For A Winning Hand, Play A High Pair
Using history as a guide, our Quadrix stock-rating system tells a simple story: The higher the score, the higher the return. Pairing a high Overall score with a high score in key Quadrix categories can lead to even better results.
Stocks in our Quadrix research universe, a group that now encompasses more than 5,000 stocks, have produced an average 12-month return of 16.3%, based on the 269 rolling periods since January 1992. Stocks with Overall scores of at least 80 have averaged 12-month returns of 18.5%, versus 20.2% for those with scores of at least 90 and 22.0% for those with scores of 97 or higher.
Returns tend to improve further when stocks also earn high ranks for certain Quadrix categories. Stocks that score at least 80 for both Overall and Value have produced an average return of 21.4%. When they score 97 or higher for both Quadrix ranks, the return rises to 26.9%.
Especially among the highest scorers, sample sizes for Quadrix pair portfolios tend to be small. On average, 27 stocks scored at least 97 for both Overall and Value in a given period, while 21 stocks scored at least 95 for Overall and Performance.
We review below four Focus List recommendations scoring at least 90 Overall and 80 for other key Quadrix categories.
Ameriprise Financial ($128; AMP) scores above 80 in Quadrix for both Overall and Value. The stock looks cheap from most angles, with more than three-fourths of individual Value factors exceeding 50.
Low interest rates, foreign-currency headwinds, and the sluggish stock market contributed to Ameriprise missing profit estimates last quarter. Sales growth slowed to 2%, the company's weakest quarterly gain since the three months ended September 2012.
However, the advice-and-wealth-management business continues to attract new clients, generating net inflows for assets under management and administration. Free cash flow jumped 33% in the 12 months ended March, emboldening Ameriprise to hike its quarterly dividend 16% in April. The dividend has risen by double-digits in five straight years. Ameriprise, yielding 2.1%, is a Buy and a Long-Term Buy.
Gilead Sciences ($122; GILD) is being upgraded to the Focus List. The stock earns the maximum rank of 100 for Overall and Momentum, while also scoring above 85 for both Value and Performance.
Hepatitis C drugs Sovaldi and Harvoni, two drugs so effective at curing patients that some investors question the sustainability of their revenues, now account for about 60% of Gilead's sales. Complicating matters further, China and India have rejected Gilead's patent application for Sovaldi, and other countries could follow suit in retaliation for the drug's high price tag. So even though the shares have risen 51% over the past year and 2015 per-share profits are projected to jump 33%, Gilead's forward P/E ratio of 11 lags the S&P 1500 biotechnology industry's median of 24.
Free cash flow surged to $16.43 billion in the 12 months ended March, up from $3.69 billion one year earlier. Gilead has plenty of flexibility to make a large deal, possibly seeking to acquire a portfolio of experimental drugs late in development. Gilead is also a Long-Term Buy.
Lam Research's ($83; LRCX) revenue surged 23% in calendar 2014, nearly double its industry's growth for spending on wafer-fabrication equipment. Lam's semiconductor-equipment business enjoys relatively high exposure to 3D NAND, a type of flash memory that is becoming increasingly popular. Lam expects industrywide spending on wafer-fabrication equipment to rise 6% to $34 billion in calendar 2015, driven by higher demand for 3D NAND, which could continue to accelerate through 2016.
Although Lam's operating profit margin has slipped in each of the past two quarters, management seems confident it can improve profitability through increased scale and cost discipline. Rising analyst estimates project Lam will increase per-share profits 18% in the next 12 months, well above median growth of 4% for S&P 1500 semiconductor-equipment stocks.
Despite its growth, Lam's stock fetches less than 15 times estimated year-ahead earnings, versus its industry median of 18. Lam is a Focus List Buy and a Long-Term Buy.
United Rentals ($92; URI) offers an attractive blend of strong operating momentum and low valuation. It scores at least 85 in Quadrix for both Momentum and Value, a feat matched by just 23 other stocks in the S&P 1500 Index, including one other Focus List Buy, Gilead.
In April, United Rentals trimmed the high end of its 2015 profit and sales targets, citing weaker-than-expected growth in rental rates. Last month, management cautioned that May results were a "little softer" than anticipated, leading some investors to fear another warning.
A heavy dose of pessimism already appears baked into the stock. United Rentals' trailing price/earnings ratio of 13 lingers near its lowest level since 2012 and well short of its five-year average of 19. Should the P/E ratio rise to 15 and United Rentals merely meet the most pessimistic 2015 profit target of $6.65, its shares will climb 8% by early 2016. United Rentals is a Focus List Buy and a Long-Term Buy.