Some Quadrix Scores Stand Out

1/23/2017


Our Quadrix system works well in most market sectors, but it doesn't work the same way in every sector.

As the chart below shows, over the long haul, stocks with high Overall scores have outperformed the average stock in eight of the 11 market sectors. However, even in sectors where Quadrix Overall doesn't work particularly well, at least one category score has demonstrated impressive predictive power.

WHICH SCORES WORK BEST
Below we present average 12-month outperformance of top Quadrix scorers in each S&P 1500 sector relative to the average stock in that sector. In most cases, the numbers reflect rolling 12-month periods since the index's inception in 1994. Individual Quadrix category scores work better in some sectors than others; the top two performers in each section are presented in green.
Aver
Sector
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Earns.
Ests.
(%)
Perfor-
mance
(%)
Overall
(%)
Cons. discretionary
1.9
1.3
0.9
(1.6)
(0.1)
0.7
3.0
Consumer staples
1.3
2.8
(0.5)
(2.1)
0.1
(1.3)
0.5
Energy
(0.7)
2.2
1.0
(0.6)
1.7
0.1
1.1
Financials
1.3
5.9
0.1
0.7
0.2
(0.8)
2.4
Health care
0.2
2.8
(0.4)
(1.5)
(0.5)
0.0
0.6
Industrials
(1.2)
2.6
(1.9)
(2.0)
(0.2)
(0.9)
(0.5)
Materials
(0.1)
5.1
1.2
(0.2)
2.7
1.0
2.9
Real estate
(0.8)
(0.3)
(0.6)
0.2
0.5
0.2
(0.3)
Technology
(0.3)
1.4
2.1
1.4
(0.2)
(0.3)
2.9
Telecom services
0.9
5.1
(3.1)
(5.8)
0.2
(2.8)
(1.4)
Utilities
0.7
1.7
(0.6)
(0.6)
0.5
0.3
0.4
Notes: Data for the Earnings Estimates score dates back to 2004; the remaining factors have history since 1994.    S&P didn't start separately classifying real estate companies until 2001, which is when our data for that sector begins.

Most of the time, Value is that score. The Value score delivered the top outperformance among the six categories in eight of the 11 sectors; it came in second in two more. The next-most-powerful score appears to be Momentum, which measures operating growth for periods of up to one year, as well as some trends in analyst estimate revisions.

Does this mean you should pick stocks based on Value or Momentum rather than Overall score? Not at all, because the broad focus of the Overall score (reflecting nearly 100 individual statistics) is key to Quadrix's long-run effectiveness. While the Value score delivers higher outperformance than the Overall score in many sectors, the returns of a Value-driven strategy tend to be more volatile, and can go into slumps for long periods of time.

However, knowing which category scores work best for a specific sector can help you make better use of our Quadrix system when selecting stocks. One possible strategy involves identifying stocks with strong fundamentals, as indicated by Overall scores, as well as high scores in the categories that have worked best in the sector.

The table below presents A-rated stocks in five sectors. Why only five? Because in six sectors, no stocks met our criteria. All of the stocks in the table earn not just high Overall scores, but solid ranks in the two categories most effective in their sector. We profile three of these stocks in the following paragraphs:

Alaska Air Group ($93; ALK) earns impressive Quadrix scores for Value (84) and Earnings Estimates (96), the two categories that work best in the industrial sector. However, the airline has no glaring weaknesses in other areas, either, with none of the six categories scores below 67.

The airline group has always been cyclical, prone to up and down streaks, and Alaska is not immune to such forces. However, the company has taken steps to reduce its seasonality by adding routes that will appeal to business travelers. In recent quarters, Alaska has increased its number of flights across the country, and other routes beyond their traditional runs north and south along the West Coast. In 2015, transcontinental routes made up 27% of Alaska's capacity, up from 21% in 2011; that percentage rose in 2016.

While Alaska has cut back on its expansion, the company still reported capacity growth of 10.2% for full-year 2016, exceeding its internal target of 8.5% only because of the Dec. 14 addition of Virgin America, which was expanding much faster than Alaska. However, companywide capacity rose 5.0% in December including Virgin, outpaced by traffic growth of 5.6%. Capacity growth should slow in the year ahead. Alaska is a Buy and a Long-Term Buy.


It isn't hard to explain why CBS ($63; CBS) earns an Overall score of 90. It scores well in the three Quadrix categories we weight most heavily for the Overall score — Momentum (70), Value (80), and Quality (89). In the consumer-discretionary sector, Momentum and Value have delivered the most predictive power.

The broadcaster has enjoyed a strong run of growth, delivering five quarters with per-share-profit gains of at least 19% and exceeding the Wall Street consensus by at least 7% in each of the last three quarters. While we expect that torrid growth to moderate, analysts seem overly conservative, projecting just 8% profit growth next year. Aggressive investment in digital media has opened up the possibility of new revenue sources. For example, CBS' streaming service has already begun to turn a profit, helped by international rights to the network's upcoming Star Trek TV series.

It's tough to call CBS especially cheap, as it trades at a premium to its peer-group average based on most valuation ratios. However, CBS' trailing price/earnings ratio of 16 is 10% below its five-year average. These shares also trade at a discount to historical norms based on price/sales and price/operating cash flow. CBS is a Focus List Buy and a Long-Term Buy.


Lam Research ($111; LRCX) has been one of the more consistently strong Quadrix scorers in recent months. Its Overall score of 95 is supported by scores of 71 for Value and 88 for Quality, which have been the most effective scores for technology stocks. Lam hasn't ended a month with a Momentum, Value, or Quality score below 70 since June.

At 13 times expected year-ahead earnings, Lam trades at a 26% discount to the average semiconductor-equipment maker in the S&P 1500 Index. That valuation seems even more attractive when you factor in Lam's growth potential, and the fact that more than 20% of its stock-market value is tied up in overseas cash. A Trump tax holiday could spark the company to move some of that cash back to the U.S. and either invest it in the business or share it with stockholders in the form of buybacks and dividends.

The consensus projects per-share-profit growth of 32% over the next 12 months and 15% annually over the next five years. Those estimates are on the rise, with the target for fiscal 2017 ending June up 9% and the fiscal 2018 target up 2% over the last 60 days. Demand for memory microchips is recovering, with industrywide sales rising faster than capacity, leaving room for Lam to cash in as semiconductor makers ramp up production. Analysts expect a slight decline in sales and profits in fiscal 2018; we think Lam can do better, and over the next year its stock should rise to reflect that fact. Lam Research is a Focus List Buy and a Long-Term Buy.

QUADRIX SECTOR STANDOUTS
All 22 of the A-rated stocks below earn strong scores for both Quadrix Overall and the two category scores that work best in the sector (presented in bold). Stocks on our buy lists are in green.
Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
---------------------------- Quadrix Scores ----------------------------
Company (Price; Ticker)
Trailing
P/E Ratio
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Industry
Consumer discretionary
AutoZone ($778; AZO)
0.0
23.1
19
80
71
90
77
85
26
92
Automotive retail
Carnival ($54; CCL)
2.6
39.1
15
73
91
74
83
1
57
88
Hotels, resorts
& cruises
CBS ($63; CBS)
1.1
28.3
16
70
80
89
55
46
56
90
Broadcasting
Foot Locker ($69; FL)
1.6
9.3
15
70
84
95
77
84
38
96
Apparel retail
General Motors
($37; GM)
4.1
59.0
6
86
97
83
50
44
80
98
Auto
manufacturers
Lear ($142; LEA)
0.8
10.2
11
84
94
94
50
87
78
100
Auto parts &
equipment
Magna International
($43; MGA)
2.3
16.6
8
72
97
92
58
9
70
96
Auto parts &
equipment
Target ($67; TGT)
3.6
38.4
13
70
90
73
46
45
25
85
General
merchandise
Twenty-First Cent. Fox
($30; FOXa)
1.2
56.4
16
73
78
71
45
61
59
87
Movies &
entertainment
Financials
Citizens Financial
($35; CFG)
1.4
18.2
19
93
72
60
97
99
97
97
Regional banks
Manulife Financial
($18; MFC)
3.1
36.3
16
95
96
44
64
NA
91
97
Life & health
insurance
Morgan Stanley
($43; MS)
1.9
79.4
17
81
77
56
47
98
92
93
Investment
banking
Health care
Aetna ($121; AET)
0.8
42.9
15
72
85
85
46
45
31
88
Managed
health care
Centene ($63; CNC)
0.0
11.0
15
89
87
91
25
19
20
89
Managed
health care
Express Scripts
($73; ESRX)
0.0
45.9
12
81
97
85
40
78
17
96
Health care
services
HCA Holdings
($80; HCA)
0.0
31.1
12
83
94
84
43
70
35
96
Health care
facilities
Industrials
Alaska Air Group
($93; ALK)
1.2
11.5
13
67
84
98
84
96
87
99
Airlines
Southwest Airlines
($50; LUV)
0.8
31.5
13
51
86
98
73
72
71
96
Airlines
Technology
Apple ($120; AAPL)
1.9
647.1
15
35
83
93
86
11
58
79
Tech hardware
& storage 
Cognizant Technology
($57; CTSH)
0.0
34.9
17
64
76
95
83
22
32
83
IT consulting
& services
Lam Research
($111; LRCX)
1.6
20.0
17
81
71
88
65
81
71
95
Semiconductor
equipment
Qualcomm ($65; QCOM)
3.3
97.1
15
75
77
81
80
19
58
86
Semiconductors
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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