Good, But Not Good Enough

12/7/2009


Wondering why your favorite big-name stock with high Quadrix® scores does not make our Buy List? You’re not alone.

Readers often wonder why we don’t recommend such-and-such a company with an Overall score of 98. Well, the reason generally revolves around three facts:

We can’t cover them all. Our Quadrix universe contains roughly 4,300 stocks, which means at any given time, about 880 stocks earn Overall scores of 80 or higher and about 450 score 90 or higher. We don’t generally recommend more than 50 stocks, so we must aggressively cull the herd.

Scores aren’t everything. Yes, Quadrix works. Stocks with high Overall scores tend to outperform the average stock. But a few high scorers are destined to generate poor returns, in part because no quantitative system can take into account all the information relevant to investors. Are new competitors about to enter the field? Is the government beefing up regulation? Is the company too dependent on one product? Only individual company analysis can answer those questions.

No thanks, we’re full. While we tend to let the selection of appealing stocks dictate our sector weightings, there’s a limit. Back in 2007 and 2008, energy stocks tended to earn higher Quadrix scores than those in other sectors. Our analysts would find attractive energy stocks, but we already had so many strong picks that at times we opted not to recommend a stock that may have met our criteria. Do we really want to recommend five oil majors, even if they’re all good investments? Sometimes we just have to choose our favorites.

There are always near-misses, stocks that look good on paper but don’t quite make the cut. Many Neutral-rated stocks fit that description. The table below lists 12 well-known stocks with solid fundamentals and high Overall scores. All are quality companies but lack that special something needed to make the Buy List.

CLOSE, BUT NO CIGAR
The 12 stocks below look like good Buy candidates by the numbers. However, all missed the cut. Beneath each company, we briefly present one or more of the reasons why it is not recommended for purchase.
Est. EPS
—— Growth ——
———————————— Quadrix Scores * ————————————
Company (Price; Ticker)
Market
Value
($Bil.)
Div.
Yield
(%)
Trail.
P/E
Ratio
Next
Fiscal
Year
(%0
Next
5 Yrs.
(Ann.)
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Sector
Amgen ($55; AMGN)
56.1
0.0
11
2
10
79
86
93
83
56
19
94
Health Care
Why not a Buy — Amgen depends heavily on a small number of drugs, including two blockbusters with safety concerns. Pipeline is thin.
Apple ($200; AAPL)
180.1
0.0
32
21
18
97
34
99
99
85
89
95
Technology
Why not a Buy — Apple has more than doubled from March lows. But that success has rendered the stock very expensive and ripe for a pullback.
AutoZone ($147; AZO)
7.4
0.0
12
12
13
75
85
96
76
52
26
92
Cons. Discretionary
Why not a Buy — AutoZone has a huge debt load. Growth has been weak in recent years, and profit expectations may prove too aggressive.
Biogen Idec ($46; BIIB)
13.4
0.0
12
11
9
70
89
95
89
69
13
94
Health Care
Why not a Buy — Deadly side effects from the biggest product are worrisome, while another top drug’s growth is slowing. Pipeline is questionable.
Bristol-Myers ($24; BMY)
48.5
5.1
12
8
6
92
82
79
82
65
50
94
Health Care
Why not a Buy — 40% of expected 2009 sales are likely to face generic competition over next four years. Cash-flow trends are weak.
Chubb ($50; CB)
17.1
2.8
8
(9)
9
94
89
75
85
83
47
96
Financials
Why not a Buy — Operating and free cash flow have trended lower over the last two years. Sales declined in seven of the last eight quarters.
Diamond Off. ($98; DO)
13.6
0.5
10
(4)
13
71
88
99
94
55
75
98
Energy
Why not a Buy — Attractive pick, but we like Transocean, National Oilwell Varco, and Oceaneering more.
Gap ($22; GPS)
15.3
1.5
17
9
12
76
70
80
93
85
78
93
Cons. Discretionary
Why not a Buy — Uncertainty about the retail environment curbs our enthusiasm for clothing stores. High profit expectations invite disappointment.
Google ($570; GOOG)
138.5
0.0
26
16
21
90
45
98
92
52
85
92
Technology
Why not a Buy — Competition is stiffening, yet the stock is still priced as if it will dominate the industry for a decade.
Humana ($40; HUM)
6.9
0.0
7
(14)
11
85
100
94
72
34
57
98
Health Care
Why not a Buy — Humana looks good by the numbers, but given uncertainty in the industry, Quadrix’s backward-looking ranks might not be predictive.
Intuitive Sur. ($276; ISRG)
10.6
0.0
53
23
21
94
24
98
99
79
91
91
Health Care
Why not a Buy — This company is an impressive grower, but the valuation (roughly triple the industry average for several metrics) scares us.
Kimberly-Clark ($65; KMB)
26.9
3.7
15
13
10
80
74
81
64
91
54
91
Consumer Staples
Why not a Buy — Profit growth is powered by cost cuts as sales fall. Estimates project a sudden return to sales growth and may prove too optimistic.
* Quadrix scores are percentile ranks, with 100 the best.

 


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