials
15.2
8
2.7
50
Health Care
16.3
6
0.0
52
Industrials
15.7
11
1.4
61
Materials
15.5
4
1.7
57
Technology
20.2
8
0.0
51
Telecom Services
21.2
10
2.2
60
Utilities
16.9
(12)
3.9
44
 
Track record
----- 5-Year Annualized Growth -----
S&P 1500 Sector
Sales
(%)
Per-Share
Earnings
(%)
Dividends
(%)
Quadrix
Quality
Score
Consumer Discretionary
4
8
5
63
Consumer Staples
6
9
10
64
Energy
9
(1)
8
55
Financials
2
(4)
(1)
45
Health Care
10
11
7
69
Industrials
4
6
8
62
Materials
5
8
6
58
Technology
8
9
10
64
Telecom Services
9
(5)
5
48
Utilities
0
3
4
43
 
Profit outlook
Est. EPS Growth,
--- Current Quarter ---
Est. EPS Growth,
----- Fiscal Year -----
Quadrix
Earnings
Estimates
Score
S&P 1500 Sector
Current
(%)
30 Days
Ago
(%)
Current
(%)
30 Days
Ago
(%)
Consumer Discretionary
10.9
13.6
13.7
14.2
53
Consumer Staples
7.4
7.3
7.7
7.8
51
Energy
(14.7)
(10.9)
(2.0)
1.3
30
Financials
10.6
11.1
10.0
11.1
50
Health Care
7.3
9.0
7.6
8.3
53
Industrials
9.6
12.2
11.3
12.2
46
Materials
3.1
6.4
10.4
10.7
39
Technology
1.5
6.6
6.0
8.2
40
Telecom Services
7.2
1.3
(1.8)
(3.2)
60
Utilities
3.1
3.5
(0.2)
2.1
55
 
Performance
--------------- Total Return ---------------
S&P 1500 Sector
3 Months
(%)
Year-To-
Date
(%)
3 Years
(Annual.)
(%)
Quadrix
Performance
Score
Consumer Discretionary
7.0
11.5
17.6
56
Consumer Staples
4.0
7.1
16.4
56
Energy
16.5
(1.6)
13.1
47
Financials
5.8
12.2
10.4
58
Health Care
7.0
11.2
12.4
57
Industrials
6.4
6.9
11.7
51
Materials
6.7
5.1
14.4
49
Technology
5.4
4.5
12.0
47
Telecom Services
12.5
9.0
8.1
61
Utilities
3.0
5.7
16.9
66
Note: Quadrix scores are percentile ranks, with 100 the best. 

Please visit www.DowTheory.com/Go/Sectors2 for details on all S&P 1500 stocks. Subscribers can also obtain two-page Individual Stock Reports on our Lucky 7 — our top seven stock picks — at www.DowTheory.com/Go/Lucky7. We normally sell this Lucky 7 report for $75, but through the end of September, Forecasts subscribers can download it free of charge. Three of our champs are reviewed below.

DirecTV ($52; DTV) shares have rallied 21% this year, as the satellite-TV provider grew operating cash flow and per-share profits by more than 25% in the first half of 2012. The stock still looks attractive at 13 times trailing earnings, 29% below the five-year average.

The pay-TV industry shed an estimated 400,000 net U.S. subscribers in the June quarter. That amounts to just a sliver of the 100 million U.S. households with pay TV, but the drop strengthens the argument that more Americans are cutting their cable cords. Against the challenging backdrop, DirecTV increased U.S. revenue by 7% and Latin America by 20%. But the two units grew in opposite ways. In the U.S., DirecTV focused on higher-paying customers, causing net subscribers to decline for the first time ever, down 52,000 as average revenue per subscriber climbed 4%. In Latin America, the addition of 645,000 net subscribers, up 37%, more than offset the 11% drop in average revenue per subscriber. DirecTV is a Focus List Buy and a Long-Term Buy.


Google ($669; GOOG) continued its torrid growth in the first half of 2012, with earnings per share rising 17%, sales jumping 30%, and cash provided by operations up 19%. Despite all that growth, the shares look cheap, trading at roughly 17 times trailing earnings. By comparison, Google has averaged a P/E of 27 over the last five years, and the median S&P 1500 internet stock trades at 19 times earnings.

Google has grown its core advertising business by scattering digital seeds across the internet. The company captured 67% of the U.S. search market in June, up from a 65% share one year ago. Its YouTube website, acquired in 2006 for $1.65 billion, has become a popular destination for people to share personal videos and listen to music. Android, its mobile operating system, took a 64% share of the global market in the June quarter, up from 43% in the year-ago quarter. Most recently, Google agreed to pay about $25 million for Frommer's, a travel-guide that could secure more advertising from online-travel bookings and local businesses. Separately, Google said that it will slash 4,000 jobs, roughly 20% of Motorola Mobility's staff, in an effort to make the newly acquired business profitable again. The cuts could cost upwards of $275 million, and other restructuring measures could lead to other "significant" charges. Google is a Focus List Buy and a Long-Term Buy.


Wells Fargo ($34; WFC) is a rare breed. It's a big bank with limited trading activities, an approach that helped it avoid many of the biggest potholes that brought down its peers. A well-capitalized balance sheet saved Wells Fargo from a Moody's credit downgrade in June that hit the other five of the six largest U.S. banks. And Wells Fargo is one of just two recommended stocks that scores above 80 in Quadrix for both Performance and Value. The shares trade at 11 times trailing earnings, 32% below their five-year average of 16.

The mortgage-banking business (about 13% of first-half sales) positions the bank to benefit from a housing recovery. The consensus now projects about 21% profit growth in both the September and December quarters. Should the shares' P/E rise to 13 and Wells Fargo meet the lowest 2012 profit estimate of $3.20, then the stock will rally 22% by early next year. Yielding 2.6%, Wells Fargo is a Focus List Buy and a Long-Term Buy.


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FOCUS LIST
--- 6-Month Growth ---
---- Valuation ----
Historical
5-Yr. Annual.
--- Growth ---
------ Estimated EPS Growth ------
Total Return
Sector
Company (Price; Ticker)
Oper.
Cash
Flow
(%)
Sales
(%)
EPS
(%)
Trailing
P/E
Ratio
Discount
To 5-
Yr. Avg.
(%)
Sales
(%)
EPS
(%)
Curr.
Qtr.
(%)
Curr.
Qtr., 30
Days
Ago
(%)
Curr.
Fiscal
Year
(%)
Curr.
Yr., 30
Days
Ago
(%)
3
Mos.
(%)
YTD
(%)
Consumer Discretionary
Bed Bath & Beyond
($63; BBBY)
16
7
29
15
10
7
14
8.9
8.7
15.6
15.2
(11)
9
DirecTV ($52; DTV)
26
10
28
13
29
12
27
32.9
34.9
23.2
24.8
21
21
Macy's ($38; M)
9
4
29
12
8
0
13
(15.4)
(12.2)
17.0
16.3
9
20
Wyndham Worldwide
($51; WYN)
(7)
7
28
17
(47)
1
9
17.3
21.6
27.6
26.7
1
35
Financials
American Express
($56; AXP)
54
6
21
13
27
2
6
5.3
3.7
5.8
4.5
2
20
Wells Fargo
($34; WFC)
NA
3
8
11
32
12
4
20.7
19.3
17.4
17.2
8
26
Health Care
Agilent Technologies
($40; A)
1
5
15
12
46
6
18
8.1
8.3
9.8
9.9
4
16
Express Scripts
($61; ESRX)
79
77
(14)
19
17
26
21
23.8
16.3
24.1
19.1
15
36
Industrials
AGCO ($44; AGCO)
(35)
19
52
8
51
10
32
17.6
18.8
27.4
22.9
11
4
Technology
Alliance Data
($135; ADS)
3
19
26
16
20