What's Working Now

10/25/2010


Our Quadrix® Overall score reflects dozens of statistics, from profit-growth rates to valuation ratios to total returns.

Markets change over time, and at any given moment, some statistics will work better than others. But Quadrix, partly because of its use of such a broad variety of metrics, has a strong history of identifying stocks that go up. In the 180 rolling 12-month periods since 1994, the top one-fifth of S&P 1500 Index stocks as measured by Overall score outperformed the average stock 125 times, for a winning percentage of 69%. During those 180 periods, high Overall scorers outperformed by an average of 2.9%.

Over the last year, value-related statistics have shown the best predictive power. History suggests we should not be surprised, as value factors have traditionally been quite effective.

Since 1994, the top one-fifth of stocks based on our Value category score have outperformed the average S&P 1500 stock by an average of 3.4%, higher than any other Quadrix category score. Of the 15 individual statistics with the best predictive power in Quadrix since 1994, 12 are part of the Value score.

Over the last 12 rolling periods, high Value scorers managed outperformance of 21.1%. That performance is skewed upward by huge gains in the rally from early 2009 lows, and such outperformance is not likely in the year ahead. However, many of the statistics that worked best over the long haul have also done well recently. Of the 15 statistics with the most predictive power in the last 12 periods, 12 are also among the best since 1994.

Our screen of the month, presented in the table below, highlights stocks that score well in many of the factors that have worked well both recently and over the last 16 years. Because the effectiveness of individual statistics waxes and wanes, we do not advise that readers rely only on individual statistics in their stock selection.

SCREEN OF THE MONTH: TOP SCORERS IN TOP FACTORS
The 20 A-rated stocks below earn Quadrix Overall scores of at least 80, as well as scores of at least 50 in at least seven of the eight Quadrix factors that have worked the best over the last 12 rolling 12-month periods. Stocks recommended on our Buy List or Long-Term Buy List are presented in green.
———— Percentile Ranks For Eight Most Effective Quadrix Factors * ————
Quadrix
—– Scores * –—
—— Price/Book Ratio ——
P/E On Curr.-
– Year Estimate –
P/E On Next-
– Year Estimate –
Company (Price; Ticker)
Value
Overall
Trailing
Vs. 3-
Year
Median
Vs. 5-
Year
Median
Trailing
P/E
Ratio
Recent
Vs. 3-
Year
Median
Recent
Vs. 3-
Year
Median
Sector
Abbott Laboratories
($53; ABT)
77
92
17
65
53
72
72
72
70
67
Health Care
Aflac ($55; AFL)
93
99
32
82
58
68
86
92
86
90
Financials
Best Buy ($42; BBY)
91
96
28
73
68
76
79
71
77
64
Cons. Discret.
Chevron ($83; CVX)
89
94
53
65
64
86
90
63
88
46
Energy
Comcast
($19; CMCSa)
90
77
73
65
62
72
60
53
62
54
Cons. Discret.
Corning ($18; GLW)
88
94
51
71
95
88
90
90
84
77
Technology
Energen ($45; EGN)
89
78
58
69
89
80
84
71
61
21
Utilities
GameStop ($18; GME)
99
82
75
95
96
91
95
90
95
88
Cons. Discret.
Gilead Sciences
($37; GILD)
92
98
13
98
91
82
85
98
84
97
Health Care
Hewlett-Packard
($43; HPQ)
95
92
36
84
62
83
88
91
89
90
Technology
Intel ($19; INTC)
96
97
38
85
71
84
87
95
80
90
Technology
J.P. Morgan Chase
($38; JPM)
91
88
83
78
67
80
82
88
87
91
Financials
L-3 Communications
($69; LLL)
98
73
71
89
84
89
91
83
90
77
Industrials
LabCorp of America
($79; LH)
74
88
19
66
56
61
60
57
57
51
Health Care
Microsoft ($25; MSFT)
88
91
13
85
70
79
83
86
82
83
Technology
Research In Motion
($47; RIMM)
95
99
19
95
88
87
92
98
86
95
Technology
St. Jude Medical
($40; STJ)
77
96
22
79
73
69
67
77
63
71
Health Care
Stryker ($50; SYK)
73
82
28
74
83
60
58
73
54
69
Health Care
Target ($54; TGT)
84
74
32
57
51
65
64
66
63
62
Cons. Discret.
Walgreen ($34; WAG)
83
89
37
68
68
64
65
69
66
67
Consumer Staples
* Quadrix scores are percentile ranks, with 100 the best.

We use the Overall score because it works consistently, and all 20 of the stocks in the table on page 5 also earn Overall scores of at least 70. However, all of the stocks also score 50 or higher in at least seven of the eight individual statistics that have worked best over the last 12 rolling periods. Three of those stocks are reviewed below.

Intel’s ($19; INTC) Overall and Value scores have soared to 97 and 96, respectively, after starting the year at 57 and 40. The company’s September-quarter results and outlook were solid, and Intel expects a September pickup in orders to continue in the December quarter. Yet nagging doubts have caused the stock to lag the Nasdaq Composite Index by 21% over the last three months.

Corporate demand for personal computers (PCs) remains strong, but consumer interest has waned in a period of soaring growth for smart phones and tablet computers. In the wake of the initial market reaction to the new products, Intel expects tablets will remain complementary devices that do not siphon off PC demand. However, the question of whether other devices will cannibalize PC sales won’t be answered for some time.

Regardless, Intel seeks new markets for its semiconductors. In September, Intel said its Atom microchip, currently used in netbook computers, will soon be installed in smart TVs and Internet-connected automobiles. Intel envisions these chips eventually reaching equipment ranging from traffic signs to security cameras to home appliances. Intel trades at just 10 times projected 2011 earnings of $1.93 per share, an attractive price for this industry leader. Intel, yielding 3.3% is a Buy and a Long-Term Buy.


J.P. Morgan Chase ($38; JPM) and other U.S. banks made for easy villains during the financial meltdown, and they aren’t doing themselves any favors with the current foreclosure fiasco. The latest wave of problems came to light when a manager at J.P. Morgan testified that she signed thousands of foreclosure documents each month without personally checking loan records. J.P. Morgan is now scouring 115,000 mortgages in 41 states for documentation errors, a review that could take weeks. Management says it remains confident that no serious problems will emerge. But it also set aside $1.3 billion of extra litigation reserves.

The stock price already reflects plenty of pessimism. The Value score of 91 reflects the stock’s trailing P/E of less than 11 — 50% below its five-year average and 33% below the average financial stock in the S&P 1500 Index. A revitalized balance sheet has stimulated both stock buybacks and discussion of boosting the dividend. J.P. Morgan said in September that it wants to restore its dividend to the level paid out before the financial crisis, roughly 30% to 40% of normalized earnings, hopefully by early 2011.

J.P. Morgan topped the profit consensus in each of the last four quarters, beating by an average of 28%. The consensus projects per-share-profit growth of 70% in 2010 and 21% in 2011 despite sales declines in both years. Earning a Quadrix Overall score of 88, J.P. Morgan is a Buy and a Long-Term Buy.


Stryker ($50; SYK), one of the biggest makers of artificial joints and hospital equipment, earns a Value score of 73 and Overall rank of 82. At less than 16 times trailing earnings, the stock trades at a 21% discount to its three-year average P/E and 9% below the average health-care-equipment stock in the S&P 1500 Index. The stock also trades at a discount to its historical norms for price/book, price/sales, and price/cash flow.

In the September quarter, Stryker earned $0.80 per share excluding special items, up 16% and $0.03 above the consensus. Revenue rose 7% to $1.77 billion on gains of 16% in medical and surgical equipment and 1% in orthopedic implants. The company also raised the bottom end of its 2010 sales and per-share-profit guidance. For 2010, Stryker now sees sales rising 7% to 8% and per-share earnings of $3.27 to $3.30, implying growth of 11% to 12% and exceeding the consensus of $3.26 at the time of the announcement. Weakness in the orthopedic-implant business is a bit worrisome in the near term, but Stryker’s valuation adequately reflects those concerns, and the company still offers superior return potential for the two- to three-year haul. Stryker is a Long-Term Buy.

EIGHT POWERFUL STATISTICS

The eight Quadrix® factors listed below — all valuation metrics — have had the most predictive power in the last 12 rolling 12-month periods, and were also among the 15 most effective over the long haul. Outperformance represents the average performance of the top one-fifth of S&P 1500 stocks as measured by a particular statistic minus the performance of the average stock in the index.

We presented outperformance for three time periods, each of which tells a different story. The outperformance since 1994 illustrates the effectiveness of each statistic over the long-term. Results for the last 12 rolling 12-month periods show us which statistics are working at this time, but because of stocks’ huge bounce-back from early 2009 lows, the total returns are unusually high. Results for the last six periods reflect the effectiveness of the factors during a stretch in which the stock market staged both a slump and a rally, ending up in roughly the same place it started.

The number of positive and negative periods reflects how often top scorers have led or lagged the average stock. Winning percentage is the number of positive periods divided by the total number of periods, illustrating the frequency at which top scorers outperformed the average stock.

Price/Book
Vs. 3-Yr.
Median
Price/Book
Vs. 5-Yr.
Median
Price/
Book
Ratio
Price/
Earnings
On Next-
Yr. Est.
P/E on
Next-Yr.
Est. Vs.
3-Yr.
Median
Price/
Earnings
On Curr.-
Yr. Est.
Price/
Earnings
Ratio
P/E On
Curr.-Yr.
Est. Vs.
3-Yr.
Median
Outperformance Since 1994 (%)
2.3
2.7
4.5
3.2 *
4.9 *
3.1 *
3.4
4.5 *
No. Of Positive Periods
68
65
109
35
45
35
112
45
No. Of Negative Periods
112
115
71
33
23
33
68
23
Winning %
38
36
61
51
66
51
62
66
Outperform., Last 12 Periods (%)
36.9
34
33.6
22.3
19.8
19.6
19.5
18.2
No. Of Positive Periods
11
10
10
12
11
11
12
11
No. Of Negative Periods
1
2
2
0
1
1
0
1
Winning %
92
83
83
100
92
92
100
92
Outperform., Last 6 Periods (%)
14
12.4
11.5
3.4
2.7
2
6.1
2.2
No. Of Positive Periods
5
4
4
6
5
5
6
5
No. Of Negative Periods
1
2
2
0
1
1
0
1
Winning %
83
67
67
100
83
83
100
83
* Four of the valuation ratios rely on profit estimates. For those statistics, our data only goes back to 2004.

 


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