What's Working Now

5/22/2017


No strategy works every time.

Talk to the baseball pitcher with a wicked slider, the baker with a killer carrot-cake recipe, or the investor with a well-researched system, and you'll hear variants of the same story. Sometimes, even if you throw the pitch perfectly, the hitter extends his arms and belts it.

Our Quadrix system is no exception. Since 1992, top Overall scorers have outperformed the average stock in the Dow Jones U.S. Index by an average of 2.3% in 12-month periods. But that doesn't mean they outperform every time. In the last 12 rolling 12-month periods, top Overall scorers lagged the average stock in the index. On the other hand, stocks with strong Value scores outperformed by an average of 1.6%, below the long-run average of 3.1%.

During some 12-month periods, the best Overall scorers outperformed the typical stock by more than 15%; in others, they underperformed by more than 15%.

The strength of Quadrix lies in its reliance on dozens of statistics. Even during periods when the Overall score lacks predictive power, plenty of individual metrics work just fine. For example; in the year ended April, eight statistics from the Value category delivered at least 7% outperformance — a showing that makes sense, given the effectiveness of the broader Value score during that period.

Quadrix's use of many inputs ensures that high-scoring stocks look good from a variety of angles. The table below presents stocks that scored well in several of the statistics that have shown the most predictive power over the last year. Four are reviewed below:

Alaska Air Group ($82; ALK) earned its way onto the table via its valuation. Despite strong returns in recent years, Alaska still scores 90 in Value. The airline earns scores in the 50s and 60s for most of the featured valuation ratios; however, it scores much better on metrics related to price/earnings.

At 10 times expected current-year earnings, Alaska trades in line with its industry median despite superior growth expectations (analysts project profit gains of 7% this year, versus an industry average of a 7% decline) and solid recent operating results (traffic up 7.8% in April versus 4.6% capacity growth, which boosted the load factor (percentage of available seats filled by paying passengers) to an industry-leading 86.6%. Alaska Air is a Buy and a Long-Term Buy.

 


Centene ($75; CNC) earns a rare 100 Overall in Quadrix, supported by five category scores above 80, including 96 in Momentum and 94 in Value. The managed-care provider has risen 33% so far this year, helped in part by the Trump administration's inability — or unwillingness — to dismantle Obamacare, as Trump threatened during last year's campaign. Last month, Centene reported solid March-quarter results and boosted full-year profit guidance — which includes $0.20 per share of "conservatism" related to health reform.

This company must deal with two sources of uncertainty, potential political action and the integration of a large merger. Yet Centene continues to deliver solid operating results, a trend expected to continue. The consensus projects per-share-profit growth of 7% this year and 12% next year, and estimates are rising. Centene is a Focus List Buy and a Long-Term Buy.

 


Shares of homebuilders, including D.R. Horton ($33; DHI), rallied after the National Association of Home Builders/Wells Fargo Housing Market Index rose this month to its second-highest point since 2005. The NAHB/Wells Fargo sentiment survey is just the most recent in a series of encouraging news items regarding the housing market:

• In the first three months of 2017, the number of new-owner households was twice that of new-renter households, marking the first time in in a decade when new buyers outnumbered new renters. Many of these younger buyers target starter homes, which should favor D.R. Horton's diversified sales model.

• Despite a continued rise in home prices and mortgage rates edging higher, existing homes sold in the first quarter at an annualized rate of 5.62 million, the fastest in 10 years.

• In the first quarter, the median home sold for $232,100, up 7% from a year earlier.

Given Horton's expectations of a 10% to 14% rise in home deliveries this year, the consensus target of 15% higher sales and 17% higher profits seems reasonable — and those estimates are on the rise. Horton is a Buy and a Long-Term Buy.

 


Analysts target per-share-profit growth of 11% for VMware's ($92; VMW) first quarter. But given the changes coming at the company, it wouldn't surprise us if results came in much different from expectations.

VMware's parent company, EMC, sold itself to Dell Technologies last year. VMware is switching to Dell's January fiscal year and as of press time had not discussed its earnings release beyond issuing an approximate date of June 1. Given the uncertainty about VMware's plans, including whether it will report three months of earnings or four, current analyst estimates are probably more "estimated" than usual.

Regardless, VMware's move away from virtualization and toward a broad mix of products designed for cloud or mobile use bodes well for future growth. VMware competes mostly with Microsoft ($67; MSFT) in server software and Citrix Systems ($83; CTXS), profiled in Analysts' Choice, in the desktop market. VMware is a Focus List Buy and a Long-Term Buy.

STOCKS WITH STRENGTH IN THE HOTTEST SCORES
Each of the eight recommended stocks below earns scores of 50 or higher in at least five of the nine Quadrix metrics that showed the most predictive power over the last year.
-------------------------------------------------- Quadrix Percentile Rank Based On: --------------------------------------------------
Company (Price; Ticker)
P/E On
Next-Yr.
Estimate
Chg. In
1-Year
EPS Est.
1-Month
Relative
Strength
Price/
Cash From
Operations
5-Year
Total
Return
Price/
Book
To 3-
Yr. Avg.
P/E On
Curr.-Yr.
Estimate
Trailing
P/E Ratio
Price/
Book
3-Year
Total
Return
Price/
Sales
Price/
Sales
To 3-
Yr. Avg.
Alaska Air Group
($82; ALK)
3
30
16
65
56
72
52
60
39
34
90
82
Amgen
($157; AMGN)
24
26
29
81
71
56
67
20
59
63
84
91
Centene ($75; CNC)
6
47
8
26
83
87
80
94
70
96
94
100
D.R. Horton
($33; DHI)
37
59
28
62
72
11
70
75
73
58
86
96
EQT Midstream
Partners ($73; EQM)
NA
36
57
91
80
NA
77
11
77
46
85
87
FedEx ($187; FDX)
31
31
37
58
68
55
39
78
64
57
71
75
LabCorp of America
($138; LH)
52
41
36
26
63
54
77
63
63
45
81
72
VMware ($92; VMW)
77
20
62
26
57
34
67
18
74
65
54
85
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not available.  

 


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