In Search Of Sector Standouts

4/12/2010


Every sector is different. And while some investment strategies work just about everywhere, investors can improve their odds by playing to those differences.

Our Quadrix® rating system is designed to compare stocks across sectors. The Overall score reflects dozens of statistics. Individual stats will have more predictive power for certain types of companies and less for others, but our use of so many metrics has helped us develop a rating that identifies high-potential stocks throughout the market.

In a back-test of 12-month returns since 1994, the top one-fifth of Overall scorers among S&P 1500 Index stocks outperformed the average stock in the index by an average of 3.0%. The same relationship holds true within most sectors — top Overall scorers outperformed the average stock in six of the 10 market sectors. However, as the table below illustrates, the Overall score works better in some sectors than others. For example, the top Overall scorers delivered outperformance of more than 3% in the consumer-discretionary, materials, and technology sectors, versus underperformance in the consumer-staples, health-care, industrials, and telecom sectors.

OVERALL SCORE WORKS IN MOST SECTORS
Top Overall scorers have outperformed the average stock in six of the 10 market sectors within the S&P 1500 Index since 1994. For example, in a back-test of 12-month returns, the index’s consumer-discretionary stocks averaged a 9.8% return, versus 14.5% for the top one-fifth of the sector as measured by Overall score. Winning percentage represents how frequently the top scorers outperformed the average stock in the last 172 rolling 12-month periods.
— Avg. 12-Mo. Return —
Sector
Average
Stock
(%)
Top Overall
Scorers
(%)

Average Out-
performance,
Top Overall
Scorers
(%)

Winning
Percentage,
Top Overall
Scorers
(%)
Consumer Discretionary
9.8
14.5
4.6
74
Consumer Staples
12.6
12.1
(0.5)
44
Energy
19.5
21.1
1.6
52
Financials
13.3
15.9
2.6
61
Health Care
14.5
13.9
(0.7)
47
Industrials
11.5
11.0
(0.5)
43
Materials
9.4
13.1
3.7
70
Technology
14.4
18.4
3.9
66
Telecom
8.1
7.9
(0.2)
53
Utilities
11.9
12.6
0.7
56
S&P 1500 Index
11.9
14.9
3.0
70

Our stock-selection strategy starts with the Quadrix Overall score; we generally avoid stocks that don’t score 80 or higher. However, when comparing stocks within sectors, we have additional tools that help identify the very top choices.

Sector-specific scores: The chart at below shows the effectiveness of our sector-specific scores. For each sector, we created two scores designed to compare companies within the sector. The 12-Factor Sector score is derived from 12 factors that work particularly well within a given sector. The Reranked Overall score starts with the same six category scores used to derive the Overall score, but reweights them for each sector, favoring category scores that work best within the sector.

Quadrix category scores: The effectiveness of category scores varies greatly between sectors. All six scores — Momentum (recent operating results), Value (P/E and other valuation ratios), Quality (long-term track record and returns), Financial Strength (debt levels and profit margins), Earnings Estimates (revision trends), and Performance (stock-price action) — have predictive power in the materials sector, while only the Value score has identified stocks that outperform in the health-care and industrials sectors.

WHAT WORKS BEST IN WHAT SECTOR
Data below reflect the average 12-month outperformance of the top one-fifth of stocks in each sector as measured by the six Quadrix category scores that make up the Overall score. The one or two most effective scores in each sector are presented in bold. Data based on rolling returns since 1994, except Earnings Estimates, for which data only goes back to 2004.
—— Average 12-Month Outperformance, By Quadrix Score ——
Sector
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Cons. Discretionary
2.5
3.1
1.9
0.2
(6.0)
0.9
Consumer Staples
0.9
4.7
(0.6)
(2.7)
(6.2)
(2.1)
Energy
(0.3)
2.8
0.9
(0.2)
(1.4)
(0.9)
Financials
1.3
5.1
1.4
0.4
(13.9)
(0.9)
Health Care
(0.5)
2.3
(1.7)
(1.0)
(9.4)
(0.2)
Industrials
(1.5)
3.4
(2.1)
(1.7)
(6.0)
(1.4)
Materials
0.5
7.1
2.6
1.7
4.9
0.9
Technology
(0.9)
2.8
3.3
1.5
(13.0)
(0.6)
Telecom Services
2.5
4.8
(4.6)
(5.0)
(1.8)
(0.3)
Utilities
0.5
3.3
(0.3)
0.1
(4.0)
0.6
S&P 1500 Index
0.6
3.5
0.5
0.0
(6.7)
(0.3)

The table at the end of the page lists stocks that stand out within their sectors. Four are reviewed in the following paragraphs.

AmerisourceBergen ($29; ABC) ranks in the top 6% of our research universe as measured by Quadrix Overall score and the top 2% of its sector as measured by the 12-Factor Sector score. The wholesale drug distributor boasts impressive operating momentum (per-share profits up 23% over the last four quarters) and share-buyback activity (share count down 6% from a year ago).

For the March quarter, Amerisource is expected to report earnings of $0.55 per share, up 15%. Quarterly results are slated for release April 22. Amerisource, which has grown its dividend at an annualized rate of 47% over the last three years, is a Focus List Buy and a Long-Term Buy.


Energen ($48; EGN) scores in the top 10% of the utility sector based on its Reranked Overall and 12-Factor Sector scores. The stock also earns an 87 in Value, the category score that works best for utilities.

The consensus projects per-share-profit growth of 26% this year, helped by a hedging strategy that has locked in 72% of estimated 2010 production at an average price equivalent to $9.70 per thousand cubic feet, more than double the current price of natural gas. Toward the end of March, Energen added to its hedge positions for 2011 and 2012. Energen is a Long-Term Buy.


The market for used business jets dried up during the downturn, but signs point to improving conditions. That stabilization should help General Dynamics ($77; GD), which sells new Gulfstream planes but also has a strong presence in maintenance, repair, and overhaul. Moreover, strength in the used-jet market tends to precede an increase in orders for new jets.

The economic recovery could be hitting its stride when General Dynamics unveils its two newest Gulfstream models, scheduled for delivery in 2011 and 2012. Until then, the defense contractor will continue to chew through its $66 billion backlog. General Dynamics is a Buy and a Long-Term Buy.


Oracle ($26; ORCL) earns strong scores in Quadrix Quality (95), 12-Factor Sector (81), and Overall and Reranked Overall (both 92) — all highly effective predictors of outperformance within the technology sector. Several catalysts could push the shares higher.

Integration of Sun Microsystems appears to be proceeding smoothly and soon should open up new markets for Oracle. In addition, a rebound in business spending is beginning to spark revenue growth. Per-share-profit estimates are rising, with the consensus forecasting growth of 18% in the May quarter and 17% in fiscal 2011 ending May. Oracle is a Buy and Long-Term Buy.

SECTOR STANDOUTS
None of the A-rated stocks listed below earn a score below 75 in any of the four Quadrix statistics presented — two sector-specific scores, the Overall score, and the category score that works best within their sector. Value is the key score in every sector other than technology, where Quality has been the most effective. Stocks on the Forecasts buy lists are presented in bold. Stocks recommended by our sister publication Upside, which focuses on small-cap stocks, are presented in green.
Sector-Specific
—– Scores * —–
Quadrix
Scores *
Sector
Company (Price; Ticker)
12-Factor
Sector
Reranked
Overall
Overall
Key
Category
Industry
Consumer Discretionary
Aeropostale ($29; ARO)
95
99
100
93
Apparel Retail
Best Buy ($44; BBY)
86
93
95
95
Electronics Retail
Big Lots ($37; BIG)
95
98
99
80
Gen’l Merch. Stores
Carter’s ($32; CRI)
95
88
96
78
Apparel & Access. 
Jo-Ann Stores
($43; JAS)
93
98
98
83
Specialty Stores
Lincoln Educ. Svcs.
($26; LINC)
92
100
100
93
Education Services
Ross Stores
($55; ROST)
87
96
99
83
Apparel Retail
TJX Companies
($45; TJX)
94
97
99
80
Apparel Retail
Consumer Staples
Amer. Italian Pasta
($39; AIPC)
92
96
96
88
Packaged Foods 
CVS Caremark
($36; CVS)
94
83
86
87
Drug Retail
Del Monte Foods
($15; DLM)
100
99
98
94
Packaged Foods 
Energy
National Oilwell
($43; NOV)
98
96
82
90
Oil & Gas Services
Financials
Aflac ($56; AFL)
82
98
99
91
Life & Health Ins.
EZCORP ($22; EZPW)
100
97
99
80
Consumer Finance
Travelers ($53; TRV)
98
93
95
94
Prop. & Casualty Ins.
World Acceptance
($35; WRLD)
99
100
100
94
Consumer Finance
Health Care
AmerisourceBergen
($29; ABC)
98
88
94
79
Health Care Distrib.
Continucare ($4; CNU)
96
89
98
86
Health Care Services
Gentiva Health Svcs. ($30; GTIV)
98
94
95
91
Health Care Services
Mednax ($59; MD)
82
82
97
77
Health Care Services
Odyssey Healthcare
($19; ODSY)
89
98
98
83
Health Care Services
U.S. Phys. Therapy
($18; USPH)
91
89
95
82
Health Care Facilities
Univ. Health Svcs.
($37; UHS)
79
90
93
84
Health Care Facilities
Industrials
APAC Customer Svcs.
($6; APAC)
84
96
97
91
Office Services 
General Dynamics
($77; GD)
86
95
93
88
Aerospace & Defense
L-3 Communications
($93; LLL)
95
94
87
93
Aerospace & Defense
Raytheon ($57; RTN)
97
99
96
91
Aerospace & Defense
Materials
Freeport-McMoRan
($87; FCX)
98
99
98
81
Metals & Mining
Lubrizol ($94; LZ)
100
100
99
91
Specialty Chemicals
Technology
Apple ($240; AAPL)
100
99
98
100
Computer Hardware
Cognizant Tech.
($52; CTSH)
98
96
92
98
IT Consulting 
Corning ($20; GLW)
87
97
96
82
Electronic Compon.
Dolby Laboratories
($59; DLB)
76
95
90
98
Electronic Compon.
Hewlett-Packard
($54; HPQ)
85
94
91
79
Computer Hardware
InterDigital ($29; IDCC)
92
100
100
99
Commun. Equipment
ManTech Int’l
($50; MANT)
85
93
95
93
IT Consulting 
Oracle ($26; ORCL)
81
92

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