Use Overall, Sector Scores Together

4/1/2013


Every sector charts its own path, and some paths lead higher than others.

For example, energy stocks in the S&P 1500 Index averaged 12-month returns of nearly 19% since 1994, versus 12% for consumer-discretionary stocks. But that doesn't mean you should load up on energy stocks.

Sectors move in cycles. Over the last four calendar years, the S&P 1500 Consumer Discretionary Sector Index returned 140%, versus 53% for the energy sector index, topping energy's return in each of the four years. To be sure, energy outperformed by a wide margin from 2004 through 2007. But had you counted on a repeat and eschewed consumer companies over the last four years in favor of energy, you would have regretted the choice.

Our advice — backed up by reams of academic research — is to purchase a diversified portfolio of high-quality stocks in various sectors. Don't blindly chase performance. Overweight sectors with a lot of attractive names, but don't let one or two sectors dominate your portfolio.

Our Quadrix® stock-rating system can help. Stocks that score well in our Overall rank or either of our two sector-specific ranks (12-Factor Sector and Reranked Overall) tend to outperform the average stock. Stocks earning high ranks in all three scores do even better. For more information on Quadrix, visit www.DowTheory.com/Go/Quadrix and click on the Quadrix Explained link. For an explanation of our sector-specific scores and data for more than 1500 companies, visit www.DowTheory.com/Go/Sectors.

About 9% of the stocks in the S&P 1500 Index earn scores above 80 (on a scale of 0 to 100) in all three of the scores.

RAREFIED AIR
About 9% of stocks in the S&P 1500 Index earn above 80 in Quadrix Overall as well as both sector-specific scores. Require scores above 90, and only 3% of the index's stocks qualify.
Number Of Companies
--------- Scoring Above 80 ---------
Number Of Companies
--------- Scoring Above 90 ---------
In At
Least
One Score
In At
Least
Two Scores
In All
Three
Scores
In At
Least
One Score
In At
Least
Two Scores
In All
Three
Scores
Consumer Discretionary
83
42
16
39
16
7
Consumer Staples
24
15
9
12
6
5
Energy
34
18
8
19
8
3
Financials
85
56
34
43
25
13
Health Care
53
30
12
26
13
4
Industrials
71
31
15
33
15
6
Materials
24
18
10
15
7
2
Technology
73
54
30
40
18
8
Telecom
5
2
2
2
1
1
Utilities
21
6
2
13
3
0
S&P 1500 Index
473
272
138
242
112
49

The table below lists a few attractive companies we fished from that pool. Three are reviewed below.

Even in the agricultural-chemicals industry, where the stocks average Overall scores of 71, CF Industries ($193; CF) stands out. Its Overall score of 95 and Reranked Overall score of 99 are both second-highest in the S&P 1500 Index. Over the last five years, the company managed annualized growth of 17% in sales and 34% in per-share profits. Yet the stock trades at seven times trailing earnings, a 33% discount to its five-year average.

Stronger-than-expected fertilizer applications in the fall helped boost December-quarter profits above expectations, and 2013 corn plantings are expected to roughly match 2012's 75-year high. However, the consensus projects per-share-profit declines of at least 7% this year and next year. Blame concerns about foreign competition, rising natural-gas prices, and CF's production constraints for the pessimism. But while all three of the above issues are legitimate, the stock seems unduly cheap at less than nine times the lowest Wall Street estimate for 2013 earnings. CF is a Buy and a Long-Term Buy.


Cisco Systems ($21; CSCO) earns an Overall score of 95 (No. 4 in its industry) and sector-specific scores of at least 88 (neither lower than No. 4). In each of the last five quarters, the networking giant has delivered at least 4% revenue growth and 12% higher per-share profits, consistency not fully reflected in the stock's price. At 11 times trailing earnings, Cisco trades at a 45% discount to the median communications-equipment company.

While orders from Europe and Asia came in lower than expected in the January quarter, the long-dormant U.S. public sector showed signs of life. Cisco is gaining share in the communications-equipment market, but the stock has dipped recently on worries regarding a slowdown in demand. Cisco, yielding 2.7%, is a Buy and a Long-Term Buy.


By the numbers, Canadian auto-parts maker Magna International ($58; MGA) has few weak points. It scores at least 70 in Quadrix Momentum, Value, Quality, Earnings Estimates, and Performance. The stock earns a Reranked Overall score higher than any S&P 1500 company in its industry, while its Overall and 12-Factor Sector score are second-best.

Thirteen consecutive quarters of at least 5% sales growth attest to the steadiness of Magna's business. The shares have jumped 32% over the last six months, yet Magna still trades at 10 times trailing earnings, 41% below the industry median and 35% below its own three-year average.

Since topping December-quarter profit estimates by more than 46%, the profit consensus for both 2013 and 2014 has risen at least 3%. Wall Street expects profits to decline in 2013, though if we exclude amortization costs related to an acquisition, profits should rise at least 12%. Magna is a Focus List Buy and a Long-Term Buy.

STOCKS WITH STRONG OVERALL, SECTOR SCORES
All 15 of the A-rated stocks below earn scores of at least 80 for Quadrix® Overall and both of our sector-specific ranks, 12-Factor Sector and Reranked Overall. We also required them to be among the top 12 scorers in their industry based on all three metrics. Stocks recommended for purchase are in bold.
Stock-
Market
Value
($Bil.)
---- Sector-Specific Scores ----
Company (Price; Ticker)
Div.
Yield
(%)
Quadrix
Overall Score
(Industry Rank)
12-Factor
Sector
(Industry Rank)
Reranked
Overall
(Industry Rank)
Sector
Industry
Abbott Laboratories
($34; ABT)
1.6
53.1
86
(8)
94
(3)
93
(1)
Health Care
Health-Care
Equipment
CF Industries
($193; CF)
0.8
12.4
95
(1)
89
(5)
99
(2)
Materials
Chemicals
Cisco Systems
($21; CSCO)
2.7
115.5
95
(4)
88
(4)
96
(2)
Technology
Communications
Equip.
Cognizant Tech.
($75; CTSH)
0.0
23.4
88
(4)
86
(6)
90
(6)
Technology
IT Services
Comcast ($41; CMCSa)
1.9
106.7
92
(1)
90
(5)
93
(2)
Discretionary
Media
CVS Caremark
($55; CVS)
1.6
67.9
91
(1)
95
(3)
91
(3)
Staples
Food & Staples
Retailing
Express Scripts
($58; ESRX)
0.0
48.4
90
(5)
89
(8)
95
(5)
Health Care
Health-Care
Providers
Goldman Sachs
($147; GS)
1.4
69.9
90
(1)
99
(1)
86
(1)
Financials
Capital Markets
Google ($812; GOOG)
0.0
217.9
81
(12)
84
(6)
83
(8)
Technology
Internet Software
J.P. Morgan Chase
($49; JPM)
2.5
188.0
97
(2)
99
(1)
97
(1)
Financials
Diversified
Financial
Macy's ($42; M)
1.9
16.8
95
(2)
88
(2)
96
(1)
Discretionary
Multiline Retail
Magna International
($58; MGA)
2.2
13.5
99
(2)
97
(2)
100
(1)
Discretionary
Auto Components
Qualcomm
($67; QCOM)
2.1
112.9
92
(8)
90
(3)
89
(3)
Technology
Communications
Equip.
Southwest Airlines
($13; LUV)
0.3
9.3
91
(4)
100
(1)
95
(3)
Industrials
Airlines
Wells Fargo
($37; WFC)
2.7
197.3
88
(9)
98
(1)
88
(5)
Financials
Commercial Banks
Note: Quadrix and sector-specific scores are percentile ranks, with 100 the best.

 


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