Underpriced Outperformers

5/26/2014


Some stocks are too strong for their own good.

Value investors understand the irony; if you purchase an attractively valued stock that subsequently outperforms, the very outperformance you sought can make the stock less of a value.

Investors who target stocks with price momentum face the same trouble from a different perspective — many top performers are too expensive for comfort, with the price already reflecting plenty of future growth.

Both types of investors can make money. Since 1994, the top quintile (one-fifth) of the S&P 1500 Index as measured by Quadrix Value scores has delivered 12-month returns 2.9% higher than those of the average stock in the index. Our Performance score, based mostly on total returns for periods of up to a year, has not been effective. However, stocks with both Value and Performance scores in the top quintile averaged outperformance of 3.5%.

To identify stocks outperforming their peers that remain reasonably valued, we performed two screens. Below we list four recommended stocks with both Value and Performance scores above 80, a truly rare combination (just 2.7% of the 4,863 stocks in our Quadrix research universe make the grade).

We also unearthed three stocks that have outperformed their industry average over the last three and six months and trade at a discount of at least 10% to their industry average P/E ratio. For these stocks, we required Value and Performance scores of at least 70.

THEY PACE THE MARKET BUT DON'T COST MUCH
------ Performance ------
Total Return
Minus Industry
--- Average ---
------ Value ------
Company (Price; Ticker)
Quadrix
Score
3
Mos.
(%)
6
Mos.
(%)
Quadrix
Score
Discount
To Industry
Avg. P/E
Industry
Screen 1 — Very high Quadrix scores
Apple ($605; AAPL)
85
9
7
88
15
Comp. hardware
Magna Int'l ($99; MGA)
88
15
14
85
(30)
Auto parts 
UGI ($48; UGI)
83
3
9
81
(23)
Gas utilities
Wells Fargo ($49; WFC)
83
9
15
81
(22)
Banks
Screen 2 — Market-beating returns and valuation
Alaska Air ($96; ALK)
93
9
13
70
(12)
Airlines
Kroger ($47; KR)
87
18
6
71
(26)
Food retail
Lear ($84; LEA)
84
9
1
80
(30)
Auto parts
Note: Quadrix scores are percentile ranks, with 100 the best.

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