Quadrix Standouts To Buy Now

1/25/2010


Our Quadrix® stock-rating system has performed admirably since its introduction in 2000, with top-ranked stocks handily outperforming the average stock. The top one-fifth of stocks based on Overall Quadrix scores returned a cumulative 222.5% through 2009 assuming quarterly rebalancing, versus a loss of 38.6% for the bottom one-fifth.

The top one-fifth has outperformed the average stock in 26 of the past 39 quarters, despite showing below-average volatility. The top one-fifth has delivered its best relative performance in down or flat markets, and its worst relative showings have come in periods when the market rallied. In fact, of the 13 quarters in which the top one-fifth of stocks underperformed, the average stock advanced in 10 of them.

While much of our research has focused on the top one-fifth of stocks, we’ve also learned that the very best scorers — with Overall scores of 95 or higher — tend to do even better. Another way to enhance returns is to emphasize stocks with above-average scores for all of the six categories that factor in the Overall score. Finally, we’ve developed sector scores that emphasize the factors that work best in a particular sector.

BACK-TESTED QUADRIX RESULTS SINCE 1992

The table below shows back-tested Quadrix results since 1992, using rolling 12-month holding periods and the broad Dow Jones U.S. Index. For example, the top one-fifth of stocks based on Momentum scores has outperformed the average of all stocks in the index by 1.1% per year.

Standard deviation measures the variability in relative returns, with a high number implying volatile relative performance. Geometric mean, an alternative measure of average outperformance, is lower when results are more volatile.

For example, the Value score has been more effective than the Overall score since 1992 based on average outperformance. But Value has been far more volatile, so Overall has performed best based on geometric mean. Overall has also performed best based on the ratio of average outperformance to standard deviation.

Outperformance of Top Fifth
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Earns.
Ests. *
(%)
Perfor-
mance
(%)
Overall
(%)
Average
1.1
3.8
0.1
0.7
1.3
2.4
3.5
Standard deviation
6.4
12.1
6.0
6.1
5.9
13.9
6.8
Outperformance/stand. dev.
0.2
0.3
0.0
0.1
0.2
0.2
0.5
Geometric mean
0.9
3.1
(0.1)
0.5
0.3
1.3
3.3
AVERAGE OUTPERFORMANCE OF TOP FIFTH OF STOCKS
The table below shows average 12-month outperformance for the top one-fifth of stocks, segmented by selection date. For example, for the 12 month-end selection dates of 2004, the top one-fifth of stocks based on Momentum scores outperformed the average stock by an average of 2.3%. Value scores worked nicely for baskets selected in 2008, while Earnings Estimates and Performance struggled.
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Earns.
Ests. *
(%)
Perfor-
mance
(%)
Overall
(%)
Selection yr. 2004
2.3
6.6
2.4
(1.0)
4.2
4.8
7.0
Selection yr. 2005
4.0
(1.1)
(4.0)
(3.1)
2.4
1.5
(1.3)
Selection yr. 2006
2.1
(1.1)
1.3
(0.8)
1.7
(0.9)
0.8
Selection yr. 2007
1.3
(4.5)
5.0
5.7
3.9
3.7
3.9
Selection yr. 2008
(2.2)
9.6
0.5
3.2
(5.4)
(13.8)
(1.2)
* Earnings Estimates data begins in Feb. 2004.

Reviewed below and listed in the table below are Quadrix standouts with superior year-ahead potential. All nine stocks listed in the table earn Overall scores above 90, and all but Aflac ($52; AFL) earn above-average scores for all six Quadrix categories. All nine earn scores above 60 for both of our sector-specific scores.

Once again, the health of Aflac’s investment portfolio will be scrutinized when the insurer reports December-quarter results on Feb. 2. At this point, it seems unlikely that the portfolio’s position in European hybrid bonds will suffer big losses, but credit-rating downgrades could pressure Aflac’s capital position. If necessary, the company’s balance sheet — with cash exceeding long-term debt — could help absorb a hit.

Aflac’s relationships with banks and post offices should fuel higher sales in the Japan business. In the U.S., growth will likely stagnate until companies begin hiring again. Total revenue is likely to climb about 15% for 2009 and another 6% in 2010. Wall Street expects 10% higher per-share profits for 2010, though the consensus declined a bit over the past 30 days. The stock trades at 10 times the year-ahead earnings estimate, a 26% discount to the three-year average. Aflac, with scores of 93 for both Value and Overall, is a Focus List Buy and a Long-Term Buy.


AmerisourceBergen ($27; ABC) is poised to come out of the recession in better shape than it had entered. Sales rose 4% in fiscal 2009 ended September, while growth in per-share profits accelerated to 18%. With lawmakers tackling health-care reform, the stock has surged 22% since October, twice the gain of the S&P 500 Index. Amerisource sees reform driving higher prescription volumes, contributing to management’s long-term growth target of 15% for per-share earnings. Amerisource also plans to deploy its cash resources to make small acquisitions and repurchase $350 million of stock. The quarterly dividend was raised twice in 2009.

Despite strong share-price action since March, Amerisource’s Value score still ranks within the top 20% of our research universe. At 16 times trailing earnings, the stock trades 10% below its five-year average. Its Earnings Estimates score, driven by upward earnings revisions for the December and March quarters, has climbed to 93 in the past couple months. Consensus estimates project per-share-profit growth of 24% for the December quarter, 10% for the March quarter, and 15% for fiscal 2010. Amerisource, due to post results on Jan. 26, is a Focus List Buy and a Long-Term Buy.


Hewitt Associates ($42; HEW), a benefits administrator, faces headwinds amid today’s weak employment outlook. But the company’s consulting business should grow in 2010, and health-care legislation could lift health-management services.

In fiscal 2009 ended September, Hewitt delivered 50% higher per-share profits despite 5% lower sales. The benefits-outsourcing unit — Hewitt’s largest and most-profitable segment — produced flat sales to keep revenue from falling further. Hewitt derived 22% of revenue from abroad, leaving the company partly exposed to currency fluctuations.

An Overall score of 95 is supported by high ranks for Momentum (86) and Value (81). Per-share growth rates have benefited from a 16% reduction in the share count over the past three years. Per-share profits are projected to rise 10% in fiscal 2010. Hewitt reports December-quarter results on Feb. 2, with analysts expecting 9% higher earnings on 1% lower sales. Hewitt Associates is a Focus List Buy.


One of four wireless carriers in Mexico, NII Holdings ($37; NIHD) controls less than 8% of the country’s market. NII’s market share could improve when Mexico begins its spectrum auctions in May as part of an effort to open up the mobile-phone and Internet markets. NII Holdings has said it may bid to build a network capable of mobile high-speed Internet access. Should NII open its war chest — cash assets total $12.26 per share — it must be careful to avoid overspending on the Mexico spectrum or other network upgrades in Brazil, Argentina, or Peru.

In 2009, the shares nearly doubled from their March low. They have gained another 5% in 2010. The stock’s Performance score ranks in the top 10% of our research universe, while its Value score still resides within the top 20%. At 19 times trailing earnings, the stock trades at a 31% discount to its five-year average. The stock also trades at deep discounts based on historical valuations for price/sales, price/cash flow, and price/book. The Overall score — currently at 96 — has fallen below 80 just once in the past 24 months. Historically, a persistently high Overall score has been a bullish indicator. Projected to grow per-share earnings by 17% in 2009 and 8% in 2010, NII Holdings is a Focus List Buy.


Stryker ($57; SYK) trades at 20 times trailing earnings, 21% below the five-year average. Shares have rallied but could rebound further if Stryker can settle some legal and regulatory problems. Stryker has received four warning letters from the FDA and could incur fines of up to $500 million stemming from federal charges that it promoted off-patent uses of bone-growth products and made false statements. Management is working to resolve these problems and has pledged to spend $200 million to resolve compliance concerns raised at its facilities.

Stryker said December-quarter sales climbed 7% to $1.83 billion, slightly above the consensus estimate. For the year, Stryker projects earnings of at least $2.94 per share, up at least 4% and in line with Wall Street expectations. In 2010, the company forecasts profit growth of at least 8% on sales growth of at least 5%.

The stock earns a score of 95 for both Quality and Financial Strength. Stryker, with an Overall score of 96, has held an Overall score above 80 in 20 of the past 24 months. Stryker is a Buy and a Long-Term Buy.

9 QUADRIX STANDOUTS
——–———————— Quadrix Scores * ————–——————
– Sector Scores * –
Company (Price; Ticker)
Market
Cap.
($Bil.)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Sector
12-Factor
Sector
Reranked
Overall
AmerisourceBergen
($27; ABC)
8.1
91
83
88
52
93
74
98
Health Care
99
98
Oracle ($25; ORCL)
128.3
90
63
96
86
95
55
97
Technology
91
97
Stryker ($57; SYK)
22.8
74
72
95
95
56
73
96
Health Care
69
79
NII Holdings ($37; NIHD)
6.4
66
82
92
72
76
93
96
Telecom
78
100
Hewitt Associates
($42; HEW)
4.0
86
81
92
68
57
57
95
Technology
78
98
Aflac ($52; AFL)
24.5
59
93
87
87
26
77
93
Financials
75
96
Hewlett-Packard
($53; HPQ)
128.3
78
83
78
67
84
58
92
Technology
81
92
Hospira ($51; HSP)
8.4
84
66
88
55
85
75
92
Health Care
84
75
DirecTV ($34; DTV)
32.9
78
60
94
77
70
72
92
Cons.
Discretionary
80
83
* Quadrix scores are percentile ranks, with 100 the best. Sector scores, also percentile ranks, compare stocks within a sector based on factors that work especially well for a sector.

 


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