Quadrix Served Three Ways

2/25/2013


We have used our Quadrix stock-rating system in real time since 2000 and tested it back to the early 1990s on all manner of U.S. stocks. And after all that time, we can confidently make the following statement:

It works.

Of course, a quantitative system such as Quadrix cannot replace individual stock analysis. But in the past 206 rolling 12-month periods since the end of 1994, S&P 1500 stocks with scores of at least 80 Overall in Quadrix averaged a 14.9% return, versus 12.7% for the average stock in the index. Stocks earning at least 90 Overall did even better, averaging 12-month returns of 16.2%. Of course, Quadrix can't guarantee such returns, but the trends suggest Quadrix can help tilt the odds in your favor.

Today we present three ways to boost returns even more.

Consistently high Overall scores: Stocks that regularly score above 80 or 90 tend to outperform high scorers with less consistency. Stocks that ended at least 22 of the past 24 months with an Overall score of 90 or higher went on to deliver an average total return of 22.3% over the next 12 months.

Overall/category score overlay: Value is the most effective of the six Quadrix categories when used in conjunction with Overall (see the table below). Since 1994, stocks scoring at least 90 for both Overall and Value averaged a 12-month total return of 19.2%. The combination of high Overall and high Quality scores also outperformed the Overall score alone, while overlays using the other four category scores lagged. All the overlays except Financial Strength led to more volatile returns, but the superior returns of the Value overlay suggests this strategy is worth considering. We use a weighted average of the six category scores — Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance — to generate the Overall score.

TAG-TEAM SCORES

Can you improve on the Overall score by overlaying it with one of its component category scores? Yes and no. For instance, stocks with both Overall and Value scores of 90 or higher averaged 12-month returns of 19.2% in rolling 12-month periods since the end of 1994. That compares to the 16.2% return of all stocks with Overall scores of at least 90, regardless of their Value scores. However, the portfolio of both Overall and Value leaders was more volatile, as measured by standard deviation (the spread of returns around the average).

Our ratio presents return per unit of risk (return/standard deviation), and a portfolio containing all S&P 1500 Index stocks scoring at least 90 Overall boasts a higher ratio than the other portfolios we tested. Winning percentage reflects the percentage of periods when the average stock in the group generated a positive return. Geometric means reflect annual compounding. Geometric returns are always lower than average returns, and portfolios with volatile returns tend to see a larger difference between the two types. Combinations of Overall and Value or Overall and Quality seem worthwhile, as they generated higher average and geometric returns than portfolios relying on Overall scores alone. However, the overlay portfolios were more volatile.

-------------- Quadrix Overall At Least 90, Plus . . . --------------
Quadrix
Overall At
Least 90
Momen-
tum At
Least 90
Value At
Least 90
Quality At
Least 90
Fin'l
Str. At
Least 90
Earns.
Ests. At
Least 90
Perfor-
mance At
Least 90
Avg 12-Mo.
Return (%)
16.2
14.0
19.2
16.8
15.3
10.3
12.0
Standard
Deviation (%)
21.9
24.9
27.0
23.1
21.6
22.6
29.4
Return/Risk Ratio
0.74
0.56
0.71
0.72
0.71
0.45
0.41
Winning
Percentage (%)
82
73
79
83
79
76
68
Geometric Mean
Return (%)
13.9
11.1
16.1
14.3
13.2
3.5
7.6
Note: Earnings Estimates data only goes back to 2004.

Super-high Overall scores: In our back-tests, stocks that score at least 95 Overall have outperformed those that score at least 90. Stocks that score at least 98 Overall generate even higher returns. But the volatility of the outperformance rises along with the Overall score. Stocks with Overall ranks of at least 98 average 12-month returns 6.4% above those of the average stock in the S&P 1500. But those ultra-high scorers outperformed in only 60% of the tested periods, versus 71% for stocks scoring at least 80.

CF Industries ($219; CF) has scored above 95 Overall for 22 consecutive month-ends. The stock's Value and Quality scores have exceeded 90 in each of the last five months. The shares have delivered a total return of 23% over the past year.

CF reported December-quarter earnings of $7.27 per share, up 2% and topping the consensus excluding mark-to-market gains and losses. Sales fell 14% to $1.48 billion, short of the $1.59 billion consensus, though sales adjusted for a the repricing of some contracts last year slightly topped expectations. CF expects strong plantings by farmers in North America, Europe, and China, with U.S. crop yields up sharply in the wake of last year's drought. CF Industries is a Focus List Buy and a Long-Term Buy.


DirecTV ($49; DTV) grew earnings per share 52% to $1.55 in the December quarter, easily surpassing the consensus estimate of $1.13. Sales climbed 8% to $8.05 billion, powered by 22% growth in Latin America. Average revenue per subscriber fell 8% to $56 in Latin America, offset by a 12% increase in net subscriber additions. In the U.S., DirecTV added 103,000 net subscribers, versus 125,000 added in the same quarter last year, while average monthly revenue per subscriber climbed 4% to $105.

Looking ahead, DirecTV sees mid-single-digit revenue growth in the U.S. over the next three years. The pay-TV company plans to take a $160 million charge in the March quarter to account for Venezuela's decision to devalue its currency. DirecTV announced a $4 billion share-repurchase program but added that it might not buy back that much this year. The company spent $5.2 billion on buybacks last year, shrinking the share count 14%. DirecTV is a Focus List Buy and a Long-Term Buy.


UnitedHealth Group's ($57; UNH) Quality rank of 86 reflects strong growth trends for sales, equity, and dividends. The health insurer also earns a Value score of 88. While UnitedHealth has less direct exposure to U.S. health reform than many of its rivals, its commercial business (66% of total medical membership) could suffer from attrition. Earlier this month, the Congressional Budget Office said about 7 million Americans will drop out of commercial coverage by 2022, up from its prior forecast of 4 million, reflecting the likelihood that some employers will choose to pay a government fine rather than offer coverage to workers.

Still, UnitedHealth has seen favorable pricing trends for managed care, while the Optum unit continues to benefit from rising demand for health services and technology. Moreover, the insurer extended its track record of winning public-sector contracts in February, securing part of a $4 billion, five-year award to cover Medicaid in the state of New Mexico. UnitedHealth is a Focus List Buy and a Long-Term Buy. For more news on UnitedHealth, see Portfolio Review.

SCREEN OF THE MONTH: QUADRIX THREE WAYS
Below we list A-rated stocks selected via three screens. Super-high scorers earn Quadrix Overall ranks of 98 or higher. Stocks in the category overlay section score at least 90 for Overall, and at least 90 for Value or Quality. The consistently high scorers have earned Overall scores of 80 or higher in at least 22 of the last 24 months. Some of the stocks satisfy more than one screen, and CF Industries ($219; CF) makes the grade for all three. Stocks currently recommended for purchase are presented in bold.
------- Quadrix Scores -------
No. Of Mos.
In Last 2 Yrs.
With Overall
At Least
Trailing
P/E
Ratio
------- 12-Month Growth -------
Stock-
Market
Value
($Bil.)
Screen
Company (Price; Ticker)
Value
Quality
Overall
80
90
Sales
(%)
Per-
Share
Profits
(%)
Operating
Cash Flow
(%)
Div.
Yield
(%)
Super-High Scores
CF Industries ($219; CF)
93
99
99
24
24
8
0
29
14
0.7
13.9
Helmerich & Payne
($68; HP)
80
86
99
23
14
13
22
25
13
0.9
7.3
J.P. Morgan Chase
($49; JPM)
92
57
98
13
7
9
(3)
12
NC
2.4
188.9
Magna Int'l ($54; MGA) e
84
83
98
17
8
10
7
26
39
2.0
12.8
Overall And Category Score Overlay
Celgene ($100; CELG)
45
98
91
22
17
20
14
33
12
0.0
43.4
DirecTV ($49; DTV)
91
97
94
24
24
11
9
35
9
0.0
29.9
Hess ($68; HES)
94
61
91
8
4
12
(2)
40
14
0.6
23.2
Oracle ($35; ORCL) ‡
73
95
94
24
17
14
1
13
3
0.7
172.3
Qualcomm ($66; QCOM)
58
93
91
15
8
16
29
26
(7)
1.5
115.0
Rogers Commun.
($48; RCI) e
71
93
90
16
8
13
3
21
8
3.3
24.8
Southwest Airlines
($12; LUV)
95
69
91
7
4
21
9
92
49
0.3
8.6
WellPoint ($63; WLP)
98
63
91
13
5
8
2
14
(19)
1.8
19.3
Consistently High Scores
Aflac ($50; AFL)
99
84
89
23
19
8
14
48
NC
2.8
23.3
Apple ($460; AAPL)
95
100
87
24
23
10
29
26
25
2.3
435.7
Bed Bath & Beyond
($58; BBBY)
86
94
88
24
16
13
10
17
14
0.0
13.2
Comcast ($41; CMCSa)
56
91
76
24
13
21
12
34
4
1.9
111.4
Foot Locker ($34; FL)
80
87
94
23
21
14
8
42
4
2.1
5.2
UnitedHealth Group
($57; UNH)
88
86
80
24
16
11
9
12
3
1.5
58.8
Note: Quadrix scores are percentile ranks, with 100 the best.     e Dividend yield estimated.     ‡ Indicated yield based on indicated quarterly dividend multiplied by four.

 


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