Quadrix Excels With Large-Caps

3/28/2011


In past issues, the Forecasts has devoted considerable space to the appeal of stocks that earn the highest scores in our Quadrix® rating system.

Quadrix helps us identify stocks with strong fundamentals in a number of areas. The Overall score, which considers dozens of statistics in six categories, works well in most portions of the market. But it seems particularly effective among midcap and large-cap stocks, the Forecasts' favorite hunting grounds.

Small-cap stocks tend to outperform larger stocks over time. Fortunately, the effectiveness of Quadrix at identifying high-potential midcap and large-cap stocks can offset small-caps' innate return advantage.

In rolling 12-month periods since the end of 1994, the average S&P 1500 Index stock with a market value of less than $1 billion returned 14.4%, versus 10.4% for the average stock valued at more than $10 billion. However, portfolios containing only the top 10% of those large-cap stocks as measured by the Overall score outperformed the average large-cap by an average of 9.3%. In contrast, the top decile among small-caps averaged outperformance of 2.7% — not too shabby, but also not comparable to the advantage Quadrix provided with the index's larger stocks. 

As the table below shows, when you limit yourself to only the top 10% of Overall scorers, outperformance tends to increase along with the size of the stocks. Among the S&P 1500's largest companies, statistics that reflect short-term operating momentum, long-term growth, and stock performance had the most predictive power. In contrast, valuation statistics were by far the most important among smaller stocks.

OVERALL SCORES FIND THE STRONGEST OF THE BIGGEST

The returns below are averages for rolling 12-month periods since the end of 1994. For example, the average stock in the S&P 1500 Index with a market value of less than $1 billion averaged a return of 14.4%, while the top 10% as measured by Overall score outperformed that average by 2.7%. However, among the largest stocks, a focus on only the top scorers would have resulted in returns of more than 9% above the average for the group.

A similar trend holds sway when you consider median returns, with Overall scores most effective for the largest stocks. Median returns are not as heavily influenced by outliers, or huge moves in a small number of stocks.

--------------- Average Outperformance of Top Decile (Top 10%) ---------------
Market-Cap
Range ($Bil.)
Avg.
12-Mo.
Return
(%)
Overall
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Below $1
14.4
2.7
(0.9)
4.6
(0.3)
(1.6)
(1.9)
(2.5)
$1 to $3
11.7
4.7
0.0
4.7
2.1
1.4
(1.1)
(0.2)
$3 to $10
12.3
8.1
6.3
2.3
4.0
3.5
(0.3)
2.9
Above $10
10.4
9.3
4.1
1.4
5.1
3.2
1.4
5.3

In the table below, we identify midcap and large-cap stocks that earn extremely high Overall scores, as well as solid scores in Momentum, Quality, and Performance. Three of the stocks are reviewed in the following paragraphs.

Altera ($41; ALTR) shows surprising consistency, considering it operates in the cyclical — and often jittery — semiconductor industry. Neither its Overall nor its Momentum score, both currently at 98, has ended a month below 90 since March 2010. The shares have appreciated 30% since the end of October, including a 14% gain this year.

Altera has posted double-digit sales growth in five consecutive quarters, while per-share earnings more than doubled in each of the last four quarters. More growth lies ahead, especially overseas. On March 17, one of China's largest telecom companies boosted its 2011 forecast for capital spending and allotted a bigger portion of its budget for infrastructure networks. Altera generates roughly 10% of its revenue from China's wireless base stations and stands to benefit from any increased spending on telecommunications systems. Altera is a Focus List Buy and a Long-Term Buy.


Hess ($82; HES) grew cash provided by operations 49% in 2010, while sales gushed 14% higher and per-share earnings more than doubled. Strong operating momentum and surging oil prices have driven a six-month return of 47%. Even though the price of oil lingers above $100 per barrel, Hess has no plans to hedge production, instead opting to maintain its exposure to energy prices. The consensus projects 19% higher per-share profits for the March quarter and 35% growth for 2011.

With operations scattered across four continents, Hess has some exposure to the violence in Libya. Roughly 11% of its proved reserves and 5% of production comes from the country, though Libya accounts for only about 2% of Hess's operating cash flow. Hess says its operations are in full compliance with U.S. sanctions placed on Libya. Earning a Quadrix Overall score of 95, Hess is a Buy and a Long-Term Buy.


NASDAQ OMX Group's ($25; NDAQ) shares have risen 6% this year, exceeding the S&P 1500 Index's 3% gain. The consensus forecasts 40% higher per-share profits in the March quarter and 23% growth for the year. Those expectations are consistent with NASDAQ's long-term trends. The company managed annualized growth of 27% or more for per-share profits, revenue, and operating cash flow over the last five years.

NASDAQ could get a lot bigger if it and a partner succeed in outbidding Deutsche Börse for a piece of NYSE Euronext ($35; NYX), though negotiations between NASDAQ and its partner appear to be breaking down. In addition, some have suggested that regulatory hurdles could prove insurmountable. The pending merger between Deutsche Börse and NYSE Euronext has already raised competitive concerns. The price tag for NYSE Euronext would likely exceed $11 billion. NASDAQ is a Buy and a Long-Term Buy.

SCREEN OF THE MONTH — HIGH-SCORING MIDCAPS AND LARGE-CAPS
---- 12-Month Growth ----
----- 5-Year Growth -----
Total
---- Return ----
------------- Quadrix Scores * -------------
Company (Price; Ticker)
Stock-
Market
Value
($Bil.)
Sales
(%)
EPS
(%)
Oper.
Cash
Flow
(%)
Sales
(%)
EPS
(%)
Oper.
Cash
Flow
(%)
YTD
(%)
6
Mos.
(%)
Momen-
tum
Quality
Perfor-
mance
Overall
Agilent Technologies
($43; A)
15
28
205
92
3
28
5
4
39
96
90
70
93
Altera ($41; ALTR)
13
63
177
130
12
26
16
15
44
98
99
82
98
Applied Materials
($15; AMAT)
20
88
2,575
100
8
10
5
8
36
99
82
72
99
Chevron ($105; CVX)
211
19
83
62
1
8
9
16
34
86
72
84
97
Corning ($21; GLW)
33
23
57
85
8
42
15
8
19
83
94
60
97
CSX ($78; CSX)
29
18
48
58
4
20
24
22
41
90
92
87
93
Exxon Mobil
($83; XOM)
415
24
56
70
1
3
0
14
36
91
72
77
97
Hess ($82; HES)
27
14
246
49
8
11
20
7
47
82
72
77
95
Lam Research
($51; LRCX)
6
151
1,004
NM
17
24
13
(1)
28
97
95
60
99
NASDAQ OMX Group
($25; NDAQ)
5
(6)
47
(24)
29
27
29
6
29
75
77
70
96
Texas Instruments
($34; TXN)
40
34
104
45
3
16
0
4
31
89
91
67
98
* Quadrix scores are percentile ranks, with 100 the best.    Recommended stocks in bold.    NM Not Meaningful.

 


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