To Find Success, Aim High

11/22/2010


Our rationale for focusing on stocks with high Quadrix® Overall scores is easy to explain — those stocks tend to outperform the rest.

In our quest for buys, we generally limit our field to stocks with Overall scores above 80. In back-tests since October 1994, U.S.-traded stocks earning Overall scores of at least 80 have averaged 12-month returns of 19.2%, versus 16.3% for the average stock. Among 80-and-up scorers, the higher the score the better. Stocks scoring above 90 averaged 21.7% returns since 1994, while those above 95 managed 23.7% returns.

Most of the stocks in our roughly 4,300-stock research universe are far smaller than Dow Theory Forecasts likes to recommend. The S&P 1500 Index, which contains most of the largest stocks in our universe, did not manage such strong returns, as shown below. But high Overall scorers outperformed among those stocks as well.

Quadrix doesn’t tell the whole story, and the Forecasts doesn’t buy stocks simply because they have high Overall scores. Also, as the story below suggests, the highest-ranking stocks offer little selection in some market sectors.

Still, history suggests you’d do well to consider the table below, which presents the highest-scoring stocks from the Forecasts and our sister newsletter Upside, which focuses on smaller companies. Four of our favorites are reviewed below.

TOP-SCORING STOCKS
All of the A-rated Dow Theory Forecasts stocks below earn Quadrix Overall scores of at least 95. Stocks recommended for purchase are presented in bold. Investors who like smaller stocks might want to consider the selections from our sister newsletter, Upside, which focuses on small-cap stocks.
—— Quadrix Scores ——
Company (Price; Ticker)
Stock-
Market
Value
($Mil.)
Div.
Yield
(%)
Trailing
P/E
Ratio
Momen-
tum
Value
Quality
Overall
Forecasts stocks
Aflac ($54; AFL)
25,374
2.2
10
91
96
83
99
Altera ($32; ALTR)
10,203
0.7
15
100
70
99
99
Ameriprise Financial
($52; AMP)
13,442
1.4
12
96
85
72
97
Apple ($302; AAPL)
280,124
0.0
20
97
56
100
97
Biogen Idec ($64; BIIB)
15,588
0.0
13
84
81
94
99
Freeport-McMoRan
($98; FCX)
46,267
1.2
12
76
72
81
95
Gilead Sciences
($38; GILD)
32,051
0.0
10
76
92
99
98
Intel ($21; INTC)
119,973
3.0
11
59
90
88
95
Lubrizol ($104; LZ)
7,156
1.4
11
75
82
94
96
Microsoft ($26; MSFT)
224,418
2.5
11
85
89
90
97
Newmont Mining
($59; NEM)
29,814
1.0
16
90
81
94
97
Research In Motion
($56; RIMM)
30,756
0.0
11
95
95
99
99
Ross Stores ($64; ROST)
7,664
1.0
15
85
69
95
97
St. Jude Medical
($39; STJ)
12,722
0.0
13
83
82
93
97
Texas Instruments
($31; TXN)
36,562
1.7
13
80
78
92
97
Travelers ($55; TRV)
25,833
2.6
8
74
93
68
96
Upside stocks
Atlas Air Worldwide
($55; AAWW)
1,437
0.0
10
90
91
57
95
EZCORP ($25; EZPW)
1,243
0.0
13
85
76
98
99
HealthSpring ($27; HS)
1,543
0.0
9
68
91
89
98
InterDigital ($33; IDCC)
1,483
0.0
10
59
94
100
99
Lincoln Educational
($14; LINC)
364
0.0
6
79
100
96
98
Magellan Health Svcs.
($48; MGLN)
1,647
0.0
11
82
94
85
97
Meadowbrook Ins.
($9; MIG)
489
1.8
9
71
93
77
96
Metropolitan Health
($4; MDF)
169
0.0
7
96
93
99
99
Micrel ($12; MCRL)
747
1.2
16
71
61
97
95
Nu Skin ($30; NUS)
1,902
1.7
15
94
67
88
95
OM Group ($36; OMG)
1,085
0.0
13
95
85
67
97
RF Micro Devices
($7; RFMD)
1,876
0.0
10
98
61
81
96
TriQuint Semicond.
($10; TQNT)
1,677
0.0
14
99
67
98
99
Note: Quadrix scores are percentile ranks, with 100 the best.

Dow Theory Forecasts stocks

Ross Stores ($64; ROST) fills its discount outlets with name-brand bargains, but lately Ross’ stock has been flying off the shelves. Setting an all-time high in November, the stock has jumped 49% this year. At 15 times trailing earnings, Ross trades at modest discounts to its five-year average and the average apparel retailer in the S&P 1500 Index.

Revenue has increased 10% over the past three quarters, while operating profit margins have widened. Ross’ same-store sales growth has slowed from the 10% rate seen in the April quarter, as prior-year comparisons have become more difficult. However, Ross still managed same-store growth of 4% or 5% in August, September, and October, building on growth of 6% to 9% in the year-earlier periods. Since April, monthly same-store sales have risen between 2% and 5%. Ross is a Focus List Buy and a Long-Term Buy.


Texas Instruments ($31; TXN) has not ended a month with its Overall score below 98 since March. Since the end of March, the stock has climbed 25%, versus 2% for the the average semiconductor stock in the S&P 500 Index.

Global semiconductor sales grew 26% in the September quarter to $26.5 billion. Corporate clients, flush with cash, are making upgrades to systems, computers, and software that were delayed during the recession.

Economic uncertainty still saps demand for consumer electronics, which generates 11% of TI’s revenue. But TI has tapped into the explosive growth of smart phones, supplying semiconductors to Nokia ($10; NOK) and Research In Motion ($56; RIMM). TI builds the power-management chip for RIM’s new BlackBerry Torch. Texas Instruments is a Buy and a Long-Term Buy.

Upside stocks

Consensus estimates for Atlas Air Worldwide ($55; AAWW) have risen since the company reported September-quarter profits 10% higher than expectations and offered an optimistic take on its business prospects for the rest of this year and next year. The consensus projects per-share-profit growth of 65% this year, followed by a decline of 5% in 2011, although the spread of estimates is wide enough to provide plenty of room for outperformance next year.

Atlas provides freight-cargo service, and a combination of strong demand and tight supply of long-haul, heavy-freighter space have allowed the company to raise its rates. The company also offers military charters and leases manned aircraft. At less than 11 times projected 2011 earnings of $5.22 per share, Atlas trades at a substantial discount to its peer-group average. Atlas Air is an Upside Best Buy.


Founded in 1984, Nu Skin Enterprises ($30; NUS) employs more than 785,000 independent distributors who promote its cosmetics, nutritional supplements, and personal-care products through a direct-sales approach. Nu Skin offers an attractive play for investors looking to bet on Asia’s rising middle class.

Sales jumped 19% for the nine months ended September, fueled by 24% growth from Asia, which accounts for 74% of total revenue. Over the last two weeks, all 10 analysts covering Nu Skin have hiked their profit estimates for the December quarter (now expected to grow 17%) and full-year 2011 (13%). With an Overall score of 95, Nu Skin Enterprises is an Upside Best Buy.


Why not just buy the best?

All else equal, a stock earning 96 Overall has better investment potential than one earning 80. But we don’t just buy all the top-scoring stocks, for at least three reasons.

Bad apples. While high-scoring stocks tend to earn superior returns, not all of them will excel. Once we identify high Quadrix scorers to target, we follow up with individual stock analysis.

Sometimes Quadrix doesn’t tell the whole story. Quantitative systems that rely mostly on historical statistics can’t take into account changes in the competitive landscape, political or regulatory shifts, or industry-specific news.

Limited options. Dow Theory Forecasts prefers stocks with at least $3 billion in stock-market value. While we generate Quadrix scores on more than 4,300 stocks, only 102 stocks with stock-market capitalizations above $3 billion earn scores above 90, with just 49 ranking above 95.

Sector concentration. Among those 49 top-scoring stocks, you’ll find only four consumer-discretionary stocks, two energy stocks, one industrial, one utility, one telecom, and one consumer staple.

The Forecasts has had success building diversified portfolios full of stocks with solid Quadrix scores, even if some of the stocks earn Overall scores of less than 90. Still, our research suggests investors should give the highest-scoring stocks a long look.


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