Reach Your Personal Finish Line
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 QuadrixÂ® 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 â€” 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.
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.Â 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 â€” 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.