Cast Quadrix To Net Winners

10/12/2015


Investors face the daunting task of sifting through thousands of stocks in the hope of spotting a lunker in a sea of minnows.

Our fishing net is Quadrix, a quantitative system that considers nearly 100 variables, and we've discovered several ways to cast it. Our search for the best stocks begins with the Quadrix Overall score, which takes into account metrics from six different categories: Momentum (recent operating results), Value (valuation ratios), Quality (long-term track record for growth and profitability), Financial Strength (efficiency and profitability ratios), Earnings Estimates (revision trends for analyst estimates), and Performance (total returns).

In back-tests since the early 1990s and real-time use since 2000, we've found that stocks scoring in the top quintile (one-fifth) for Overall tend to outperform. But the top quintile of the S&P 1500 Index contains 300 companies, so we've developed other ways to winnow the field down to a more manageable number. Here are four of our favorites:

Threshold analysis. This technique looks at the percentage of Quadrix variables or factors that score above a specific threshold. Stocks with the largest percentage of Quadrix variables above 60 — or above 80 or 90 — tend to outperform the average stock. This strategy works especially well in conjunction with scores above 80 for Overall. We found that 185 of S&P 1500 stocks rank above 60 for at least 50% of Quadrix factors.

Sector scores. The Reranked Overall score uses the same six categories as the Overall score but puts greater emphasis on categories that work better for each sector. The 12-Factor Sector score uses a dozen metrics particularly effective within each sector. A total of 169 stocks from the S&P 1500 Index score above 80 for both sector-specific scores.

Persistence. The Overall score is a key criteria for making buy and sell decisions. When stocks consistently earn high Overall scores, we gain confidence in the strength of their fundamentals. With stocks that earn consistently high scores, we can hold positions longer and limit trading costs. Using this strategy, 113 stocks in the S&P 1500 have scored above 80 in at least 18 of the past 24 months.

Super-high Overall scores. Stocks with Overall ranks above 80 tend to outperform lower scorers, but stocks scoring above 90 deliver even stronger returns. Super-high scorers, those with Overall ranks of 97 or higher, tend to deliver the best performance. Just 43 stocks in the index score at least 97 Overall.

If we dissect S&P 1500 stocks using all four Quadrix strategies, only 21 make the cut. Of course, Quadrix does not eliminate the need to analyze company-specific factors. We've considered many of the top scorers as potential Buys in recent months and currently recommend seven for purchase in the Forecasts or its sister publication Upside, which focuses on small-cap stocks. Check out those stocks in the table below.

QUADRIX STUDS
Seven of the 21 stocks in the S&P 1500 that pass all four screens are recommended by Forecasts or our sister publication Upside. Lear ($115; LEA) qualifies — but is not a member of the S&P 1500. Upside stocks are in bold.
Stock-
Market
Value
($Bil.)
% Of
Quadrix
Factors
Above 60
No. Of
Months
Overall 80
Or Higher,
Last 2
Years
-------------- Quadrix Scores --------------
Company (Price; Ticker)
Value
Overall
12-Factor
Sector
Reranked
Overall
Apple ($111; AAPL)
642.6
64
24
83
99
90
99
Cardtronics
($34; CATM)
1.5
59
19
84
97
97
95
Gilead ($100; GILD)
150.2
70
18
92
100
83
100
Lear ($115; LEA)
8.8
62
24
91
99
100
100
Selective Insurance
($33; SIGI)
1.8
58
23
90
99
98
100
Southwest Airlines
($39; LUV)
25.6
65
24
77
99
86
96
Trinity Industries
($26; TRN)
3.8
69
24
98
99
99
100
Universal Insurance
($33; UVE)
1.1
67
24
72
100
84
99
Note: Quadrix scores are percentile ranks, with 100 the best.

We also recommend Lear ($115; LEA), which qualifies on all four counts but is not in the S&P 1500. Lear is reviewed in Analysts' Choice, while we discuss two others more briefly below.

A perennial high-flyer in Quadrix, Southwest Airlines ($39; LUV) has scored above 80 Overall in at least 24 straight months and topped 95 in 11 of the past 13 months. Its current Overall rank of 99 is supported by scores of 65 or higher for all six Quadrix categories. Southwest's passenger traffic climbed 7.9% in the 12 months ended June, faster than capacity growth of 7.0%. Management plans to expand capacity at a slower rate next year, which could help support higher airfares. Southwest Airlines is a Buy and a Long-Term Buy.


Shares of Selective Insurance ($33; SIGI), a property-and-casualty insurer, look particularly timely, with scores above 80 for Momentum, Earnings Estimates, and Performance. The stock has generated a total return of 14% in the past three months, while the average S&P 1500 property-and-casualty insurer has returned less than 3% and stocks in the broader index have lost 7% on average. Yet Selective's valuation remains compelling at 13 times trailing earnings, which ranks among the lowest 20% of stocks in the index. Selective, earning a Value rank of 90, is rated Best Buy in Upside.


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