Compare Apples To Apples

10/29/2012


The average utility stock in the S&P 1500 Index trades at a 29% premium to its five-year average price/earnings ratio, yet its P/E of 17 is among the lowest for any sector. The average consumer-staples stock grew per-share profits 6% over the last four quarters and managed a 12-month return of 12%, while the average energy stock delivered 14% profit growth but a negative return of 5%.

These disparities highlight the incredible breadth of the U.S. stock market — and illustrate why we began using sector-specific scores in 2009. These sector scores are designed to augment the traditional Quadrix Overall score, which considers more than 80 factors and assigns percentile rankings to roughly 4,500 stocks.

Based on back-tested 12-month returns since the end of 1994, the top quintile (one-fifth) of the S&P 1500 Index as measured by Overall score has outperformed the average stock in the index by an average of 2.6%. In seven of the 10 market sectors, top Overall scorers have outperformed the average stock in their sector. But Quadrix has not worked as well in the consumer staples, industrials, and telecom sectors as it has in the others.

Our sector scores help us select winning stocks in not only the three most troublesome sectors, but in all 10. The scores come in two flavors:

12-Factor Sector: This score considers a dozen statistics that work particularly well in a given sector, and the sectors' innate differences spurred us to vary the selections widely. For example, most of the 12-Factor Sectors scores use two or three statistics from our Quality category, but the number ranges from a minimum of one to a maximum of four. Only three of the sector scores utilize a Performance statistic. And while every score features Value metrics, some use just three while a few use as many as five.

Reranked Overall: The statistics used to compute the Overall score are slotted into six categories (Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance). The Reranked Overall score uses these same six category scores, but reweights them to favor categories that work best within a given sector.

2 SCORES BEAT JUST 1
Stocks in the top one-fifth of their sectors in Overall score that also earn at least 80 in one of the two sector scores tend to outperform high Overall scorers alone. And in most sectors, the combination portfolios outperform the average stock by a wide margin.
Outperformance Of Top
Overall Scorers That Also
Earn At Least 80 In . . .
Sector
12-Factor
Sector
Reranked
Overall
Cons. Discretionary
10.0
5.4
Consumer Staples
2.9
(0.1)
Energy
3.0
0.8
Financials
4.9
3.4
Health Care
6.6
1.5
Industrials
2.9
0.1
Materials
7.8
6.8
Technology
11.0
4.2
Telecom Services
6.4
0.7
Utilities
1.5
1.0

This week, we relaunch the sector scores, updating both the individual factors in the 12-Factor Sector and the weightings in the Reranked Overall score. We tweak the traditional Quadrix stock-rating system periodically, and we are doing the same with our sector scores to reflect nearly four years of new return data.

While the sector scores have plenty of predictive power, they were designed to complement, not replace, the Quadrix Overall score. Used in concert, the scores work particularly well. For example: In rolling 12-month periods since 1994, the top quintile of the consumer discretionary sector as measured by Overall score outperformed the average stock in the sector by 4.4%, versus 8.7% for top 12-Factor Sector scorers and 5.2% for top Reranked Overall scorers. However, stocks in the top quintile for Overall score that also scored 80 or higher in the 12-Factor Sector score outperformed by 10.0%. We see similar trends in several other sectors, with the combination yielding outperformance of at least 6% in the health care, materials, technology, and telecom sectors. The combination of Overall and either 12-Factor Sector or Reranked Overall outperformed the Overall score alone in all 10 sectors.

SCREEN OF THE MONTH: SECTOR STANDOUTS
All of these A-rated stocks or Top 15 Utilities rank at least 80 in both of our sector-specific scores, as well as Quadrix Overall. Stocks on our buy lists are listed in bold.
Stock-
Market
Value
($Bil.)
Div.
Yield
(%)
12-Mo.
EPS
Growth
(%)
-- P/E Ratio --
Quadrix
Overall
Score
Sector-Specific
----- Scores -----
Sector
Company (Price; Ticker)
Trailing
Vs. 5-
Yr. Avg.
12-
Factor
Sector
Reranked
Overall
Consumer Discretionary
Comcast
($36; CMCSa)
198
1.8
21
21
1.16
91
95
96
DirecTV ($51; DTV)
32
0.0
30
13
0.72
96
82
91
Foot Locker
($35; FL)
5
2.1
40
16
NA
95
83
99
Macy's ($39; M)
16
2.0
22
13
0.95
91
93
95
Wyndham
($53; WYN)
8
1.7
31
19
1.60
80
91
83
Consumer Staples
CVS Caremark
($46; CVS)
58
1.4
16
15
1.00
90
94
95
Walgreen
($35; WAG)
33
3.1
(6)
13
0.90
89
92
96
Financials
Aflac ($50; AFL)
23
2.7
53
8
0.58
100
98
100
BB&T ($29; BBT)
20
2.8
69
11
0.71
91
95
91
J.P. Morgan
($41; JPM)
157
2.9
(3)
9
0.57
95
90
94
MetLife ($35; MET)
37
2.1
193
7
NA
94
92
98
Travelers
($73; TRV)
28
2.5
95
11
1.07
91
97
85
U.S. Bancorp
($33; USB)
63
2.3
20
12
0.77
93
87
89
Wells Fargo
($34; WFC)
179
2.6
11
11
0.67
93
95
92
Health Care
Aetna ($44; AET)
15
1.6
14
9
0.92
89
93
95
Thermo Fisher
($58; TMO)
21
0.9
19
12
0.58
91
81
94
UnitedHealth
($56; UNH)
58
1.5
14
11
1.09
83
83
86
Materials
CF Industries
($206; CF)
13
0.8
86
8
0.67
100
94
100
Technology
Apple ($613; AAPL)
575
1.7
68
14
0.68
98
86
98
Cisco Systems
($18; CSCO)
95
3.1
19
10
0.59
97
86
95
Cognizant Tech.
($70; CTSH)
21
0.0
17
22
0.94
89
97
89
EMC ($25; EMC)
52
0.0
17
15
0.68
91
95
88
Google
($680; GOOG)
178
0.0
6
18
0.68
83
91
91
Utilities
PNM Resources
($22; PNM)
2
2.7
51
16
NA
80
100
99
PPL ($30; PPL)
17
4.9
13
11
0.78
80
96
100

The table above presents our screen of the month, stocks that score well in both our sector-specific scores and the Overall score. We limited our screen to stocks with A ratings or components of our Top 15 Utilities portfolio. There are no A-rated telecoms, and none of our A-rated energy or industrials stocks qualified. Three intriguing buys are reviewed below:

Aflac ($50; AFL) enjoys solid operating momentum. In the September quarter, revenue rose 14% and per-share profits 7%, both comfortably above the consensus. The insurer warned of tougher sales comparisons in the December quarter and guided below the consensus. But Aflac also raised its full-year guidance and now projects 5% to 6% profit growth, versus the 4% consensus. Japan remains the company's growth engine. New annualized premium sales rose 32%, with revenue from WAYS — life insurance that can convert to medical or nursing-care insurance or an annuity — more than doubling. Aflac raised its dividend 6%, the 30th consecutive annual increase. With a maximum Overall rank of 100 and at least 98 in both sector scores, Aflac is a Focus List Buy and a Long-Term Buy.


Foot Locker ($35; FL) shares have surged 50% this year but still trade at 16 times trailing earnings, 12% below the median apparel retailer. Favorable industry trends could extend Foot Locker's rally. U.S. sales of athletic shoes have enjoyed strong growth in recent months, and rival Finish Line ($21; FINL) posted a 16% jump in total revenue and 12.3% higher same-store sales for the August quarter. Given its recent share gains at Finish Line's expense in the U.S. market, Foot Locker seems poised to deliver strong October-quarter results. The consensus expects Foot Locker to report 26% higher per-share earnings on 5% sales growth. Foot Locker is a Focus List Buy and a Long-Term Buy.


CF Industries ($206; CF) has benefited from strong fertilizer prices brought about by a strong U.S. planting season and tight global supplies. The company's earnings per share have soared 86% on 24% higher sales in the past 12 months, well ahead of the median growth of 9% for both measures among S&P 1500 materials stocks. That momentum contributes to the stock scoring above 90 for both sector-specific ranks. CF Industries, which scores above 85 in five of the six Quadrix category scores, is a Focus List Buy and a Long-Term Buy.

SECTOR AVERAGES: DIFFERENT STROKES FOR DIFFERENT SECTORS
The 10 market sectors have different fundamental characteristics. Our sector-specific scores take these differences into account, emphasizing statistics that work particularly well within a given sector. All data are averages.
Div.
Yield
(%)
12-Mo.
EPS
Growth
(%)
Est. 5-
Yr. EPS
Growth
(Annual.)
(%)
P/E
Ratio
Price/
Sales
Vs. 5-
Yr. Avg.
Long-
Term
Debt/
Capital
(%)
Return
On
Equity
(%)
12-Mo.
Total
Return
(%)
--------- Quadrix Scores ---------
S&P 1500 Sector
Momen-
tum
Value
Overall
Cons. Discretionary
1.2
9
14
19
1.13
28
19
14
55
54
61
Consumer Staples
2.0
6
10
17
1.06
38
20
12
55
49
57
Energy
0.8
14
11
17
0.86
32
13
(5)
50
60
57
Financials
2.7
7
9
22
1.14
36
10
20
58
51
54
Health Care
0.7
5
14
18
0.96
25
17
13
55
52
63
Industrials
1.5
11
14
17
0.99
27
16
13
52
62
60
Materials
1.7
4
11
18
1.07
35
15
13
51
55
54
Technology
0.8
(6)
15
19
0.92
16
16
1
42
54
53
Telecom Services
3.5
(14)
7
23
0.85
50
10
15
52
61
54
Utilities
3.9
0
5
17
1.29
50
10
10
44
49
43
S&P 1500 Index
1.6
5
12
19
1.04
29
15
11
52
54
57
Note: Averages exclude some outliers. Quadrix scores are percentile ranks, with 100 the best.

 

Want More on our scores?

• For more information on Quadrix, including an explanation of the Overall score and its component category scores, visit www.DowTheory.com/Go/Quadrix and click on the "Quadrix Explained" link on the left side of the page.

• To see sector scores for more than 1,500 stocks, visit www.DowTheory.com/Go/Sectors.


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