Sector Scores Improve The Odds

1/26/2009


The Forecasts’ Quadrix stock-rating system provides us with an edge, a leg up in identifying stocks likely to outperform. But while Quadrix has worked well since we began using the system to pick stocks in 2000, we are constantly on the lookout for ways to further stack the deck in our favor. One such strategy involves sector-specific Quadrix® scores.

While the Quadrix Overall score works well in most parts of the market, it has historically been less effective in the utility sector. So in 2007, we created sector-specific Quadrix scores designed to find utility stocks likely to outperform other utilities. Those scores have worked well, helping our Top 15 Utilities portfolio outperform its benchmark by nearly six percentage points last year.

We have since created similar scores for the remaining nine market sectors, and most have proven quite effective in our back-tests. Such back-tested data must be viewed with skepticism, and there is no guarantee that high scorers will outperform in the future. But for most sectors, the results are strong enough to warrant consideration, and sector scores represent an appealing check against the Quadrix Overall score.

For each of the 10 market sectors, we developed two sector-specific scores. The Sector score is derived from 12 factors that have particularly strong predictive power within that sector. The Reranked Overall score uses the same six category scores as the traditional Overall score. But we rerank the categories (Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance) to emphasize those that work best within a sector.

How the scores work
The Quadrix system is designed to rank stocks relative to all other stocks in our universe of more than 4,000 companies. The new sector scores rank stocks relative only to other stocks in their sector, finding stocks likely to outperform industry rivals.

Think of the sector scores as a second round of testing. Such scores can be useful, most notably for the two strategies listed below:

Finding the best of the best. The average energy stock in the S&P 1500 earns a Quadrix Overall score of 86, and 49% of energy names earn scores above 90. With so many high scorers available, picking the best energy stock using Overall score can be difficult. Sector scores can help us separate stocks that traditional Quadrix scores rank of similarly high quality.

Fishing in a sea of mediocrity. Some sectors have historically scored poorly in Quadrix. Utilities, for example, typically earn weak scores because of low growth rates and high debt levels. Very few utilities earn Overall scores of more than 80, limiting our options in the sector. While we generally avoid low Quadrix scorers, we also advise investors who want to own utilities that they should purchase a diversified portfolio. Sector scores can help you unearth the best options out of a group with generally low scores.

The table below lists top-scoring stocks in each sector, including some Forecasts selections.

In the following paragraphs we review one high-scoring stock in each of three sectors.

Rather than risk its financial health, Aflac ($34; AFL) bowed out from bidding on American International Group’s ($1; AIG) Japanese units. Given the number of financial companies that have feasted on peers only to suffer from heartburn later, Aflac’s prudence appears well placed.

Aflac remains as trim as ever, with a solid balance sheet and more operating momentum than most financials. Wall Street expects 23% growth in per-share profits in 2008, followed by a 15% gain in 2009. The company is scheduled to declare December-quarter earnings Feb. 2.

Even in today’s harsh environment, 2009 profit estimates are rising, contributing to a Quadrix Earnings Estimates score of 98. Aflac, which earns a Sector score of 83 and a Reranked Overall score of 92, is a Long-Term Buy.


Cognizant Technology Solutions’ ($19; CTSH) growth history, liquidity, and lack of long-term debt contribute to its outstanding Quadrix scores for Quality (99), Financial Strength (96), and Overall (96). The stock earns 100 in both sector-specific scores. The consensus projects a 26% increase in 2008 per-share earnings, marking the 11th consecutive year of at least 25% profit growth. Wall Street expects 10% growth in 2009.

Tight technology budgets will likely slow spending and delay projects this year. But sales could accelerate as Cognizant picks off clients fleeing Satyam, the Indian consultant that admitted to inventing earnings and inflating assets by a billion dollars. Cognizant will also bolster per-share earnings by plowing some of its considerable operating cash flow (up 24% in the past 12 months) into the repurchase of up to 1% of outstanding shares in 2009. Cognizant is a Buy and a Long-Term Buy.


Questar ($32; STR) shares owe much of their precipitous decline over the last six months to the swooning price of natural gas. The stock trades 57% off July highs and at 10 times estimated 2009 earnings, well below the three-year average forward P/E of 14. There is little evidence to suggest natural-gas prices will jump in the near term. In mid-January, underground inventories exceeded both last year’s levels and the five-year average.

But for investors seeking long-term growth, Questar is positioned well. The Energy Information Administration forecasts that more than half of America’s new energy capacity will come in the form of natural gas — and Questar owns some of the richest gas fields in the country. Questar earns a Quadrix Momentum score of 91 and Overall score of 94 and Sector and Reranked Overall scores of 99. Questar is a Long-Term Buy.

TOP SECTOR SELECTIONS
All of the stocks below earn scores of at least 70 in both of the Forecasts’ new sector scores. We presented five top scorers in every sector except telecommunications, which has very few stocks and even fewer high scorers. Most of the companies below are not on the Forecasts’ Monitored List. Those labeled “Upside Buy” are recommended in the Upside newsletter (www.UpsideStocks.com) and those labeled “Top 15 Util.” are part of the Top 15 Utilities portfolio.
————— Quadrix Scores * —————
Sector
Company (Price; Ticker)
Mkt.
Value
($Mil.)
Div.
Yield
(%)
Trailing
P/E
Ratio
Overall
Sector
Reranked
Overall
Avg.
Of 3
Scores
Industry
Advice
Consumer Discretionary
Aeropostale ($19; ARO)
1,281
0.0
9
99
94
100
98
Apparel Retail
Upside
Buy 
GameStop ($23; GME)
3,775
0.0
10
95
98
99
97
Comp. & Elect. Retail
Not
Ranked
Priceline.com
($66; PCLN)
2,680
0.0
12
95
99
97
97
Internet Retail
Upside
Buy 
Spartan Motors
($4; SPAR)
135
2.4
3
99
95
100
98
Auto Parts & Equip.
Not
Ranked
WMS Industries
($23; WMS)
1,128
0.0
18
91
100
90
94
Casinos & Gaming
Upside
Buy 
Consumer Staples
Andersons ($14; ANDE)
262
2.4
3
93
96
99
96
Food Distributors
Not
Ranked
Archer-Daniels-Midland
($25; ADM)
16,114
2.1
7
95
97
96
96
Agricultural Prods.
Not
Ranked
Bunge ($42; BG)
5,120
1.8
4
93
99
97
96
Agricultural Prods.
Neutral
Corn Products Int’l
($27; CPO)
1,975
2.1
8
95
94
95
94
Agricultural Prods.
Not
Ranked
Hansen Natural
($33; HANS)
3,032
0.0
18
94
74
92
87
Soft Drinks
Not
Ranked
Energy
Murphy Oil ($43; MUR)
8,191
2.3
5
97
97
100
98
Integrated Oil & Gas
Not
Ranked
National Oilwell Varco
($22; NOV)
9,327
0.0
5
97
91
97
95
Oil & Gas Equip. & Svcs.
Buy †
Pioneer Drilling
($5; PDC)
236
0.0
3
96
94
91
94
Oil & Gas Drilling
Not
Ranked
Plains Exploration &
Prod. ($19; PXP)
2,052
0.0
2
98
100
99
99
Oil & Gas Expl. & Prod.
Not
Ranked
Superior Energy
Services ($15; SPN)
1,135
0.0
4
94
80
93
89
Oil & Gas Equip. & Svcs.
Upside
Buy 
Financial
Aflac ($34; AFL)
15,638
3.3
9
79
83
92
85
Life & Health Insurance
LT Buy 
Amerisafe ($19; AMSF)
350
0.0
7
94
92
99
95
Ppty. & Cas. Insurance
Not
Ranked
Investment Technology
Grp. ($19; ITG)
829
0.0
7
90
97
99
95
Invest. Banking &
Brokerage
Not
Ranked
Tower Group
($24; TWGP)
562
0.8
9
90
98
98
95
Ppty. & Cas. Insurance
Not
Ranked
World Acceptance
($17; WRLD)
281
0.0
5
94
93
100
95
Consumer Finance
Not
Ranked
Health Care
Amedisys
($44; AMED)
1,174
0.0
15
96
100
89
95
Health-Care Svcs.
Upside
Buy 
AstraZeneca
($39; AZN)
55,945
4.9
8
91
74
93
86
Pharmaceuticals
Buy †
Catalyst Health
Solutions ($21; CHSI)
923
0.0
19
89
97
74
87
Health-Care Svcs.
Upside
Buy 
HealthSpring ($16; HS)
941
0.0
8
99
98
100
99
Managed Health Care
Not
Ranked
Humana ($32; HUM)
5,394
0.0
7
84
93
95
91
Managed Health Care
Neutral
Industrials
Apogee Enterprises
($10; APOG)
283
3.2
5
92
93
96
94
Building Prods.
Not
Ranked
BE Aerospace
($8; BEAV)
811
0.0
4
96
96
97
96
Aerospace & Defense
Not
Ranked
Brinks ($25; BCO)
1,143
1.6
8
99
93
99
97
Security & Alarm Svcs.
Not
Ranked
EMCOR ($19; EME)
1,269
0.0
7
96
100
98
98
Const. & Engineering
Upside
Buy 
Triumph Group
($38; TGI)
623
0.4
7
97
97
100
98
Aerospace & Defense
Upside
Buy 
Materials
CF Industries ($46; CF)
2,601
0.9
4
95
87
97
93
Fertil. & Agricul.
Chemicals
Not
Ranked
FMC ($42; FMC)
3,122
1.2
10
93
97
92
94
Diversified Chemicals
Not
Ranked
Nucor ($40; NUE)
12,574
3.5
6
94
86
82
87
Steel
Neutral
Reliance Steel &
Aluminum ($19; RS)
1,372
2.1
3
96
98
98
97
Steel
Not
Ranked
Steel Dynamics
($10; STLD)
1,866
3.9
3
97
95
99
97
Steel
Not
Ranked
Technology
Akamai Technologies
($12; AKAM)
2,102
0.0
8
93
99
92
95
Internet Software & Svcs.
Not
Ranked
Cognizant Tech.
Solutions ($19; CTSH)
5,562
0.0
14
96
100
100
99
IT Consulting &
Other Svcs.
Buy †
eBay ($13; EBAY)
16,026
0.0
7
97
91
95
95
Internet Software & Svcs.
Neutral
Harris ($40; HRS)
5,425
2.0
11
96
98
100
98
Communications
Equip.
Focus
Buy †
Western Digital
($12; WDC)
2,668
0.0
3
96
79
97
91
Comp. Storage & Periphs.
Buy 
Telecom
CenturyTel ($27; CTL)
2,660
10.6
8
73
77
77
75
Integrated Telecom Svcs.
Not
Ranked
Cincinnati Bell
($1; CBB)
313
0.0
4
71
100
85
85
Integrated Telecom Svcs.
Not
Ranked
NII Holdings ($18; NIHD)
3,027
0.0
7
93
92
100
95
Wireless Telecom Svcs.
Focus
Buy
Utilities

CenterPoint Energy
($12; CNP)

4,278
5.9
9
83
83
98
88
Diversified Utilities
Top
15 Util.
Energen ($26; EGN)
1,874
1.8
6
86
98
95
93
Utility/Energy Hybrids
LT Buy 
MDU Resources
($19; MDU)
3,497
3.3
9
75
93
92
87
Utility/Energy Hybrids
Top
15 Util.
Questar ($32; STR)
5,579
1.6
9
94
99
99
97
Utility/Energy Hybrids
LT Buy 
Southern Union
($13; SUG)
1,560
4.8
7
74
96
89
87
Gas Utilities
Top
15 Util.
* Quadrix® scores are percentile ranks, with 100 the best.      † Also qualifies as a Long-Term Buy. 

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