Value Dominates Top Quadrix Stats

3/18/2013


Our Quadrix rating system ranks stocks based on more than 150 variables, using more than 80 to calculate the Overall score.

That may sound like a lot of numbers, but the breadth serves a purpose: identifying stocks that look good from many angles. Our research suggests stocks with sufficiently broad-based strength to earn high Overall scores tend to outperform. However, not all factors are created equal.

Of the six category scores used to derive the Overall score, Value has been the most effective. For example, the top one-fifth of stocks as measured by the Value score averaged outperformance of 2.2% in rolling 12-month periods over the last five years and 2.7% over the last 10. These performance numbers are based on six back-tests (see the caption of the chart for details).

No other category score works as well as Value, and many of the best-performing individual factors are valuation ratios.

Of the 127 Quadrix statistics with five years of data, only eight are among the top 20 in outperformance over the last five and 10 years, and since inception (ranging from 1992 to 1994, depending on the index tested). All eight — price/earnings, price/book, price/cash flow, price/sales, enterprise value/EBITDA, price/earnings to five-year median, price/cash flow to five-year median, price/sales to five-year median — are components of the Value score.

TOP EIGHT FACTORS
Of the 127 Quadrix factors with five years of data (not all are used to calculate the Overall score), only eight rank among the top 20 in outperformance over the last five years, 10 years, and since inception. All are components of the Value score. Value has not worked well over the last year, and none of the factors are in the top 50 for that period.
-- Since Inception --
--- Last 10 Years ---
---- Last 5 Years ----
Quadrix Factor
Average
Outperfor-
mance
(%)
Rank
Average
Outperfor-
mance
(%)
Rank
Average
Outperfor-
mance
(%)
Rank
Enterprise Value/EBITDA
4.3
1
3.6
4
2.3
14
Price/Book
3.5
5
3.6
3
2.7
9
Price/Cash Flow
3.7
3
4.0
2
3.4
6
Price/Cash Flow
To 5-Yr. Median
1.1
20
1.3
19
2.5
12
Price/Earnings
3.5
4
2.5
8
1.9
20
Price/Earnings
To 5-Yr. Median
1.2
18
1.7
12
2.7
10
Price/Sales
3.2
6
4.6
1
3.9
3
Price/Sales
To 5-Yr. Median
2.1
9
3.6
5
4.4
1
Note: Outperformance is derived from six back-tests, considering top scorers relative to the average and median stocks in each of three indexes. Inception dates range from 1992 through 1994, depending on the index.

Check out the table below, which lists 13 stocks that score above 60 in at least six of the eight factors. Three are reviewed below.

Some investors have trouble seeing Apple ($428; AAPL) as a value stock because of its high per-share price. But the numbers don't lie. At 10 times projected earnings in fiscal 2013, Apple trades at a 5% discount to the median computer-hardware company in the S&P 1500 — after several years of commanding a steep premium because of its superior growth. The stock trades at a 50% discount to its own five-year median trailing P/E ratio, as well as a 35% discount to its historical price/sales ratio and a 50% discount on price/cash flow. For all three of those relative valuation measures, Apple earns a score of at least 89 because it is cheaper than roughly 89% or more of U.S.-traded stocks.

Apple's December-quarter revenue growth of 18% lagged expectations, and the company projected 5% to 10% growth in the March quarter — well below the consensus of 16% at the time of the announcement. Since releasing quarterly results, Apple shares have declined 17% and its consensus profit estimates have reset. However, with demand for iPhones and iPads still strong in most markets and scuttlebutt calling for new iPad models in the spring and a new iPhone in the summer, expectations for profit growth of 1% in the year ending September seem conservative, leaving room for positive surprises. Apple is a Focus List Buy and a Long-Term Buy.


In each of the last 14 quarters, DirecTV ($51; DTV) grew sales at least 8% and per-share profits at least 18%. During that period, the satellite-TV provider spent nearly $17 billion buying back shares, reducing the share count 40%. Such consistent growth and stock repurchases should command a premium price. But you needn't pay up to buy DirecTV.

The stock earns a Quadrix Value score of 95. At less than 12 times trailing earnings, it trades 38% below the median price/earnings ratio for broadcasting and cable TV companies in the S&P 1500, not to mention 35% below its own five-year median. The shares look particularly cheap relative to their profit-growth potential.

Over the last five years, DirecTV managed annualized per-share-profit growth of 35%. The consensus projects 15% annual growth over the next five years. Divide the stock's P/E of 10 times estimated current-year earnings by the growth projection, and you get a price/earnings-to-growth (PEG) ratio of 0.7, well below the industry median of 1.1. DirecTV, with its impressive blend of growth and value, is a Focus List Buy and a Long-Term Buy.


Early this month, Wells Fargo ($37; WFC) shares hit their highest point since 2008. In the December quarter, the company grew revenue 7% and per-share earnings 25%, the strongest profit growth in six quarters. Solid operating results and two dividend hikes that more than doubled the quarterly payout over the last year have helped the shares. Wells Fargo has risen 7% so far this year and 33% since the end of 2011, yet remains attractively valued.

At 11 times trailing earnings, the stock trades at a 22% discount to the median bank in the S&P 1500 and 31% below its own five-year median P/E ratio. A Value score of 90 bespeaks appeal based on a number of valuation ratios.

The consensus projects per-share-profit growth of 8% for the year, hurt by a 1% decline in revenue. Wells Fargo expects mortgage volumes to slow this year because of a decline in refinancing activity, and net interest margins should remain under pressure. However, the company also expects loan growth higher than underlying economic growth. Wells Fargo, yielding 2.7%, may be capable of exceeding expectations. The stock is a Focus List Buy and a Long-Term Buy.

STOCKS STRONG IN THE TOP FACTORS
Below we present 13 A-rated stocks that score above 60 in at least six of the eight most effective individual Quadrix factors — price/earnings, price/cash flow, price/sales, price/book, price/earnings to 5-year median, price/sales to 5-year median, price/cash flow to 5-year median, and enterprise ratio. All eight of the factors are part of the Value score. Stocks recommended for purchase are presented in bold.
Quadrix
--- Scores ---
Price/
--- Earnings ---
Price/Cash
---- Flow ----
Price/Sales
Price/Book
P/E To 5-Yr.
--- Median ---
P/S To 5-Yr.
--- Median ---
P/CF To 5-Yr.
--- Median ---
Enterprise
----- Ratio -----
Company
(Price; Ticker)
Value
Overall
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Quadrix
Rank
Ratio
Abbott Labs
($35; ABT)
90
82
95
6.9
84
6.2
56
1.4
44
2.0
98
0.52
91
0.55
94
0.56
87
4.8
Apple
($428; AAPL)
97
89
87
9.7
68
8.7
34
2.4
26
3.2
98
0.52
89
0.63
95
0.51
77
6.1
Cisco Systems
($22; CSCO)
87
97
70
13.4
62
9.7
34
2.4
43
2.1
77
0.92
69
0.96
81
0.85
74
6.4
DirecTV
($51; DTV)
95
89
83
10.6
87
5.3
67
1.0
0
(5.5)
97
0.58
84
0.75
85
0.78
77
6.1
Exxon Mobil
($89; XOM)
81
82
84
10.5
81
6.6
67
1.0
36
2.5
69
0.98
65
0.99
76
0.90
76
6.2
Helmerich &
Payne
($64; HP)
82
99
77
11.9
80
6.9
40
2.1
52
1.7
76
0.93
75
0.89
76
0.91
83
5.3
Hess
($70; HES)
85
89
83
10.6
92
4.3
79
0.6
74
1.1
75
0.94
49
1.12
75
0.91
89
4.4
Intel
($22; INTC)
89
83
85
10.2
85
5.8
41
2.0
42
2.2
77
0.92
83
0.78
84
0.79
87
4.8
J.P. Morgan
($50; JPM)
90
98
86
9.9
78
7.2
46
1.8
80
1.0
83
0.87
29
1.32
76
0.90
84
5.2
Magna Int'l
($56; MGA)
91
99
87
9.6
86
5.8
87
0.4
63
1.4
44
1.11
37
1.23
74
0.93
84
5.1
Southwest Air
($12; LUV)
94
90
53
17.0
79
7.0
84
0.5
68
1.3
80
0.90
77
0.86
80
0.86
82
5.5
WellPoint
($64; WLP)
98
90
93
7.6
83
6.3
91
0.3
88
0.8
84
0.86
80
0.82
79
0.88
96
2.8
Wells Fargo
($37; WFC)
90
94
84
10.3
68
8.7
40
2.1
66
1.3
89
0.78
37
1.23
79
0.88
85
5.1
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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