Target The Best Industries

9/3/2012


We're like most investors — or farmers. We prefer to harvest only the richest fields.

What do we consider a rich field? An industry or sector with solid fundamentals — operating momentum, valuation, growth history, stock-price action, etc. — and multiple stocks that earn the kind of Quadrix Overall scores that qualify them for our buy lists.

Stocks in all 12 groups average Overall scores of 66 or higher, and at least one-third of the stocks in each group score above 80, our cutoff for consideration as additions to our recommended lists. At the moment, 11 of our 36 recommended stocks come from these 12 groups.

For a look at more than 150 industry groups, visit www.DowTheory/Go/Groups.

We consider the Overall score the most important Quadrix rank. Of course, some investors like certain types of stocks better than others. Our Overall score is derived from more than 80 variables in six categories, and stocks with high Overall scores tend to be strong in multiple areas. But subscribers with a hankering for values — or momentum plays, high-quality names, or stocks with strong price action — should check out the charts and tables on this page and on page 5.

We screen for industries that score well in four of our Quadrix categories and list A-rated stocks in those industries. An A rating equates to above average, and stocks on our buy lists are presented in bold.

Value

The Value score has the most predictive power among the six categories. To compute the Value score, we use a variety of valuation ratios, including variants of price/earnings, price/sales, price/cash flow, and price/book. We also look at the ratios relative to a company's historical norms.

Aflac ($46; AFL) shares have delivered a 28% total return in the past year but still look deeply discounted. Versus five-year averages, the stock trades at a discount of 48% relative to trailing earnings, 29% to sales, and 40% to book value. Aflac is also cheap relative to other life and health insurers, which as a group tend to be cheap relative to the market. Aflac's Value score has consistently ranked among the top 4% of stocks in our research universe since February. The stock, yielding 2.9%, is a Focus List Buy and a Long-Term Buy.

----------- Valuation Ratios -----------
Company (Price; Ticker)
Quadrix
Value
Score
P/E
5-Yr.
Avg.
Price/
Book
5-Yr.
Avg.
Industry
Aflac ($46; AFL)
98
7
13
1.5
2.5
Life/Health
Insurance
Chevron ($112; CVX)
80
8
9
1.7
1.9
Integrated
Oil & Gas
Exxon Mobil
($88; XOM)
77
11
12
2.5
3.0
Integrated
Oil & Gas
MetLife ($34; MET)
99
7
13
0.6
0.9
Life/Health
Insurance
Southwest Airlines
($9; LUV)
91
15
11
1.0
1.3
Airlines
U.S. Bancorp
($33; USB)
68
12
16
1.9
2.0
Banks
Wells Fargo
($34; WFC)
82
11
16
1.3
1.6
Banks

Momentum

The Momentum score measures operating momentum. Short-term growth rates for sales, profits, and cash flow account for most of the score.

CSX ($23; CSX) has produced 10 straight quarters of earnings growth, and going forward it seems capable of drafting off the railroad industry's momentum. Among all U.S. railroads, intermodal volume rose by more than 3% in the first three weeks of August. Intermodal cargo, which relies on multiple modes of transportation, accounted for 38% of CSX's volume in the first half of 2012. Projected to grow earnings per share at double-digit rates in both 2012 and 2013, CSX is rated Long-Term Buy.

12-Month Growth
Est. EPS Growth
Company (Price; Ticker)
Quadrix
Momen-
tum
Score
Sales
(%)
Per-
Share
Earnings
(%)
Curr.
Year
(%)
Next
Year
(%)
Industry
CSX ($23; CSX)
55
5
13
11
12
Railroads
Halliburton
($34; HAL)
50
32
38
(2)
10
Oil/Gas —
Eq. & Svcs.
National Oilwell
($77; NOV)
58
33
33
25
15
Oil/Gas —
Eq. & Svcs.
Norfolk Southern
($74; NSC)
73
10
27
11
11
Railroads
Union Pacific
($124; UNP)
88
13
29
24
14
Railroads
Note: Quadrix scores are percentile ranks, with 100 the best.

Performance

Our Performance score mostly depends on a stock's total returns for periods no longer than 12 months. Returns of strategies limited to stocks with high Performance scores tend to be volatile, and while stocks going up tend to continue going up, focusing too much on price action can lead investors to chase overvalued names. The Performance score, like the rest of our category scores, works best in concert with other scores.

Over the last 12 months, Comcast ($34; CMCSa) has provided investors a total return of 63%. June-quarter results provided the latest catalyst, with management reporting favorable subscriber trends and impressive viewership of its Olympics telecast. Despite the rally, Comcast still earns an above-average Value score. Should Comcast meet the 2012 consensus profit estimate of $1.93 per share and the stock's P/E hold at its current 19, roughly in line with the five-year average, the shares will rise another 10% over the next six months. The stock is a Long-Term Buy.

------------ Total Returns ------------
-- Annualized --
Company (Price; Ticker)
Quadrix
Perfor-
mance
Score
YTD
(%)
12
Mos.
(%)
3
Yrs.
(%)
10
Yrs.
(%)
Industry
CSX ($23; CSX)
62
9
6
18
13
Railroads
Comcast ($34; CMCSa)
89
45
63
32
7
Cable & Satellite
DirecTV ($52; DTV)
76
22
20
28
17
Cable & Satellite
Macy's ($40; M)
74
27
58
39
7
Retail —
Dept. Stores
Norfolk Southern
($74; NSC)
65
3
14
20
10
Railroads
Union Pacific
($124; UNP)
78
18
38
29
20
Railroads

Quality

The Quality score considers long-term growth rates and returns on equity, assets, and investment. Our stock-selection approach has long favored high-quality stocks. On average, our recommended stocks earn a Quality rank of 81, the highest of any of the category scores.

Alliance Data Systems ($138; ADS) has scored at least 90 for Quality in 14 straight months, supported by outstanding five-year-growth in earnings per share (up an annualized 19%), sales (12%), and operating cash flow (23%). Alliance is a Focus List Buy and a Long-Term Buy.

-- 5-Yr. Annual. Growth --
Est. EPS
Growth,
Next
5 Yrs.
(Annual.)
(%)
Company (Price; Ticker)
Quadrix
Quality
Score
Sales
(%)
Per-
Shares
Earnings
(%)
Oper.
Cash
Flow
(%)
Industry
Alliance Data
($138; ADS)
96
12
19
23
16
Data
Processing
CF Industries
($207; CF)
99
23
55
38
12
Chemicals —
Agricultural
CSX ($23; CSX)
89
4
18
7
13
Railroads
Monsanto ($87; MON)
86
10
15
12
15
Chemicals —
Agricultural
Norfolk Southern
($74; NSC)
85
4
10
7
14
Railroads
Target ($64; TGT)
74
3
5
3
12
General
Merchandise
Union Pacific
($124; UNP)
94
5
19
14
16
Railroads
Visa ($127; V)
79
24
27
59
19
Data
Processing
Note: Quadrix scores are percentile ranks, with 100 the best.

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