The Little Things We Do

3/16/2015


We get a lot of questions about why we like one stock better than another and how we select one stock as a Focus List Buy while other, similar companies don't make the cut.

Regular readers know we start with Quadrix, our proprietary quantitative-analysis system that ranks roughly 5,000 stocks from 0 to 100 based on nearly 100 individual statistics in six categories. Those categories are:

• Momentum (recent operating results).

• Value (valuation ratios).

• Quality (long-term growth and returns on assets, investment, and equity).

• Financial Strength (debt levels and profit margins).

• Earnings Estimates (trends in analyst revisions).

• Performance (total returns).

Using these categories we derive an Overall score designed to compare stocks regardless of their sector or size. Visit www.DowTheory.com/Go/Quadrix for more on how the stock-rating system works.

While Quadrix helps us separate the wheat from the chaff, no quantitative system can assess every relevant factor. Once we narrow the list of stocks to a manageable size, we follow up with individual company analysis, a process each of our analysts approaches from a unique angle.

Sure, we all consider many of the same factors, such as valuation, growth, profitability, and estimate trends. But contrasts in how we emphasize those factors lead our analysts to different types of stocks, a variety that keeps our Focus List, as well as our other recommended lists, fresh and energetic.

FOCUS LIST TROUNCES S&P 500
Price Returns
Focus
List
Minus
Index
Return
(%)
Time Period
Focus
List
(%)

S&P
500
Index
(%)

Since inception †
616.1
343.6
272.5
2015 †
3.0
(0.9)
3.9
2014
22.1
11.4
10.7
2013
36.0
29.6
6.4
2012
14.2
13.4
0.8
2011
(4.8)
0.0
(4.8)
2010
19.5
12.8
6.8
2009
40.0
23.5
16.6
2008
(48.8)
(38.5)
(10.3)
2007
22.8
3.5
19.3
2006
12.9
13.6
(0.8)
2005
8.1
3.0
5.1
2004
17.5
9.0
8.5
2003
20.2
26.4
(6.2)
2002
(28.9)
(23.4)
(5.6)
2001
(16.0)
(13.0)
(3.0)
2000
14.0
(10.1)
24.1
1999
22.9
19.5
3.4
1998
23.2
26.7
(3.4)
1997
26.6
31.0
(4.4)
1996
23.9
20.3
3.7
1995
30.4
34.1
(3.7)
Dec. 23, 1994 *
0.7
(0.1)
0.8
* Inception date for Focus List.    
† Through Mar. 11.

Rich Moroney, editor and director of research, puts a lot of weight on cash-flow trends. He prefers to see both operating cash flow and net income rising. Cash from operations serves as a check on profits, and if both are moving in the same direction, it suggests the profit growth is legitimate, not driven by accounting tricks or noncash gains. In addition, Moroney gravitates toward companies with high-quality earnings, as indicated by operating cash flow higher than net income.

Here are two Focus List Buys that excel based on Moroney's key criteria:

• Apple ($122; AAPL).
• United Rentals ($88; URI).

Managing Editor Bob Sweet has a soft spot for stocks with rising profit margins and returns on assets, investment, and equity, reflecting an increasingly efficient use of resources. Companies can boost profitability in many ways, including cost controls, investment in more efficient production, focus on higher-margin end markets, and economies of scale.

Below are two Focus List Buys with impressive profitability trends:

• Lam Research ($78; LRCX).
• Shire ($238; SHPG).

Contributing Editor Dave Wright watches' companies profit-estimate trends. Not so much profit surprises from the last quarter, but changes in estimates for future periods. Plenty of companies top a consensus target, then tease expectations lower. Wright is more confident when a company's strong guidance or other good news drives analysts to boost profit targets.

Here are two companies with strong revision trends:

• Alaska Air ($65; ALK).
• Nvidia ($23; NVDA).

Contributing Editor Dave Walle pays particular attention to stocks' valuations relative to their industry average. He considers price/earnings based on both trailing 12-month earnings and estimated earnings.

Here are two stocks that look cheap from both directions:

• Aetna ($100; AET).
• Magna International ($104; MGA).

Conclusion

While each of our analysts weighs stocks on his own scale, all of the metrics mentioned were among the favorite indicators for more than one analyst, with relative valuation and margin trends particularly popular. Those of you who rely on the Forecasts to select quality stocks can rest assured we're considering all of the aforementioned statistics and a lot more in making buy and sell decisions.

For those of you who prefer to do your own research, this week we'll leave you with two quick tips:

• No single metric, no matter how predictive, should drive you to purchase a stock. Most companies look good from at least one angle, even if other viewpoints show fatal flaws.

• No single stock, even the high-potential selections on our Focus List, excels in every area. Don't waste your time looking for the perfect stock. Instead, try to find the best 15 to 25 stocks.

KEY STATS FOR THE FOCUS LIST — AND OTHER RECOMMENDATIONS
Below we present all 34 of the stocks on our recommended lists. Focus List Buys are in green, Buys in bold, Long-Term Buys in plain text. All Focus and Buy list stocks are also Long-Term Buys.
12-Month
--- Growth ---
Times CF
Above NI
In Last
12 Qtrs.
Oper. Profit
-- Margin --
Return On
-- Equity --
90-Day Change In Per-
Share Profit Estimate
--------------- P/E Ratio ---------------
Company (Price; Ticker)
Cash From
Operation
($)
Net
Income
(%)
Last 12
Months
(%)
1 Yr.
Ago
(%)
Last 12
Months
(%)
1 Yr.
Ago
(%)
Curr.
Qtr.
(%)
Curr.
Year
(%)
Next
Year
(%)
Trailing
Discount
(Premium)
To Industry
Average
(%)
On
Year-
Ahead
Estimate
(%)
Discount
(Premium)
To Industry
Average
(%)
Quadrix
Overall
Score
Focus List Buys
Aetna ($100; AET)
48
7
9
8.4
8.6
14.0
15.3
(3.7)
1.3
(0.2)
15
33
14.0
34
87
Alaska Air Group
($65; ALK)
5
19
10
22.8
18.5
28.1
31.1
34.9
25.9
21.2
16
25
10.6
16
99
Ameriprise Fin'l
($131; AMP)
76
21
7
23.4
20.2
19.5
15.6
2.2
1.5
0.1
15
21
13.4
24
98
Apple
($122; AAPL)
34
20
12
33.9
32.5
37.1
29.0
4.9
10.6
7.8
17
(3)
14.2
4
99
Corning
($23; GLW)
69
21
11
31.3
31.2
12.1
9.1
(3.1)
(1.0)
(0.6)
15
21
14.5
17
93
Foot Locker
($61; FL)
33
21
6
13.3
12.3
20.2
17.5
(4.6)
0.8
1.6
17
16
15.7
17
85
Jones Lang
($157; JLL)
70
43
9
11.1
10.5
16.9
13.6
(7.9)
2.6
2.4
18
38
17.4
38
95
Kroger ($75; KR)
24
14
10
4.8
4.5
33.8
31.6
(0.8)
4.7
4.1
21
2
19.2
6
90
Lam Research
($78; LRCX)
83
111
9
22.1
18.5
14.6
7.4
1.0
1.3
5.6
17
30
16.4
26
96
Lear ($106; LEA)
13
56
8
7.6
6.8
21.7
14.2
3.9
2.2
5.4
13
24
11.1
32
99
Magna Int'l
($104; MGA)
9
21
10
9.0
8.4
20.1
16.4
(9.2)
(5.0)
(4.2)
11
34
10.8
34
84
Nvidia
($23; NVDA)
(2)
43
8
19.8
18.7
14.7
9.8
6.8
3.0
2.7
16
32
15.4
30
97
Shire
($238; SHPG)
189
412
12
45.6
40.1
51.9
34.7
(1.2)
(0.8)
2.7
22
15
21.0
14
89
United Rentals
($88; URI)
16
40
12
46.3
45.2
29.9
23.7
(3.2)
(2.1)
(5.5)
13
27
10.7
34
88
Buys and Long-Term Buys
CDW ($36; CDW)
19
84
8
7.3
7.3
29.5
36.5
0.0
3.5
2.7
15
19
13.3
24
97
Cognizant Tech.
($61; CTSH)
3
17
8
20.3
20.9
20.6
22.7
1.0
0.5
0.5
23
(13)
20.8
(6)
77
Comcast
($58; CMCSa)
20
23
12
33.7
33.3
16.1
13.8
(2.4)
(1.8)
(3.3)
20
4
18.0
3
83
CVS Health
($102; CVS)
41
1
9
7.7
7.8
12.2
12.0
(6.2)
0.9
1.6
23
(3)
19.7
4
68
F5 Networks
($113; FFIV)
12
20
12
31.6
31.2
23.8
18.8
(1.9)
(0.4)
(0.4)
20
9
17.8
3
79
Gilead Sciences
($99; GILD)
313
294
6
65.6
43.2
85.8
29.0
(16.2)
(4.1)
(6.2)
12
62
10.4
64
98
Google
($556; GOOGL)
20
12
12
25.6
27.7
14.6
16.9
(5.4)
(5.9)
(7.4)
22
29
19.2
32
67
J.P. Morgan
($60; JPM)
NM
22
NM
55.8
58.2
9.9
8.7
(4.4)
(3.1)
(1.9)
11
33
10.4
30
84
Lincoln National
($57; LNC)
216
22
6
16.7
15.8
10.1
8.9
0.5
0.7
0.5
9
33
9.0
31
99
Macy's ($62; M)
6
3
9
13.8
13.4
26.5
25.4
(12.0)
(2.8)
(3.1)
14
34
13.1
42
78
ManpowerGroup
($82; MAN)
(23)
48
4

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