The More High Scores, The Better

9/22/2014


We use nearly 100 statistical factors to compute the Quadrix Overall score, and stocks with high Overall scores tend to outperform. So shouldn't stocks with a lot of high scores for individual Quadrix factors outperform?

The answer is yes, at least since 1992. Stocks with a high percentage of factors with percentile scores above 60, 70, and 80 have indeed outperformed. More important, these thresholds have proved useful screens when shopping among Quadrix standouts.

In rolling 12-month periods since 1992, the top one-fifth of stocks in the Dow Jones U.S. Index as measured by the number of factors above 80 returned an average of 1.6% more than the typical stock in the index. Strategies involving scores above 70 and 60 also worked, though not as well.

The rules of the game appeared to change for the worse in recent years, with all three threshold strategies proving less effective over the last five and 10 years. Portfolios selected based on the number of Quadrix factors above 60 or 70 underperformed over the last five years. However, the last two years have been far friendlier.

In the 12 months from November 2012 through October 2013, stocks with a lot of factors over 80 delivered 2.7% outperformance, the largest in more than two years. In the next 10 periods, outperformance averaged 4.9%, including 3.7% in the 12 months ended August 2014. Threshold strategies focusing on scores above 60 or 70 saw similar trends.

Plenty of stocks with a large number of high factor scores do not earn top Overall scores, and threshold analysis should not be used as a stand-alone tool. However, among the highest Overall scorers, stocks with a lot of high factor scores have outperformed.

With that in mind, in the table below we present stocks that look good based on threshold analysis, and also have high Overall scores. Four are reviewed below.

Seventy percent of Alaska Air Group's ($46; ALK) individual Quadrix factors are above 60, a feat managed by only six other stocks in the Dow Jones U.S. Index. Only one of the more than 20 factors that derive Alaska's Quality score of 97 is below 60, a phenomenon driven by impressive one-, three-, and five-year growth.

Alaska's growth should continue, with the consensus projecting per-share-profits will rise 21% in the September quarter and 27% in the December quarter on more than 8% revenue growth. Profit margins have moved generally higher over the last two years, a trend expected to continue through 2015 as air-travel demand rises. This growth potential warrants a premium valuation, yet Alaska (Value score of 95) trades at 12 times expected 2014 earnings, 27% below the industry median. Alaska Air Group, yielding 1.1%, is a Focus List Buy and a Long-Term Buy.


The auto-components industry looks good in Quadrix, yet Magna International ($108; MGA) stands out even in that elite group. Magna's 62 Quadrix factors above 60 and 50 scores above 70 top any other stock in the industry. The Overall score has ended each of the last six months at 99.

Quadrix tends to reward companies for consistent growth, and Magna has delivered. Per-share profits have risen in 10 of the last 11 quarters, averaging 26% growth. During that period, operating cash flow more than doubled to $2.79 billion while free cash flow reached $1.14 billion, up from a negative $262 million.

Analysts expect Magna's growth to continue. The per-share-profit consensus for 2014 has risen 3.6% over the last 60 days. The 2015 estimate is up 4.1%. Those targets represent growth of 19% this year and 16% next year. Magna, yielding 1.4%, is a Focus List Buy and a Long-Term Buy.


Skyworks Solutions ($56; SWKS) earns an Overall score of 95, with five of its six category scores above 85. Thirty-five of its individual Quadrix statistics are above 80, third-highest among our recommended stocks. Every factor used in our Momentum and Quality scores is at least 60, and all but one metric for each score is above 70.

While the stock's superior growth (consensus profit gains of 25% in fiscal 2015 ending September) warrants a premium valuation, it compares favorably to its peers on many metrics. At 14 times the 2015 estimate, Skyworks trades 11% below the semiconductor-industry median. Skyworks' PEG ratio, which divides the P/E based on expected current-year earnings by the five-year estimated profit-growth rate, is 1.0, well below the peer-group median of 1.6. Skyworks, yielding 0.8%, is a Buy and a Long-Term Buy.


Whiting Petroleum ($84; WLL), which owns oil and natural-gas properties in North Dakota, Oklahoma, and Texas, grew its production 14% last year and 15% in the first half of 2014. The Bakken/Three Forks field in North Dakota accounted for nearly three-fourths of production in the June quarter. Bolstered by acquisitions as well as the drillbit, the company expects at least 20% higher production for full-year 2014.

The company has 27 individual Quadrix factors (29% of the total) above 80 and 40 (43%) above 70. The 43% of above-70 scorers ranks seventh among the 33 oil & gas exploration firms in the index, while Whiting's Overall score of 94 ranks fourth.

Oil prices have fallen in recent weeks. Since the start of July, per-barrel prices have averaged just under $100 per barrel, down 4% from the June quarter and 6% from the year-earlier period. Despite the dip in oil prices, the consensus projects per-share-profit growth of 9% for the September quarter. Whiting is a Focus List Buy and a Long-Term Buy.

RECOMMENDED STOCKS THAT OUTSCORE THEIR SECTORS
The 24 recommended stocks below have higher percentages of individual Quadrix factors above 60, 70, and 80 than the average stock in their Dow Jones U.S. Index Sector and also earn Overall scores above 80. Want to see how the rest of our Monitored List stocks stack up? Visit www.DowTheory.com/Go/Scores.
Quadrix Factor
Scores Above 60
Number (%)
Quadrix Factor
Scores Above 70
Number (%)
Quadrix Factor
Scores Above 80
Number (%)
- Quadrix Scores -
Company (Price; Ticker)
Value
Overall
Advice *
Sector
(% Of Scores
Above 80)
Aetna ($83; AET)
46
(49)
31
(33)
21
(22)
84
96
Buy 
Health care (16%)
Alaska Air Group ($46; ALK)
64
(70)
51
(55)
36
(39)
85
99
Focus Buy 
Consumer
svcs. (15%)
Ameriprise Fin'l
($127; AMP)
50
(60)
33
(40)
20
(24)
69
95
Focus Buy 
Financials (17%)
Apple ($102; AAPL)
57
(62)
48
(52)
26
(28)
74
98
Focus Buy 
Technology (19%)
Capital One Fin'l
($83; COF)
33
(40)
30
(36)
23
(28)
88
86
LT Buy
Financials (17%)
EOG Resources ($105; EOG)
53
(56)
41
(44)
23
(24)
69
85
Buy 
Oil & gas (19%)
Foot Locker ($57; FL)
56
(66)
36
(42)
26
(31)
66
97
Focus Buy 
Consumer
svcs. (15%)
Gilead Sciences
($104; GILD)
62
(68)
61
(67)
54
(59)
47
95
LT Buy
Health care (16%)
Halliburton ($66; HAL)
51
(54)
31
(33)
18
(19)
65
88
Buy 
Oil & gas (19%)
Jones Lang LaSalle
($129; JLL)
49
(52)
39
(41)
17
(18)
64
95
Buy 
Financials (17%)
Kroger ($52; KR)
49
(52)
34
(36)
20
(21)
67
87
Focus Buy 
Consumer
svcs. (15%)
Lam Research ($75; LRCX)
55
(60)
41
(45)
31
(34)
72
97
Buy 
Technology (19%)
Lear ($100; LEA)
56
(61)
49
(53)
32
(35)
73
97
Focus Buy 
Consumer
goods (17%)
Macy's ($61; M)
42
(45)
33
(35)
17
(18)
86
93
LT Buy
Consumer
svcs. (15%)
Magna Int'l ($108; MGA)
62
(66)
50
(53)
31
(33)
80
99
Focus Buy 
Consumer
goods (17%)
ManpowerGroup ($76; MAN)
55
(59)
45
(48)
17
(18)
89
96
Focus Buy 
Industrials (13%)
Norfolk Southern
($112; NSC)
46
(49)
32
(34)
14
(15)
57
88
LT Buy
Industrials (13%)
Packaging Corp. ($65; PKG)
64
(68)
48
(51)
29
(31)
87
97
Buy 
Industrials (13%)
Qualcomm ($76; QCOM)
49
(52)
41
(44)
25
(27)
78
85
LT Buy
Technology (19%)
Skyworks Solutions
($56; SWKS)
64
(70)
59
(64)
35
(38)
42
95
Buy 
Technology (19%)
UGI ($35; UGI)
34
(41)
23
(28)
11
(13)
86
92
Buy 
Utilities (11%)
Union Pacific ($110; UNP)
58
(62)
43
(46)
28
(30)
41
90
Focus Buy 
Industrials (13%)
United Rentals ($118; URI)
50
(56)
42
(47)
22
(24)
58
92
Focus Buy 
Industrials (13%)
Whiting Petroleum
($84; WLL)
53
(58)
40
(43)
27
(29)
62
94
Focus Buy 
Oil & gas (19%)
* All Buys and Focus List Buys also qualify as Long-Term Buys.     Note: Quadrix scores are percentile ranks, with 100 the best.

 


Where to find the big scorers

When it comes to Quadrix scores, not all sectors are created equal.

As the table below illustrates, within the Dow Jones U.S. Index, technology and oil & gas stocks average 16 individual Quadrix factors above 80, tied for tops among the 10 market sectors. In contrast, industrials average 11 factors above 80 and utilities just nine.

Ranking the sectors
Sector
Average No. Of
Scores Above 80
(Rank)
Average
Rank
Since 1992
Technology
16
(1)
 
1.8
Oil & Gas
16
(1)
 
2.2
Consumer Goods
15
(3)
 
5.6
Health Care
14
(4)
 
3.0
Financials
14
(4)
 
6.6
Consumer Svcs.
13
(6)
 
3.9
Telecom
13
(6)
 
4.7
Basic Materials
12
(8)
 
6.2
Industrials
11
(9)
 
6.4
Utilities
9
(10)
 
9.7

While Quadrix scores are constantly changing, the nearby table allows us to draw a few conclusions:

• The best and worst are easy to spot. Technology and oil & gas have ranked either first or second in scores above 80 in each of the last 24 months. In contrast, utilities have consistently been near the bottom in scores above 80 and above 70.

• Correcting for the lower number of data points helps the financial sector, though it doesn't do much for utilities. Financials in the Dow Jones U.S. Index average 30% of scores above 70 and 17% above 80, percentages that land them in the top half of sectors.

• Health care has fallen somewhat out of favor. Since 1992, the sector has averaged the third-highest number of scores above 80. Health care is fifth now, and is middle of the road in most of the threshold percentages. In recent months, we've had trouble finding attractive stocks in the sector.

• The sectors with the highest number or percentage of high Quadrix factors don't necessarily have the broadest appeal. The top two sectors as measured by the number of scores above 80, technology and oil & gas, average Overall scores of 62 (third-highest) and 61 (sixth-highest), part of a tight cluster in the middle, with five sectors averaging between 60.9 and 62.3. However, we are purchasing stocks, not sectors, and plenty of companies with many high individual scores also earn strong Overall scores. Top picks include EOG Resources ($105; EOG) and Whiting Petroleum ($84; WLL) in energy and Apple ($102; AAPL) and Skyworks Solutions ($56; SWKS) in technology.


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