Reach Your Personal Finish Line

2/7/2011


A man's definition of success says a lot about him, about how he thinks. If you jump to the end of the story, investment success is easy to define. Did you generate market-beating returns? Did you build enough wealth to fund your retirement? Answer those questions, and you'll be able to satisfy most investors' demarcations of success. But on a practical level, you can't skip to the last page to see how the book ends.

To the nervous investor who worries when his stocks decline, success may mean finding a strategy that delivers solid returns most of the time or limits year-to-year volatility.

To the investor seeking to maximize his long-term wealth, success may mean finding a strategy with the highest potential returns.

To the investor who doesn't like complex systems or the casual investor who wants strong returns without spending much time on his portfolio, success may mean finding a simple, easily understandable strategy.

Our Quadrix® stock-rating system can help all three types of investors find success.

A number of Quadrix-driven strategies have provided market-beating returns with moderate risk in back-tests since the end of 1994. All of our tests focused on the S&P 1500 Index.

Simply buying the top one-tenth of the index as measured by Overall score generated an average return of 16.9%, well above the average of 12.6% for S&P 1500 stocks. The returns of all the tested portfolios were more volatile than those of the average stock — not surprising, considering that the portfolios averaged 141 to 146 stocks, versus the 1,400-plus index names for which we normally have data. But the difference in volatility was not large, and all of the strategies delivered risk-adjusted returns higher than those of the average stock in the index.

The strategies with the best risk-adjusted returns involve the 12-Factor Sector score. Our sector-specific scores compare stocks to others within the same sector, while the traditional Quadrix scores compare stocks to our entire universe of more than 4,300 companies. Of course, our sector scores were created using back-tests specifically designed to find strategies with the best returns, and there is a chance that some of the statistics we selected will become less effective in the future.

RISK-ADJUSTED RETURNS
We back-tested portfolios of S&P 1500 stocks selected based on different Quadrix variables in rolling 12-month periods since the end of 1994. All 10 of the portfolios presented below delivered both absolute and risk-adjusted returns higher than those of the average S&P 1500 stock. Standard deviation is a measure of volatility. The return-risk ratio divides total return by standard deviation and reflects risk-adjusted returns. The higher the ratio, the better. Winning percentage reflects how often the strategy generated a positive return or exceeded the index average.

"Top one-tenth" portfolios derived by traditional Quadrix scores contain the highest-scoring 10% of the index based on the stated scores. Portfolios that use 12-Factor Sector or Reranked Overall scores pull the top 10% of each sector based on the stated scores.

----- 12-Month Total Return -----
-- Winning Percentage --
Top One-Tenth of S&P 1500
As Measured By . . .
Average
(%)
Average
Outperformance
(%)
Standard
Deviation
(%)
Return-
Risk
Ratio
Best
12-Mo.
Return
(%)
Worst
12-Mo.
Return
(%)
Positive
Returns
(%)
Returns
Above
Index
Average
(%)
Overall score
16.9
4.3
22.8
0.74
77.0
(45.2)
81
69
Overall and Value score
17.2
4.6
24.6
0.70
95.0
(48.9)
77
68
Overall and Momentum score
15.8
3.2
22.6
0.70
77.3
(45.2)
79
64
Overall, Value, and Momentum score
16.6
4.0
24.0
0.69
87.7
(49.8)
78
64
12-Factor Sector Score
19.9
7.3
22.3
0.89
74.4
(45.8)
85
82
Reranked Overall score
16.9
4.3
22.2
0.76
77.9
(41.6)
81
78
Reranked Overall and 12-Factor Sector Score
18.9
6.3
22.1
0.86
73.6
(42.5)
82
78
Overall and 12-Factor Sector Score
18.2
5.6
21.5
0.85
75.4
(41.9)
82
75
Overall and Reranked Overall score
16.2
3.6
21.7
0.75
75.3
(41.4)
80
78
Overall, Reranked Overall, and 12-Factor Sector Score
18.0
5.4
21.8
0.83
72.5
(41.8)
82
79
Avg. stock in S&P 1500
12.6
NM
21.4
0.59
93.1
(43.5)
77
NM
NM Not Meaningful.

We don't lock ourselves into a certain strategy. We start with the Overall rank, then consider other scores to help us identify the best options among high Overall scorers. We also perform individual company analysis and never purchase stocks simply because they earn high Quadrix scores.

The table below lists A-rated stocks with appeal based on a variety of Quadrix scores. Three are reviewed below.

Hess ($85; HES) ranks in the top 5% of stocks in our research universe for both sector-specific Quadrix scores, with a Reranked Overall score of 99 and 12-Factor Sector rank of 96. Hess has posted four straight quarters of higher revenue and operating cash flow. The wave of upward analyst revisions in the past month suggests Hess can sustain that momentum.  For 2011, Wall Street projects 23% higher per-share profits on 12% higher revenue.

A rebound in oil prices has emboldened energy companies to raise spending for 2011. In January, Hess formed a partnership with a state-owned company in China as the country prepares to auction off exploration blocks of shale gas in the next couple months. Hess is a Buy and a Long-Term Buy.


Microsoft ($28; MSFT) scores 90 or higher in Overall, Momentum, 12-Factor Sector, and Reranked Overall. The Value score is 88. But the stock's performance has been dogged by doubts concerning Microsoft's relevance in the new landscape of mobile technology.

As if to validate that pessimism, revenue from the Windows operating system, traditionally Microsoft's biggest business, plunged 30% in the December quarter because of weakness in personal computers. Microsoft sold more than 2 million copies of its new Windows Phone 7 software to handset makers in the quarter — a solid start but well short of the 16 million iPhones that Apple ($345; AAPL) sold in that period. Otherwise, results were strong. Sales rose 5% to $19.95 billion on double-digit gains at Microsoft's four other major business units. Microsoft earned $0.77 per share, up 28% excluding deferred revenue recognition in the year-earlier quarter and $0.09 above the consensus estimate. Microsoft is a Buy and a Long-Term Buy.


Research In Motion ($60; RIMM) scores 94 in Momentum and 97 in Value. In the past year, RIM has generated 78% growth in free cash flow, 46% higher per-share profits, and 29% higher sales. RIM's operating momentum should continue in the year ahead. The company is ramping production of its PlayBook tablet computer, and shipments could begin this month.

India says it is unsatisfied with RIM's concessions to help the government monitor terrorist activities. RIM has already given government officials access to the less-secure instant messaging service, but the company says it can't hand over secure corporate e-mails sent through BlackBerry devices because it cannot unlock the encrypted messages. The corporations alone possess the keys. India's smart-phone market is forecasted to quadruple to 40 million users by 2015. Earning a Quadrix Overall score of 99, Research In Motion is a Buy and a Long-Term Buy.

HIGH-SCORING STOCKS
The 15 A-rated stocks below earn solid scores in most Quadrix category scores and rank 90 or higher for Overall, as well as in both of our sector-specific scores. Stocks recommended for purchase are presented in bold.
----------------------------------- Quadrix Scores * -----------------------------------
Sector-Specific
-------- Scores --------
Company (Price; Ticker)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.

Perfor-
mance

Overall
12-
Factor
Sector
Reranked
Overall
Sector
Aflac ($59; AFL)
78
96
82
71
18
43
94
91
94
Financials
Altera ($39; ALTR)
98
71
99
97
94
68
99
97
96
Technology
Apple ($345; AAPL)
98
66
100
94
99
69
99
100
95
Technology
Applied Materials
($16; AMAT)
96
69
75
82
86
77
96
97
91
Technology
Chevron ($96; CVX)
84
84
79
74
97
64
98
98
95
Energy
CSX ($72; CSX)
91
66
92
62
96
79
97
95
99
Industrials
Freeport-McMoRan
($57; FCX)
79
83
78
82
83
78
97
91
99
Materials
Hess ($85; HES)
84
95
80
46
93
83
99
96
99
Energy
Microsoft ($28; MSFT)
92
88
91
92
13
39
96
90
90
Technology
NASDAQ OMX
($25; NDAQ)
65
86
76
41
61
73
92
98
93
Financials
Newmont Mining
($57; NEM)
88
86
92
89
96
17
98
98
100
Materials
Research In Motion
($60; RIMM)
94
97
99
95
38
33
99
100
93
Technology
Ross Stores
($66; ROST)
60
74
96
75
97
57
95
96
98
Cons. Discret.
Texas Instruments
($35; TXN)
89
80
90
97
93
73
99
93
96
Technology
UnitedHealth Group
($42; UNH)
62
91
84
52
56
71
94
92
93
Health Care
* Quadrix scores are percentile ranks, with 100 the best. The sector-specific scores rank stocks relative to others within their sector, while traditional Quadrix scores rank stocks relative to our universe of more than 4,000 stocks.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com