Quadrix's Sector Story

4/20/2015


We use the Quadrix stock-rating system as the first step of our analysis process for one simple reason.

It works. Of course, it doesn't work the same way in every sector.

In rolling 12-month periods since the end of 1994, stocks in the S&P 1500 Index scoring above 80 in Quadrix Overall outperformed the average stock in the index by an average of 2.2%. Top Overall scorers delivered market-beating returns in eight of the 10 market sectors, and the weakest sector — telecom services — is so small that historical comparisons are of limited value.

Our Overall score is derived from six category scores — Momentum (recent operating results), Value (price/earnings and other valuation ratios), Quality (long-term growth and returns on equity, assets, and investment), Financial Strength (debt levels, interest coverage, and profit margins), Earnings Estimates (trends in analyst targets), and Performance (total returns).

The returns posted by top-ranked stocks based on category scores vary widely from sector to sector. Value is by far the most effective category score, and it delivered the highest returns in seven sectors. However, other scores earn the top spot in three sectors.

We've also developed two special scores designed to analyze stocks within sectors. While traditional Quadrix scores rank stocks relative to the other roughly 5,000 companies in our research universe, our sector-specific scores compare stocks only to others within their sector. The 12-Factor Sector score considers a dozen statistics that work particularly well within a given sector, while the Reranked Overall score starts with the same six categories but changes their weightings to favor those that work best in a sector.

TOP STOCKS IN 10 SECTORS
Below we present up to three top stocks in each of the 10 market sectors, with our very favorite on top. Most of these stocks score well in Overall, our sector-specific scores, and the category score that works best in their sector, though the interdependent relationship of our Quadrix scores makes it uncommon for a single stock to earn top marks everywhere. Stocks from our recommended lists are in bold, while those from our sister newsletter Upside, which focuses on small-cap stocks, are in green. We don't rate any telecom or utility stocks A (above average); our favorite telecom is rated B (average), and our favorite utilities are taken from the Top 15 Utilities portfolio. In each sector, we've highlighted the Quadrix category score that works best.
--------------------------------------- Quadrix Scores ---------------------------------------
Company
(Price; Ticker)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
12-
Factor
Sector
Reranked
Overall
Consumer Discretionary
Lear ($114; LEA)
89
85
92
35
33
86
97
100
98
Foot Locker
($61; FL)
71
66
94
68
80
76
94
84
93
Gentherm
($52; THRM)
98
48
100
71
79
91
96
95
98
Consumer Staples
Kroger ($74; KR)
89
48
92
41
93
91
92
93
94
CVS Health
($102; CVS)
64
46
79
44
96
76
76
96
84
Energy
Schlumberger
($92; SLB)
31
71
86
83
2
28
59
45
68
Valero Energy
($57; VLO)
80
96
90
39
97
80
100
94
97
Financials
Ameriprise Fin'l
($129; AMP)
94
84
88
62
76
45
98
95
97
AMERISAFE
($46; AMSF)
71
87
71
88
84
70
97
89
95
Travelers
($108; TRV)
72
92
73
79
92
60
97
97
97
Health Care
Aetna ($106; AET)
52
66
80
38
76
90
84
69
91
Shire ($247; SHPG)
87
49
99
94
70
65
91
77
89
Lannett ($68; LCI)
100
51
100
98
38
97
95
49
95
Industrials
ADT ($43; ADT)
78
80
58
69
75
90
94
87
93
Alaska Air
($62; ALK)
90
77
96
76
34
80
97
86
90
Wabash Nat'l
($14; WNC)
90
92
88
33
77
69
99
85
100
Materials
Innospec
($45; IOSP)
78
84
83
60
32
71
94
85
93
Minerals Tech.
($72; MTX)
92
78
84
45
54
77
96
87
94
CF Industries
($287; CF)
52
61
92
84
75
35
80
62
89
Technology 
Apple
($127; AAPL)
94
70
98
91
98
84
99
90
99
ON Semicond.
($12; ON)
76
76
81
59
59
86
94
83
94
Lam Research
($72; LRCX)
91
78
92
70
56
33
95
77
95
Telecom Services
Nippon Telegraph
($34; NTT)
23
91
36
73
NA
73
67
47
94
Utilities
WGL Holdings
($56; WGL)
98
64
44
52
92
76
86
99
99
Atmos Energy
($55; ATO)
61
65
46
56
92
52
70
95
82
New Jersey Res.
($31; NJR)
89
82
81
49
20
65
92
100
100
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.

 

Today we bring all of those tools together to identify strong stocks in every sector. The table above lists up to three favorites per sector. Our top pick from each sector is discussed briefly in the following paragraphs:

Consumer discretionary: Our top selection in this sector, Lear ($114; LEA), is profiled in Analysts' Choice.


Consumer staples: While the Value score works well in this sector, the average consumer-staples stock in the S&P 1500 Index earns a score of 45, and just 10% top 80. Kroger's ($74; KR) Value score is just 48, but at 19 times expected year-ahead earnings, it trades at a 9% discount to its grocery-retailing peers. Kroger is a Focus List Buy and a Long-Term Buy.


Energy: We recommend only one stock from the troubled energy sector, Schlumberger ($92; SLB). The oilfield-services giant has the strength to ride out the storm and end up positioned better than most rivals. Schlumberger is a Long-Term Buy.


Financials: Ameriprise Financial ($129; AMP) earns an Overall score of 98 and at least 95 in both sector-specific scores. Over the last year, the money manager grew sales 9%, per-share profits 25%, and operating cash flow 76%. Ameriprise, reviewed in Portfolio Review, is a Focus List Buy and a Long-Term Buy.


Health care: Managed-care provider Aetna ($106; AET) has returned 43% over the last six months yet still trades at 16 times trailing earnings, 28% below the industry median. Aetna is a Focus List Buy and a Long-Term Buy.


Industrials: Security and home-automation leader ADT ($43; ADT) has deployed its generous cash flows to fund aggressive stock buybacks — enough to reduce the share count by 12% over the last year and 9% annually over the last three. ADT was added to the Focus List in the April 13 issue.


Materials: Innospec ($45; IOSP) makes specialty chemicals — mostly fuel additives, oilfield chemicals, and ingredients used in fragrances. Increasing global demand for fuel-efficient, low-emission vehicles should contribute to future growth. Earlier this month, Innospec was added to the Buy List of our sister newsletter, Upside, which focuses on small-company stocks.


Technology: With an Overall score of 99, Apple ($127; AAPL) is tied for the top spot in the S&P 1500's technology sector. Despite its big name and history of innovative products, Apple earns a Value score of 70 and trades at just 17 times trailing earnings, 17% below the median tech stock in the S&P 1500. Apple is a Focus List Buy and a Long-Term Buy.


Telecom services: We don't rate any stocks in this tiny sector A (above average). Japan's Nippon Telegraph and Telephone ($34; NTT) has decent Quadrix numbers, but its Overall score of 67 is well below our typical cut-off of 90 for new Buys. NTT is rated B (average).


Utilities: Our top utility pick is WGL Holdings ($56; WGL), a natural-gas utility serving 1.1 million customers in the Washington, D.C., metro area. WGL, which earns a 99 in both sector-specific scores, yields 3.3%. The stock was added to our Top 15 Utilities portfolio in the Feb. 23 issue.

SECTOR ANALYSIS
Excess returns represent average 12-month outperformance since 1994 for top-scoring stocks in each S&P 1500 sector. Average returns vary greatly from sector to sector, and sectors with the strongest excess returns (the ones for which Quadrix works best), may not be the ones with the best absolute returns. The two most effective category scores for each sector are in bold. The only category score not among the top two in at least one sector is Financial Strength; in contrast, Value is number one or two in every sector.
Return
Of Avg.
Stock
(%)
---------------------------------------------------------- Quadrix Scores Above 80 ----------------------------------------------------------
Momentum
---- Value ----
---- Quality ----
Fin'l Strength
Earns. Ests.
Performance
---- Overall ----
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Avg.
Return
(%)
Excess
Return
(%)
Consumer
Discretion.
13.1
15.4
2.3
14.7
1.6
14.1
1.0
11.3
(1.8)
12.7
(0.4)
13.3
0.2
15.5
2.4
Consumer
Staples
14.6
15.4
0.8
17.3
2.6
13.8
(0.8)
12.6
(2.0)
13.6
(1.0)
13.1
(1.5)
15.9
1.3
Energy
18.0
17.8
(0.2)
21.0
3.0
20.4
2.4
16.9
(1.1)
18.2
0.2
15.1
(2.8)
19.5
1.5
Financials
14.3
15.5
1.2
18.8
4.4
15.5
1.2
14.1
(0.2)
7.8
(6.6)
13.2
(1.1)
16.5
2.1
Health Care
16.3
16.5
0.2
22.1
5.8
15.8
(0.5)
15.9
(0.4)
13.6
(2.7)
16.6
0.3
17.0
0.7
Industrials
13.8
12.6
(1.2)
16.1
2.3
11.8
(2.0)
11.0
(2.7)
12.5
(1.3)
11.9
(1.9)
13.7
0.0
Materials
11.9
10.0
(1.9)
15.7
3.9
12.0
0.1
13.3
1.4
16.2
4.3
13.6
1.7
14.2
2.3
Technology
15.1
14.9
(0.2)
16.3
1.1
14.9
(0.2)
14.9
(0.2)
10.0
(5.2)
13.2
(1.9)
17.5
2.4
Telecom
Services
9.2
13.6
4.3
18.6
9.3
(5.2)

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