Augmenting The Overall Score

9/6/2010


It takes dozens of variables to calculate the Quadrix® Overall score, and not all of them have to be high for a stock to earn a strong score.

Among S&P 500 stocks with Overall scores of 80 or higher, placing them in the top one-fifth of our research universe, an average of 25% of the scores for individual Quadrix variables are above 80. Only one stock in the index has more than 50% of its individual factors above 80.

While every stock has weaknesses, our research suggests that those with fewer flaws tend to outperform. In rolling 12-month periods since the start of 1990, S&P 500 stocks averaged 12.4% returns. However, the top one-fifth as measured by the percentage of individual Quadrix variables with scores above 60 managed a 14.0% return. We call such studies threshold analysis.

While changing the criteria to requiring scores above 70, 80, 90, or 95 resulted in higher returns than a strategy of selecting stocks based on the percentage of scores above 60, the outperformance came at the price of higher volatility.

A portfolio containing only S&P 500 stocks with Overall scores of 80 or higher averaged a 16.6% return with a standard deviation of 19.9%, well below the volatility of any of the threshold-analysis strategies. Standard deviation, a measure of volatility, considers how widely returns vary from the average.

While threshold strategies on their own are generally inferior to strategies based on the Overall score, the two work well in tandem. While high Overall scorers tended to outperform, within that group stocks with the largest number of high individual factor scores delivered the best returns.

We have ranked S&P 500 Index stocks based on the percentage of individual factor scores above 60. To check out that data, visit DowTheory.com/Go/Threshold. The table below lists A-rated stocks with Overall scores of at least 80 and at least 50% of their individual factor scores above 60. Four of those stocks are reviewed below.

Abbott Laboratories ($49; ABT) earns an Overall score of 85, even though the stock doesn’t rank extremely high in any one category. The highest category score, Quality, is 86. But 51% of Abbott’s individual factors, scattered across all six Quadrix categories, receive ranks above 60.

Drug giants are scrambling to find new growth channels to replace older medications approaching patent cliffs. Abbott has turned to branded generic drugs and emerging markets, including India, where it will take a 7% stake in the pharmaceutical industry upon completion of its $3.7 billion acquisition of Piramal Healthcare’s drug business. Wall Street sees Abbott’s per-share profits growing faster than those of most peers over the next five years. Yet the price for Abbott’s long-term growth (price/earnings-to-growth ratio of 1.2) looks inexpensive compared to that of the group (median PEG of 1.4). To calculate the PEG ratio, we divide the P/E based on the current-year estimate by the five-year growth estimate. Abbott is a Buy and a Long-Term Buy.


DirecTV’s ($38; DTV) Overall score of 92 is supported by 56% of its factors exceeding 60. The pay-TV company’s weakest Quadrix category score is a 61 in Value, not surprising considering its stock-price gain of 53% over the last 12 months. The strong gain has boosted the Performance score, now at 79.

Positive profit-estimate revisions made in the past month should help continue the stock’s upward momentum. Wall Street now projects per-share-profit growth of 65% in 2010 and 31% next year. DirecTV has grown its subscriber base by offering exclusive programming and coming up with new ways to bring that content to users. This fall, DirecTV will offer an online version of its NFL Sunday Ticket that will stream online video to computers and mobile devices. DirecTV is a Focus List Buy and a Long-Term Buy.


Newmont Mining ($61; NEM) generates 75% of annual revenue from projects in Peru, Indonesia, and the U.S. The stock, sensitive to gold prices, tends to diverge from the broader market’s price movements. Shares have gained 30% this year — and set an all-time high in July — while the S&P 500 Index backtracked 6%. At 17 times trailing earnings, shares trade 33% below their three-year average P/E. Newmont also looks cheap based on historical averages for price/sales and price/operating cash flow.

The stock’s strongest category scores are Momentum (96) and Quality (92). Newmont’s Overall score of 95 is the highest in the gold sector, and the company is one of only two gold stocks in our research universe with a dividend yield of at least 1%. Newmont is a Focus List Buy and a Long-Term Buy.


Nearly a quarter of Ross Stores’ ($50; ROST) Quadrix factors exceed 80, reflecting long-term growth trends and financial fortitude. The economic slump plays to the discounter’s business model, which involves filling its racks with popular brands of clothing, home supplies, and accessories at bargain prices.

Revenue rose at a 9% annualized rate over the last three years, while operating profit margins and return on equity climbed. During that three-year period, per-share profits grew at a 33% clip. Shares trade at 12 times trailing earnings, a 30% discount to their five-year average P/E ratio. Ross is a Focus List Buy and a Long-Term Buy.

STOCKS WITH A LOT OF HIGH QUADRIX SCORES
All 24 of the A-rated stocks below score at least 80 in Quadrix Overall and above 60 for at least half of their individual Quadrix factors. Stocks that score well in many Quadrix factors and also earn top Overall scores tended to deliver superior performance in our back-test. Stocks on our recommended lists are presented in bold.
Stock-
Market
Value
($Bil.)
————— Quadrix Scores * —————
% of Individual
Quadrix Scores
Company (Price; Ticker)
Div.
($)
Yield
(%)
Momen-
tum
Value
Quality
Overall
Over
60 *
Over
80 *
Sector
Abbott Laboratories
($49; ABT)
1.76
3.6
76.6
59
72
86
85
51
13
Health Care
Advance Auto Parts
($54; AAP)
0.24
0.4
4.7
81
57
85
94
52
21
Cons. Discretionary
Aflac ($47; AFL)
1.20
2.5
21.6
85
95
81
98
61
24
Financials
Apache ($90; APA)
0.60
0.7
30.5
85
81
77
90
52
25
Energy
Apple ($243; AAPL)
0.00
0.0
225.4
97
50
100
96
70
41
Technology
Chevron ($74; CVX)
2.88
3.9
148.6
91
89
77
98
63
26
Energy
DirecTV ($38; DTV)
0.00
0.0
34.4
73
61
97
92
56
20
Cons. Discretionary
EMC ($18; EMC)
0.00
0.0
38.9
82
51
77
81
52
6
Technology
Exelon ($41; EXC)
2.10
5.2
27.0
42
89
64
82
52
19
Utilities
Express Scripts
($43; ESRX)
0.00
0.0
23.4
88
52
95
84
52
24
Health Care
Freeport-McMoRan
($72; FCX)
1.20
1.7
34.1
64
92
85
93
54
36
Materials
Intel ($18; INTC)
0.63
3.6
100.9
97
91
86
97
63
41
Technology
Lubrizol ($93; LZ)
1.44
1.5
6.5
90
86
95
99
71
39
Materials
Microsoft ($23; MSFT)
0.52
2.2
207.0
84
84
89
94
53
22
Technology
Newmont Mining
($61; NEM)
0.60
1.0
30.6
96
66
92
95
62
40
Materials
Oracle ($22; ORCL)
0.20
0.9
111.2
50
62
93
81
52
23
Technology
Research In Motion
($43; RIMM)
0.00
0.0
23.9
91
94
99
97
68
45
Technology
Rogers Communications
($35; RCI) e
1.24
3.6
20.2
77
81
99
98
74
44
Telecom Services
Ross Stores ($50; ROST)
0.64
1.3
6.0
40
78
96
83
53
22
Cons. Discretionary
St. Jude Medical ($35; STJ)
0.00
0.0
11.4
76
76
93
93
56
23
Health Care
Stryker ($43; SYK)
0.60
1.4
17.2
56
76
92
83
51
21
Health Care
Texas Instruments
($23; TXN)
0.48
2.1
28.1
97
82
91
99
68
40
Technology
TJX Companies ($40; TJX)
0.60
1.5
16.3
61
78
96
88
50
16
Cons. Discretionary
Union Pacific ($73; UNP)
1.32
1.8
36.9
87
51
82
87
54
13
Industrials
Average S&P 500 company
1.8
20.2
54
59
63
62
37
15
* Quadrix scores are percentile ranks, with 100 the best.     e Dividend and yield estimated.

 


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