Where Quadrix Works Best

1/26/2015


We've been using the Quadrix stock-rating system to select stocks since 2000, but we're still learning about how it works.

If you've been reading the Forecasts for any length of time, you know that stocks with high Quadrix Overall scores tend to outperform, while the system works better with some groups of stocks than others. The charts below expand on that topic, considering not the magnitude of returns, but how likely top-scoring stocks are to provide market-beating performance.

Our research, based on rolling 12-month total returns since 1994, uncovered a few facts subscribers should find encouraging:

• In the large-cap S&P 500, S&P MidCap 400, and S&P SmallCap 600 indexes, stocks scoring above 80 (roughly the top 20%) tended to deliver returns well above the market average in the year ahead. In rolling periods since 1994, an average of 25.3% of top-scoring stocks in the small-cap index achieved year-ahead returns in the top one-fifth of the S&P 1500 Index, versus 23.6% for midcaps and 21.7% for large-caps. The S&P 1500 consists of the S&P 400, 500, and 600 indexes.

• While high-scoring large-caps were less likely than small-caps to manage extremely high returns, they were also less likely to underperform. An average of 54% of top scorers from the S&P 500 and S&P 400 outperformed the average stock in rolling periods since 1994, versus 52% for S&P 600 stocks.

• Six of the nine market sectors with enough high Overall scorers to determine a trend saw an average of 22% of those high scorers manage year-ahead returns in the top one-fifth, with three (energy, health care, and consumer discretionary) averaging more than 25%.

In the table below we present strong stocks in industries where Quadrix has historically worked, as well as stocks with individual histories of success. Three of the stocks are discussed below:

Aetna ($95; AET), added to the Focus List in the Jan. 19 issue, earns an Overall score of 94, tops among managed-care providers in the S&P 500 Index. Aetna also earns the industry's top scores for Value (79), Quality (83), and Earnings Estimates (98). Since 1994, S&P 1500 managed-care stocks with Overall scores above 80 went on to post 12-month returns in the top one-fifth of the index about one-third of the time.

Uncertainty about the future of health-care reform in America hasn't kept Aetna down. The shares have risen 35% over the last year. Yet Aetna represents an appealing value at 14 times trailing earnings, a 32% discount to the industry median.

Earlier this month, Aetna projected better-than-expected membership growth for 2014. The consensus calls for Aetna, expected to report Feb. 3, to post December-quarter earnings per share 9% lower than year-earlier levels, then rebound to 7% growth in 2015. The current-year estimate seems unduly conservative, particularly with some analysts projecting a slowdown in medical-cost growth. Aetna is a Focus List Buy and a Long-Term Buy.


Since 1994, the average biotechnology stock in the S&P 1500 that scored above 80 Overall went on to deliver returns in the top one-fifth 31% of the time. That trend bodes well for Gilead Sciences ($104; GILD). Of course, Gilead has a history of its own, and managed returns in the top one-fifth 44% of the time when it had an Overall score above 80.

The consensus projects per-share-profit growth of nearly 300% in the December quarter (results expected in early February) and 25% in 2015. That growth comes surprisingly cheap, with shares trading at 11 times expected 2015 earnings, 52% below the industry median. Some discount is justified, given Gilead's reliance on a small number of high-priced drugs, coupled with a broad-based backlash against such prices. These concerns could weigh on the stock temporarily, which explains in part why Gilead is a Long-Term Buy, but not a Buy.


Excluding $1.77 billion ($1.27 per share) in charges for restructuring, asset impairment, and currency valuation, oilfield-services giant Schlumberger ($82; SLB) reported December-quarter per-share profits of $1.50, up 11% and $0.04 above the consensus. Sales lagged expectations, hurt by a decline in oil prices that crimped drilling activity, particularly in Europe.

Schlumberger shares rallied 6% on the earnings news, and the company seems reasonably well-positioned for what is likely to be a very tough year in the oilfield-services sector. The company plans to cut 9,000 jobs, or about 7% of its work force, leaving open the option for more cuts.

Since 1994, when Schlumberger earned an Overall score above 80, it delivered returns in the top one-fifth more than 33% of the time. On Jan. 20, Schlumberger announced plans to acquire part of a Russian energy company for $1.7 billion. The stock, which raised its quarterly dividend 25% to $0.50 per share payable April 10, now yields 1.9% and remains a Buy and a Long-Term Buy.

QUADRIX LEADERS WORTH WATCHING
This table features two types of stocks. At the top are high-scoring recommended stocks in industries with a history of frequent high returns for top Quadrix scorers. At the bottom are stocks that have historically been more likely than most to parlay high Quadrix Overall scores into top 12-month returns.
---- P/E Ratio ----
--- 12-Month Growth ---
% Of Periods
When Top
Overall Scorers
Delivered
Year-Ahead
Returns In
Company (Price; Ticker)
Yield
(%)
Stock-
Market
Value
($Mil.)
Trailing
On Est.
For
Next 12
Months
Sales
(%)
Per-
Share
Profits
(%)
Oper.
Cash
Flow
(%)
Quadrix
Overall
Score
Top
20%
Top
50%
Industry
Top stocks in top industries
Aetna ($95; AET)
1.1
33.80
14
14
28
18
68
95
31
54
Managed care
Alaska Air ($65; ALK)
0.8
8.85
17
12
8
56
12
99
58
90
Airlines
Apple ($110; AAPL)
1.7
654.24
17
14
7
14
11
99
60
77
Comp. hardware
EMC ($28; EMC)
1.7
57.00
15
13
7
5
(2)
83
47
73
Comp. storage
Gilead Sciences
($104; GILD)
0.0
169.51
17
11
94
206
241
94
44
69
Biotechnology
Southwest Airlines
($42; LUV)
0.6
28.90
24
14
6
87
23
98
49
74
Airlines
Stocks for which Overall has worked in the past
B/E Aerospace
($60; BEAV)
0.0
6.25
14
17
21
29
(12)
87
55
72
Aerospace
Cognizant Technology
($55; CTSH)
0.0
33.84
22
20
17
18
29
96
42
71
IT consulting
F5 Networks
($126; FFIV)
0.0
9.37
23
20
17
16
10
95
47
64
Commun. equip.
Foot Locker ($53; FL)
1.7
7.65
15
14
9
23
33
97
49
63
Apparel retail
Macy's ($64; M)
1.9
22.96
15
14
0
10
14
91
32
81
Dept. stores
Nvidia ($20; NVDA)
1.7
11.33
16
14
12
27
(2)
91
34
51
Semiconductors
Schlumberger
($82; SLB)
1.9
106.30
15
20
7
22
22
81
33
53
Oil & gas equip.
Skyworks Solutions
($77; SWKS)
0.7
14.98
24
17
28
62
55
97
60
77
Semiconductors
United Rentals
($88; URI)
0.0
9.11
14
11
12
44
42
94
47
58
Trading cos.
Notes: Quadrix scores are percentile ranks, with 100 the best.

 


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