Dance With The Girl You Brought

10/4/2010


Sometimes, you can’t trust your instincts.

If stocks with high Quadrix® Overall scores tend to outperform the average stock, then stocks with high Overall scores and multiple high scores in other categories should outperform the average high Overall scorer, right? Presumably, stocks with no low scores should have fewer weaknesses. Instinctively, the premise made sense. So we tested it out.

And as is often the case, what seems like a good idea at first blush looks less appealing once the makeup comes off. Since 2004, when we first began using the Earnings Estimates score, stocks with Overall scores of at least 80 and five or six of the category scores (Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance) above 50 or 60 underperformed the average high Overall scorer.

While the study did not provide us with an investment edge, it did re-emphasize the edge we already have — the Quadrix Overall score. Our real-time experience and back-tests indicate that seeking the highest Overall scorers is more important than insisting on solid scores across the board.

Since 2004, S&P 1500 Index stocks with Overall scores above 80 averaged 12-month returns of 7.7%, slightly above the 7.6% average for all stocks in the index, but with substantially less volatile returns. Since 1994, top Overall scorers have averaged 12-month returns of 15.2%, versus 12.5% for the average stock in the index. Listed in the table below and reviewed in the following paragraphs are stocks with high Overall scores, suggesting strong all-around fundamentals.

Shares of DirecTV ($42; DTV) have risen 53% over the last year, the second-strongest return of any Forecasts recommendation. Yet DirecTV earns an above-average Value score of 57, suggesting the stock still has room to run.

DirecTV said subscription momentum picked up in the September quarter. The subscriber additions, particularly in Latin America, stemmed from interest in the World Cup soccer tournament, which wrapped up in July. And though some growth proved temporary, management says churn, or customer attrition, remains within company expectations.

Over the next five years, DirecTV is expected to increase per-share profits at an annual clip of 19%, well ahead of the median projected growth rate of 12% for broadcasters and pay-TV providers in the S&P 1500 Index. Yet the price for DirecTV’s growth (price/earnings-to-growth ratio of 0.9) appears low relative to the group (median PEG of 1.3). To calculate the PEG ratio, we divide the P/E based on the current-year estimate by the five-year growth estimate. DirecTV is a Focus List Buy and a Long-Term Buy.


Lubrizol ($107; LZ) earns an Overall score of 99, supported by ranks of 80 or higher in five of the six Quadrix categories. The lowest score is Financial Strength (60), but Lubrizol’s balance sheet can support an aggressive stock-repurchase program as well as acquisitions.

Net debt (total debt minus cash) fell 55% to $380 million in the past year, helped by an 85% surge in free cash flow to $562 million that allowed Lubrizol to both pay off debt and increase its cash position without a stock offering. Management has said that it will consider acquisitions of up to $500 million in value to complement organic growth. Lubrizol seeks to expand in its current markets, especially outside of North America.

Lubrizol produces additives for industrial polymers and motor oil, a business that would suffer in the event of sustained economic weakness. But despite concerns about slowing growth, Lubrizol shares have soared 33% since the end of June, powered by impressive quarterly results. At 11 times trailing earnings, the shares trade 24% below their five-year average P/E ratio. The consensus projects 33% higher per-share profits on 18% revenue growth for 2010, and estimates are trending higher. Lubrizol is a Focus List Buy.


Newmont Mining ($64; NEM) scores 80 or higher in 42% of the dozens of Quadrix factors we use to generate the Overall score. Not surprisingly, the broad strength of those individual statistics lifts five of Newmont’s six category scores above 80. The persistence of Newmont’s scores is also notable. Since February, its Overall and Momentum scores have ended each month above 90, while the Quality score never closed out the month below 80.

Newmont, which generates about 80% of its revenue from gold, is the only gold pure-play in the S&P 500 Index. In the June quarter, Newmont realized an average price of $1,200 per ounce for its gold, up 31% from year-earlier levels. In late September, Newmont’s stock reached its highest price in more than 20 years, yet the stock trades at 18 times trailing earnings, a 45% discount to its five-year average P/E ratio. Gold trades at $1,307 per ounce, up from $992 a year ago and $743 three years ago.

Wall Street forecasts a 30% jump in per-share profits this year on 19% higher revenue. While much of that growth stems from higher gold prices, production is also rising. In the six months ended June, Newmont’s gold production rose 5%. Given that a couple large mines are still ramping up production, production could continue rising next year. Newmont is not hedging (locking in prices) its production, which suggests that if production rises and the price of gold remains steady or continues climbing, 2011 expectations for per-share-profit growth of 11% could prove quite conservative. Earning an Overall score of 98, Newmont is a Focus List Buy and a Long-Term Buy.

ACROSS-THE-BOARD QUADRIX LEADERS
All 16 of the A-rated stocks below earn scores above 60 in at least five of the six Quadrix categories — Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance. All 16 also earn Overall scores of at least 89. Stocks recommended for purchase are presented in green.
Est.
Quad
Company (Price; Ticker)
Market
Value
($Bil.)
Trailing
P/E Ratio
Curr.
Year
(%)
Next
Year
(%)
Next
5 Yrs.
(Annual.)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
3M ($87; MMM)
63.2
16
24
9
12
85
51
79
82
86
67
89
Abbott Laboratories
($52; ABT)
81.3
13
12
11
10
62
73
86
74
74
59
91
Advance Auto Parts
($59; AAP)
5.1
17
27
14
11
82
55
84
79
67
93
92
Aflac ($52; AFL)
24.8
10
13
10
12
85
93
81
70
96
68
99
Apple ($287; AAPL)
266.0
23
59
22
20
97
40
99
96
97
85
96
AstraZeneca
($52; AZN)
75.8
8
3
0
(2)
59
79
91
90
87
83
97
Chevron ($81; CVX)
162.2
10
95
3
15
95
89
76
75
17
72
96
CSX ($56; CSX)
21.6
17
35
16
12
85
55
83
76
92
69
92
DirecTV ($42; DTV)
38.1
21
65
32
19
77
57
96
63
76
90
94
Freeport-McMoRan
($87; FCX)
41.2
11
26
14
11
66
81
83
80
60
80
95
Lubrizol ($107; LZ)
7.5
11
33
2
23
90
80
95
60
98
89
99
Newmont Mining
($64; NEM)
32.1
18
30
11
14
93
65
92
81
87
89
98
Oracle ($27; ORCL)
138.2
15
19
11
15
75
53
94
87
97
78
94
Research In Motion
($47; RIMM)
25.6
9
37
4
14
94
95
99
95
99
3
99
Rogers Commun.
($38; RCI)
21.9
13
17
9
8
77
81
99
62
NA
78
99
UnitedHealth Group
($35; UNH)
39.8
9
11
-2
10
69
90
83
49
77
87
97
* Quadrix scores are percentile ranks, with 100 the best.     NA Not Available.

 


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