Three Scores Better Than One

8/23/2010


Our Quadrix® system ranks more than 4,000 stocks based on dozens of statistics, assigning each company a percentile rank called the Overall score.

Higher-ranking stocks have historically outperformed lower-ranking stocks, as shown below. In a back-test since year-end 1994, S&P 1500 Index stocks with Overall scores of 80 or higher averaged 12-month returns of 15.0% in 176 rolling periods, versus 12.4% for all S&P 1500 stocks. However, Quadrix worked better in some sectors than in others, with relatively poor results when limited to the industrial, health-care, consumer-staples, or telecom sectors.

To help identify top stocks in every sector, we developed two sector-specific ranks. The 12-Factor Sector score considers 12 statistics that work particularly well within a sector. The Reranked Overall score uses the same category scores that derive the traditional Overall score but overweights those that work best within a sector.

Stocks with high 12-Factor Sector or Reranked Overall scores on average outperformed not only the average stock in the S&P 1500, but also stocks with high Overall scores.

Our scores worked even better in concert. Stocks with high ranks in both sector scores, or in the Overall and 12-Factor Sector score, outperformed stocks with a high rank in just one score. And stocks with top scores in both sector scores and the Overall score did even better.

As is the case with most Quadrix strategies, results varied from sector to sector, as shown below. But in every sector, stocks with high sector-specific scores outperformed.

For sector scores on every stock in the S&P 1500 Index, visit www.DowTheory.com/Go/Sectors. The table below lists 28 Forecasts monitored stocks with strong Overall scores and at least one high sector-specific score. Three of them are reviewed below.

OVERALL AND SECTOR LEADERS
All of the A-rated stocks listed below earn Quadrix Overall scores of at least 79, as well as 80 or higher in one of the two sector-specific scores. Stocks listed in bold are recommended for purchase.
— Trailing P/E —
Est. EPS
— Growth —
Sector-Specific
—— Scores * ——
Sector
Company (Price; Ticker)
Div.
($)
Yield
(%)
Current
5-Yr.
Avg.
Curr.
Year
(%)
Next
Year
(%)
Quadrix
Overall
Score *
12-Factor
Sector
Reranked
Overall
Industry
Consumer Discretionary
Advance Auto ($55; AAP)
0.24
0.4
15.9
16.1
27
14
94
99
98
Automotive retail
DirecTV ($39; DTV)
0.00
0.0
19.0
23.9
64
31
93
91
94
Cable & satellite
GameStop ($20; GME)
0.00
0.0
8.6
21.6
16
9
88
92
66
Electronics retail
TJX ($42; TJX)
0.60
1.4
12.7
15.4
19
10
95
76
81
Apparel retail
Energy
Apache ($93; APA)
0.60
0.6
11.5
11.7
71
22
92
87
94
Oil & gas expl. & prod.
Chevron ($78; CVX)
2.88
3.7
9.4
9.4
90
7
97
96
99
Integrated oil & gas
Financials
Aflac ($48; AFL)
1.20
2.5
9.3
15.5
13
10
98
95
98
Life/health insurance
J.P. Morgan ($37; JPM)
0.20
0.5
11.1
16.8
62
27
90
69
91
Financial services
Travelers ($50; TRV)
1.44
2.9
7.9
9.5
(11)
4
85
96
90
Ppty./casualty insur.
Health Care
Amerisource ($29; ABC)
0.32
1.1
14.0
17.5
27
9
80
89
75
Health-care distrib.
Expr. Scripts ($46; ESRX)
0.00
0.0
22.7
25.3
40
27
83
84
65
Health-care services
LabCorp ($76; LH)
0.00
0.0
14.8
17.2
12
11
86
81
80
Health-care services
St. Jude Med. ($38; STJ)
0.00
0.0
13.6
21.3
20
10
94
60
87
Health-care equipment
Industrials
3M ($84; MMM)
2.10
2.5
15.0
16.0
24
9
87
64
84
Indust. conglomerates
CSX ($51; CSX)
0.96
1.9
15.3
15.7
34
16
90
81
88
Railroads
Union Pacific ($75; UNP)
1.32
1.8
16.4
17.9
44
16
89
88
89
Railroads
Materials
Freeport ($73; FCX)
1.20
1.6
9.4
9.9
29
12
90
86
80
Metals & mining
Lubrizol ($94; LZ)
1.44
1.5
9.8
14.6
32
3
100
100
100
Specialty chemicals
Newmont ($58; NEM)
0.60
1.0
16.5
33.4
30
8
97
99
86
Gold
Technology
Apple ($252; AAPL)
0.00
0.0
20.4
29.9
59
21
96
98
98
Computer hardware
EMC ($19; EMC)
0.00
0.0
17.2
24.1
34
15
84
77
82
Storage & peripherals
Intel ($20; INTC)
0.63
3.2
11.7
18.5
165
3
99
73
95
Semiconductors
Microsoft ($25; MSFT)
0.52
2.1
11.8
17.5
13
11
96
54
87
Systems software
Res. In Motion ($50; RIMM)
0.00
0.0
10.5
33.3
27
8
98
100
90
Commun. equip.
TX Instruments ($25; TXN)
0.48
1.9
11.9
19.1
116
4
99
96
98
Semiconductors
Telecom Services
Rogers Com. ($36; RCI) e
1.16
3.3
12.6
26.8
17
9
98
21
95
Wireless telecom
Utilities
Energen ($44; EGN)
0.52
1.2
11.1
13.1
27
(17)
87
99
98
Utility/energy hybrids
Exelon ($41; EXC)
2.10
5.1
10.7
15.9
(5)
5
79
96
94
Electric utilities
* Percentile ranks, with 100 the best. Sector-specific scores rank companies relative to others within the same sector. The 12-Factor Sector score considers 12 statistics that work particularly well within a sector. The Reranked Overall score uses the same category scores that derive the traditional Overall score, but overweights categories most effective in each sector.    e Estimated.

Advance Auto Parts ($55; AAP) ranks above 90 for the 12-Factor Sector and Reranked Overall scores. The stock has returned 35% so far this year, versus an average of 3% for consumer-discretionary stocks in the S&P 1500 Index. Those gains reflect strong quarterly profits and an improving outlook for the remainder of the year. Shares leapt 5% the day after the release of June-quarter results and 6% after the March-quarter report.

U.S. consumers’ confidence in the conditions for buying cars declined in June and July. Uncertainty about the U.S. economy tends to help Advance Auto, the second-largest domestic retailer of auto parts and accessories, as a higher volume of older cars on the road means more will need repair. The do-it-yourself business gained strength in the June quarter, while the newer commercial unit posted its 10th consecutive quarterly double-digit gain in same-store sales. Advance Auto is a Long-Term Buy.


Energen ($44; EGN) earns an Overall score of 87, meaning it ranks among the top 14% of stocks in our research universe. Relative to the utility sector, Energen looks even better, with 12-Factor Sector and Reranked Overall scores of at least 98.

Operating revenue at Alagasco, Energen’s natural-gas utility (42% of 12-month operating revenue), rose less than 1% in the 12 months ended June. The exploration business (58% of revenue) drives the company’s growth, with revenue up 7% over the last year on 2% higher production and richer prices for natural gas and oil.

Energen has missed consensus profit estimates in three of the last four quarters, so analysts have become more conservative. The consensus projects earnings of $4.46 per share in 2010, which implies 27% growth but falls short of the $4.50 midpoint of Energen’s guidance range. Energen is a Long-Term Buy.


Concerns about Laboratory Corp. of America ($76; LH) center on weak testing volumes. Nevertheless, LabCorp, the second-biggest U.S. clinical-laboratory operator, raised its 2010 revenue target in July, projecting growth of about 5% from 2009.

Free cash flow rose 20% in the year ended June. Management puts excess cash to work through acquisitions and buybacks. The share count has shrunk 4% over the last year, while a fresh $250 million buyback program announced in August could shave off another 3%.

Shares trade at 15 times trailing earnings, 14% below the five-year average. LabCorp earns a 12-Factor Sector score of 81 and Reranked Overall score of 80. LabCorp is a Buy and a Long-Term Buy.

SECTOR-STRATEGY RETURNS
In most sectors within the S&P 1500 Index, portfolios of stocks with high ranks in either both sector-specific scores (12-Factor Sector and Reranked Overall) or both the Overall and 12-Factor Sector scores delivered higher returns than portfolios containing stocks with high scores in just one area. The overlay of Overall and Reranked Overall score tends to be less effective than the other combinations. The 12-Factor Sector score considers 12 statistics that work particularly well within a sector. The Reranked Overall score uses the same category scores that derive the traditional Overall score, but overweights categories most effective in each sector.
——————————— 12-Month Return of Strategy Minus Return of Average Stock in Sector ———————————
Strategy
Energy
(%)
Materials
(%)
Industrials
(%)
Cons.
Discret.
(%()
Cons.
Staples
(%)
Health
Care
(%)
Financials
(%)
Tech-
nology
(%)
Telecom
(%)
Utilities
(%)
Scores of 80 or higher in
12-Factor Sector
4.0
5.5
4.8
7.0
4.4
6.3
4.6
8.0
9.2
1.1
Reranked Overall
2.1
6.0
1.9
4.5
2.2
2.6
4.7
3.3
6.8
1.6
Overall
2.4
2.6
(0.2)
3.2
0.4
(0.3)
2.1
2.7
(0.7)
3.4
12-Factor Sector and
Reranked Overall
2.9
7.4
4.6
7.7
4.0
7.0
7.7
11.3
14.5
0.4
Overall and
12-Factor Sector
4.0
6.1
3.2
7.5
2.2
5.2
4.1
10.8
12.5
2.6
Overall and
Reranked Overall
2.5
4.0
0.5
4.6
1.0
2.2
3.9
4.7
0.4
3.7
All three scores
3.9
7.1
3.5
8.2
2.4
6.2
6.1
12.8

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