Quadrix Value Score Dominates

6/23/2014


Value is back in vogue.

In the 12-month period starting at the end of June 2012, top Quadrix Value scorers outperformed the average stock in the S&P 1500 Index by 7.5%, by far the best of the six category scores. In similar periods starting in each of the next 12 months, Value delivered at least 4.3% outperformance and averaged 8.7%; no other category score topped 3.8% in its best month.

Value has frequently remained strong for multiyear periods, so the trend may have legs. Check out the table below for a list of stocks that score well in the top-performing individual valuation ratios.

Since the end of 1994, S&P 1500 Index stocks with high Quadrix Value scores have delivered 12-month returns an average of 2.9% above the average stock in the index. None of the other five Quadrix category scores comes close to that kind of performance.

Year-to-year volatility

Given its superior long-term returns, you might expect Value to dominate most years. Yet it does not.

As the table below illustrates, while Value ranks first among Quadrix category scores in returns for periods starting in 2012 and 2013, it came in dead last in 2010 and 2011. This pattern has panned out for nearly two decades, with high Value scorers delivering either the top or bottom returns in 16 of the last 19 calendar years.

VALUE'S VOLATILE RIDE
12-Month Periods
Starting In . . .
Average
Outperformance
of Top Value
Scorers
(%)
Rank
Among
Quadrix
Categories *
All periods
2.9
1
2013 †
7.3
1
2012
5.3
1
2011
(3.3)
6
2010
(2.2)
6
2009
11.8
1
2008
7.1
1
2007
(4.1)
6
2006
(1.5)
5
2005
0.3
4
2004
5.7
1
2003
6.1
1
2002
3.8
2
2001
12.2
1
2000
20.3
1
1999
(14.6)
5
1998
(3.6)
5
1997
5.0
1
1996
4.4
1
1995
(2.8)
5
* Until 2004, there were only five categories.  
† Only five 12-month periods have elapsed.

In short, when Value is good, it tends to be great. And when Value falls out of favor, it stinks. This hot-or-cold streakiness highlights an advantage of our Quadrix Overall score, which considers more than 90 factors in six categories. At any given time, one or more categories may lose their predictive power, while other categories pick up the slack.


A different Angle

Next week we take a different approach toward valuation with a feature on implied prices. We'll screen for stocks that look cheap relative to prices implied by their historical average valuations, as well as their sector and industry averages.


Value, our most heavily weighted category, tends to perform well when the other scores perform poorly, and vice versa. This relationship contributes to the relative steadiness of the Overall score. Top Overall scorers have outstripped the average stock in nearly two-thirds of 12-month periods and managed stronger excess returns (average of 2.3% since the end of 1994) than any category score except Value, with less volatility than any of the categories.

In the following paragraphs we review five recommended stocks with high scores in both Value and Overall.

In the March quarter, Aetna ($81; AET) topped the consensus profit estimate by $0.42 per share, or 27%. Since the profit announcement, shares of Aetna have jumped 17%, versus 10% for the S&P 1500 Managed Care Index. Yet Aetna still earns a Value score of 84. At 13 times trailing earnings, Aetna trades at a 12% discount to its peers.

The consensus projects per-share profits of $6.51 this year, up 11%, well above the median of 2% for managed-care stocks in the index. From its 2013 acquisition of Coventry Health Care, Aetna targets per-share-earnings accretion of $0.50 this year and $0.90 next year. However, early this month, the company said it might be able to capture some of the 2015 benefit this year via cost savings, providing some potential upside to the consensus profit target. Aetna is a Long-Term Buy.


At first glance, Alaska Air Group ($95; ALK) doesn't look overly cheap. It trades at a premium to its five-year average for price/earnings, price/sales, and other valuation ratios. However, airlines as a group seem expensive relative to their historical norms. Alaska looks appealing relative to its industry, trading at a discount to the median airline based on price/earnings and price/operating cash flow.

In a J.D. Power survey last month, Alaska Airlines rated number one in customer satisfaction among traditional U.S. airlines for the seventh consecutive year. Alaska's on-time performance has helped stave off competition in Seattle, where it carries more than half of all passengers. Delta Air Lines ($39; DAL) is adding new routes in Seattle, raising the specter of a price war. However, the U.S. pricing environment remains strong, with most airlines loathe to discount. Alaska is a Focus List Buy and a Long-Term Buy.


Foot Locker's ($49; FL) trailing P/E ratio of 16 is 16% below the median apparel retailer and 18% below the median specialty store, as well as 24% below its own five-year average. The shoe-store chain earns a Quadrix Value score of 79 (versus an average of 69 for apparel and specialty retailers) and an Overall score of 98 (average of 63).

Investments in store remodeling are starting to pay off, with remodeled stores delivering strong same-store-sales growth even after the one-year anniversary. Foot Locker plans to add about 60 new stores in the current fiscal year while closing about 100 weaker locations. Despite the store closures, the consensus projects sales growth of 8% and per-share-profit growth of 15% in fiscal 2015 ending January. Foot Locker is a Focus List Buy and a Long-Term Buy.


Over the last four years, Macy's ($58; M) has averaged same-store-sales growth of 4.2%, with much of those gains stemming from its fast-growing online business. The omnichannel marketing program encourages online or mobile shoppers to pick up purchases in the store, a visit that can spark additional buying. In part because of its expanding online presence, Macy's operating profit margins have expanded over the last five years.

The consensus projects profit growth of at least 12% this year and next year. At 13 times the analyst estimate of $4.50 per share for fiscal 2015 ending January, Macy's trades at a 27% discount to the median retailer. Macy's is a Buy and a Long-Term Buy.


Magna International ($108; MGA) earns a Value score of 81, well above the industry average of 64; only one auto-parts maker in the S&P 1500 Index has a higher score. At 14 times trailing earnings, Magna is 26% cheaper than the industry median and looks similarly attractive using price/sales and price/operating cash flow.

Such an appealing valuation might suggest inferior growth potential, but not with Magna. The stock's Quadrix Momentum score of 94 and Earnings Estimates score of 97 top any S&P 1500 auto-parts company. The consensus projects per-share-profit growth of 14% for Magna this year, 16% next year, and 17% annually over the next five years. Magna, which earns a perfect 100 in both of our sector-specific scores to go with a 99 Overall, is a Focus List Buy and a Long-Term Buy.

STOCKS STRONG IN TOP SIX VALUE SCORES
Since the Quadrix Value score's resurgence starting at the end of May 2012, top scorers in six Value metrics have averaged 12-month outperformance of at least 6% — P/E ratios based on trailing earnings and estimates for the current year and next year, price/sales, enterprise value/EBITDA, and price/free cash flow. The A-rated stocks below rank at least 60 in each of the six scores. Stocks on our buy lists are in bold.
--- P/E Ratio ---
P/E On Curr.-
---- Year Est. ----
P/E On Next-
---- Year Est. ----
-- Price/Sales --
Ent. Value/
----- EBITDA -----
Price/Free
--- Cash Flow ---
Quadrix Scores
Company
(Price; Ticker)
Quadrix
Rank
Actual
Ratio
Quadrix
Rank
Actual
Ratio
Quadrix
Rank
Actual
Ratio
Quadrix
Rank
Actual
Ratio
Quadrix
Rank
Actual
Ratio
Quadrix
Rank
Actual
Ratio
Value
Overall
Aetna
($81; AET)
83
13
87
13
84
11
87
0.6
77
7.4
83
12.5
84
94
Alaska Air
($95; ALK)
72
15
81
14
79
12
65
1.3
86
6.2
71
16.6
78
99
American Int'l
($55; AIG)
94
9
87
12
86
11
69
1.2
NA
NA
82
12.9
90
95
Foot Locker
($49; FL)
68
16
73
15
67
14
72
1.1
75
7.6
NA
NA
79
98
Hewlett-Packard
($35; HPQ)
91
11
97
9
95
9
87
0.6
90
5.5
88
9.6
96
93
Macy's ($58; M)
75
15
84
13
83
11
81
0.8
79
7.2
73
16.2
87
95
Magna Int'l
($108; MGA)
76
14
84
13
84
11
84
0.7
75
7.6
68
17.5
81
99
National Oilwell
($78; NOV)
80
14
85
13
84
11
63
1.4
76
7.5
NA
NA
95
87
Travelers
($95; TRV)
94
9
94
10
89
10
67
1.2
89
5.6
86
10.7
98
100
Valero Energy
($54; VLO)
90
11
97
9
96
8
97
0.2
91
5.2
74
15.7
97
88
WellPoint
($106; WLP)
82
13
86
13
81
12
91
0.4
91
5.1
79
13.8
88
77
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.

 


WHAT'S WORKING IN QUADRIX

Of the 12 Quadrix factors that delivered the highest outperformance in the 12 months ended May 31, seven are in the Value category. This trend suggests investors who purchased stocks with attractive valuations did the best, but also implies that Value isn't everything.

Of the remaining five scores, two are from the Performance category (year-to-date and six-month total returns) and three from Quality (five-year equity growth and three-year growth of cash flow and equity). Top-scoring stocks in all five of these factors outperformed the average stock in the S&P 1500 Index by more than 2.6% over the year ended May.

We recommend nine stocks that earn at least 70 in all five of the best-performing factors outside the Value group. Here are the stocks:

Focus List Buys
• Schlumberger ($106; SLB).
• United Rentals ($103; URI).
• Wells Fargo ($52; WFC).
• Whiting Petroleum ($78; WLL).

Buys
• Apple ($92; AAPL).
• Halliburton ($68; HAL).
• Skyworks ($48; SWKS).

Long-Term Buys
• Aetna ($81; AET).
• Continental Res. ($152; CLR).


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