Safe, Sustainable Profits

11/23/2015


With volatility in emerging markets and sagging growth in the U.S., many investors have turned conservative. They are bidding up the prices of high-quality companies with strong track records of operating growth. They prefer that analysts largely agree about a company's outlook. And they prize companies with a history of generating steady profits.

Over the past decade, stocks with low valuation ratios have tended to go on to produce the highest 12-month returns, as we show below. But in the past 12 rolling 12-month periods, Quadrix factors from the Earnings Estimates and Quality categories have proved to be the most effective.

Among these top current metrics is the rarely discussed Earnings Predictability factor. As its name implies, Earnings Predictability identifies companies that generate profits with a low level of variability. Consistent profit trends can signal that a company's business is resilient in even the most challenging environments. That stability can also boost management's confidence about growing the dividend.

A Shifting landscape for top Quadrix factors
Nearly 100 factors are considered for the calculation of the Quadrix Overall score. Valuation metrics have traditionally ranked among the most effective factors in Quadrix for 12-month returns. For instance, the quintile of S&P 1500 Index stocks with the lowest price/sales ratio has outperformed the average stock by an average of 3.8% in rolling 12-month periods over the past decade. But over the past 12 months, the top Quadrix factors hail from the Quality and Earnings Estimates categories. Coefficient of variation measures the dispersion of analyst estimates around the consensus estimate. Similarly, the high-low spread measures the range between the most bullish and bearish analysts. Stocks that score well for these factors have estimates in a tight range, increasing our confidence in the consensus.
----- Last 10 Years -----
---- Last 12 Months ----
Quadrix Factor
Quadrix
Category
Factor
Rank
Average
12-Mo.
Outperfor-
mance
(%)
Factor
Rank
Average
12-Mo.
Outperfor-
mance
(%)
Top 10 Quadrix factors for past 10 years
Price/sales ratio
Value
1
3.8
52
(0.4)
P/E for next-yr est.
to 3-year median
Value
2
2.6
67
(1.3)
P/E for current-year est.
to 3-yr. median
Value
3
2.3
49
(0.2)
Enterprise ratio
Value
4
2.1
88
(5.4)
High-low spread for
curr.-year EPS est.
Earns.
Ests.
5
1.9
3
5.0
Price/cash-flow ratio
Value
6
1.8
90
(6.1)
P/E to 5-year median
Value
7
1.7
65
(1.3)
P/E to 3-year median
Value
8
1.7
53
(0.5)
P/E ratio for next-year est.
Value
9
1.7
80
(3.6)
Price/sales to 3-year median
Value
10
1.7
86
(5.1)
Top 10 Quadrix factors for past 12 months
Coefficient of variation for 
current-year EPS estimate
Earns.
Ests.
NA
NA
1
5.7
Gross profitability
Quality
NA
NA
2
5.6
High-low spread for
curr.-year EPS est.
Earns.
Ests.
5
1.9
3
5.0
High-low spread for
next-year EPS est.
Earns.
Ests.
37
0.1
4
5.0
Coefficient of variation for current-quarter EPS est.
Earns.
Ests.
NA
NA
5
4.7
Return on investment
Quality
57
(0.6)
6
4.7
Earnings predictability
Quality
59
(0.6)
7
4.5
5-year sales growth
Quality
41
0.1
8
4.2
5-year equity growth
Quality
32
0.5
9
3.7
5-year dividend growth
Quality
50
(0.3)
10
3.5
Note: Quadrix scores are percentile ranks, with 100 the best.  NA Not available because we don't have 10 years of data.

To calculate the Earnings Predictability factor, we measured the dispersion of quarterly per-share operating profits over the past five years relative to the average of those quarterly profits.

Investing strategies can fall out of favor with little warning. With that in mind, we screened for stocks with high scores for the most effective factors today. See the table below. With the exception of Disney ($118; DIS), they also earn above-average scores for at least one of the best Quadrix factors over the past decade. Four of our top picks are reviewed in greater detail below.

Comcast ($63; CMCSa) earns a Quadrix Earnings Predictability score of 92. Annual per-share profits and sales have both increased in nine straight years. Over the past five years, per-share profits have risen at an annualized rate of 20% on annualized sales growth of 14%.

That consistency reflects Comcast's knack for adjusting to structural shifts in its industry. The company has shed 3.3 million video subscribers since the end of 2007 but found growth opportunities elsewhere. During that same period, Comcast has averaged annual net subscriber additions of 1.2 million for internet and 940,000 for phone. Comcast's next new growth avenue may be in wireless services. Earlier this month, Comcast launched a pilot program for unlimited wireless data in Atlanta that runs on Verizon Communications' ($45; VZ) wireless network. Comcast is a Focus List Buy and a Long-Term Buy. Verizon is rated B (average).


C.H. Robinson Worldwide ($68; CHRW) keeps gaining share in the North American trucking industry, contributing to per-share-profit growth in excess of 10% in six straight quarters. Despite soft pricing in the September quarter, net profit margins expanded because of lower fuel costs and a favorable freight mix that included a higher proportion of small customers.

Free cash flow, up 85% to $421 million for the 12 months ended September, has climbed by double-digits in eight straight quarters. That reliable cash generation supports C.H. Robinson's dividend, which has grown at an annualized rate of 9% over the past five years. The company tends to raise its dividend in the December quarter. C.H. Robinson, yielding 2.2%, is a Focus List Buy and a Long-Term Buy.


Gilead Sciences ($108; GILD) scores at least 85 for three of the top Quadrix factors over the past year. It also scores in the top quintile for six of the top factors over the past decade, including metrics not shown in the table below: P/E to three-year median, P/E to five-year median, and price/sales to three-year median.

Per-share profits have risen in 12 straight quarters. An expanding roster of drugs figures to buttress future growth. In November, Gilead won U.S. approval to sell an HIV combo drug called Genvoya and expand the use of hepatitis C drug Harvoni to include a wider range of hepatitis sufferers, as well as patients also infected with HIV. At nine times trailing earnings, the stock trades at a steep 57% discount to the median for S&P 1500 biotechnology stocks and 51% below its own five-year average. Gilead is a Focus List Buy and a Long-Term Buy.


Grocery-store chain Kroger ($38; KR), a bellwether in the consumer-staples sector, is the model of consistency.

It has delivered at least 15% growth in per-share operating profits in each of the past six quarters and 11 of the past 12, while same-store sales have expanded in 47 consecutive quarters. Concerns have recently emerged about food-price disinflation, which could weigh on grocers' revenue. But last month Kroger said same-store sales excluding fuel for the October quarter were trending toward the high end of its 4% to 5% growth target for fiscal 2016 ending January.

Kroger earns a middling Value rank of 50, though it scores in the top 10% of our research universe for price/sales ratio, the very best Quadrix factor over the past decade. At 0.3 times trailing sales, Kroger's stock trades at a 26% discount to the median for S&P 1500 food and staples retailers. Kroger, yielding 1.1%, is a Buy and a Long-Term Buy.

PREDICTABLE PROFITS
Of our 30 recommended stocks, 17 score above 80 in Quadrix for Earnings Predictability. Many also score above 80 for other factors that have worked in the past 12 months or 10 years. Factor scores above 80 are in bold.
------- Top Quadrix Factors For Past 12 Months -------
------------- Top Quadrix Factors For Past 10 Years -------------
Company (Price; Ticker)
Earnings
Predict-
ability
5-Year
Dividend
Growth
5-Year
Sales
Growth
5-Year
Equity
Growth
Return On
Investment
Price/
Sales
Ratio
Enterprise
Ratio
P/E Ratio
On Next-
Yr. Est.
P/E On
Next-
Yr. Est.
To 3-Yr.
Median
P/E On
Curr.-
Yr. Est.
To 3-Yr.
Median
Quadrix
Overall
Score
Apple ($117; AAPL)
95
NA
97
97
97
36
66
81
58
63
99
Alphabet
($760; GOOGL)
94
NA
92
89
85
12
12
24
51
44
79
C.H. Robinson
($68; CHRW)
95
58
79
92
97
78
36
37
48
55
88
CBRE Group
($36; CBG)
99
NA
85
93
84
64
33
53
66
65
95
Cisco Systems
($27; CSCO)
83
NA
63
76
80
35
69
78
58
67
90
Comcast ($63; CMCSa)
92
74
89
70
69
47
68
45
36
36
88
CVS Health ($95; CVS)
98
89
83
68
75
79
39
48
50
50
71
Disney ($118; DIS)
99
92
72
79
NA
26
31
35
41
45
81
F5 Networks
($104; FFIV)
96
NA
92
93
96
24
41
65
91
92
77
Gilead Sciences
($108; GILD)
85
NA
98
98
NA
18
71
88
97
98
100
J.P. Morgan Chase
($67; JPM)
84
96
31
67
51
40
96
81
14
17
77
Kroger ($38; KR)
98
71
81
92
83
91
65
44
18
18
84
Robert Half Int'l
($51; RHI)
95
59
80
81
98
60
46
45
67
65
82
Shire ($215; SHPG)
96
74
81
96
97
13
21
47
68
68
75
Skyworks Solutions
($80; SWKS)
97
NA
95
85
NA
20
32
80
93
92
97
Southwest Airlines
($46; LUV)
90
98
82
66
92
56
81
77
85
85
99
U.S. Bancorp
($44; USB)
95
92
45
78
NA
28
45
72
33
37
65
Note: Quadrix scores are percentile ranks, with 100 the best.  NA Not available.

 


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