In Search Of A Sector's Best

3/28/2011


Within these pages, we have often discussed how we use our Quadrix® stock-rating system to help us winnow out stocks that lack fundamental strength. Yet even after we've skimmed the cream, sorting through a manageable group of winners can prove challenging.

For instance, 142 of the 765 technology stocks in our 4,500-stock research universe earn Overall scores of 90 or higher, including 49 with ranks of 98 to 100. Moreover, not all sectors behave in the same manner, and Quadrix does not work equally well in every sector or industry.

INDUSTRIES WITH TOP-SCORING STOCKS
-------- Average Quadrix Scores * --------
Industry (No. of Stocks)
% of
Stocks
Above 80
Overall
Value
Earnings
Estimates

Perfor-
mance

Largest Percentage of Stocks Above 80 Overall
Semiconductor Equipment (49)
71
79
64
63
69
Health Care — Managed Care (17)
71
84
80
77
73
Oil & Gas — Integrated (26)
65
81
67
88
68
Technology Distributors (19)
63
79
78
63
58
Services — Education (23)
52
69
71
41
31
Largest Percentage of Stocks Above 80 for Value
Insurance — Life & Health (26)
81
73
89
56
41
Retail — Electronics (7)
71
65
91
26
26
Insurance — Reinsurance (17)
71
63
86
14
38
Airlines (20)
70
59
83
21
22
Insurance — Multiline (15)
67
57
79
51
43
Largest Percentage of Stocks Above 80 for Earnings Estimates
Oil & Gas — Integrated (26)
65
81
67
88
68
Retail — Department Stores (10)
60
63
66
84
58
Diversified Capital Markets (6)
50
65
77
71
48
Oil & Gas — Drilling (20)
45
49
41
65
82
Chemicals — Diversified (16)
44
64
59
74
63
Largest Percentage of Stocks Above 80 for Performance
Oil & Gas — Drilling (20)
70
49
41
65
82
Oil & Gas — Equip. & Services (54)
59
44
36
41
78
Precious Metals (25)
56
36
13
51
74
Packaging — Paper (10)
50
71
71
48
67
Oil & Gas — Exploration & Prod. (148)
47
44
32
51
71
* Quadrix scores are percentile ranks, with 100 the best.

To help resolve these problems, we have designed two additional scores to further sharpen our focus on the very best stocks. The 12-Factor Sector score considers a dozen statistics especially effective at predicting outperformance for stocks in a given sector. The Reranked Overall score starts with the same six categories that derive the Overall score, then reweights them according to their effectiveness within each sector. Both scores compare stocks only to other stocks within the same sector and can help identify the top opportunities within a sector or industry group.

The stocks in the table below all earn Overall scores above 85. They also qualify as sector leaders by earning scores above 80 for both 12-Factor Sector and Reranked Overall. In addition, they epitomize our strategy of seeking growth at a good price. All 32 stocks earn Value scores that exceed their industry average.

In the following paragraphs, we review an especially promising stock from four promising sectors.

Consumer discretionary

With an Overall score of 98, DirecTV ($46; DTV) ranks first among the 15 cable and satellite companies in our research universe. The stock also stands out within the broader consumer discretionary sector, earning a 12-Factor Sector score of 96 and Reranked Overall score of 100.

Over the past year, DirecTV grew per-share profits 65%, outpacing the industry's median growth of 34%. Wall Street expects the company to grow earnings at a 25% annual rate in the next five years, versus the median growth of 15% for its peers. DirecTV is a Focus List Buy and a Long-Term Buy.

Energy

Exxon Mobil ($83; XOM) offers investors a rare blend of strong growth and attractive value. Lapping the recession's weak comparisons, Exxon generated 24% higher revenue in 2010. Growth is expected to accelerate to 28% this year, with revenue projected to hit an all-time high near $490 billion.

The shares trade at 13 times trailing earnings, a 6% discount to the average integrated oil company. Exxon has averaged a 20% premium to the group over the last decade. Earning a 12-Factor Sector score of 97 and a Reranked Overall score of 99, Exxon Mobil is a Focus List Buy and a Long-Term Buy.

Financials

Aflac ($52; AFL) qualifies as the top-ranked life and health insurer in Quadrix, earning an Overall score of 97, versus the industry average of 73. Just back from visiting Japan, CEO Dan Amos reiterated his confidence that nothing short of a nuclear disaster will have a serious impact on Aflac's earnings. Analysts appear to believe Amos, and consensus profit estimates for 2011 have actually risen in the past month. Yielding 2.3% and projected to grow 2011 per-share earnings 12%, Aflac is a Focus List Buy and a Long-Term Buy.

Technology

Lam Research's ($56; LRCX) etching products remove portions of various films from silicon wafers, while its cleaning equipment clears residual particles from the wafer surface again and again while the semiconductor is being fabricated. Lam qualifies as one of the best stocks in the technology sector, earning a 12-Factor Sector rank of 94 and Reranked Overall score of 98. The shares have risen 12% since the end of January but still trade at just 10 times trailing earnings, a 41% discount to its sector average. Lam Research is a Focus List Buy.

TOP STOCKS IN NINE SECTORS
All 32 of the stocks listed below earn Quadrix Overall scores above 85 and scores above 80 for both of our sector-specific scores. All of the stocks rank in the top three in their industry as measured by the Overall score. Stocks from our sister newsletter, Upside, which focuses on small-caps, are presented in green. All of the other stocks earn A ratings in the Dow Theory Forecasts Monitored List, with stocks recommended for purchase listed in bold.
Quadrix Overall
-------- Scores --------
Quadrix Value
-------- Scores --------
--- Sector Scores ---
----- Current Year -----
Sector
Company (Price; Ticker)
Company
Industry
Average
Company
Industry
Average
12-
Factor
Sector
Reranked
Overall
Est.
EPS
($)
%
Chg.
Est.
P/E
Industry (No. of Cos.)
Consumer Discretionary
Advance Auto
Parts
($66; AAP)
89
63
71
61
80
82
4.69
19
14
Retail —
Automotive (18)
Comcast
($25; CMCSa)
90
65
77
61
96
91
1.56
23
16
Cable & Satellite (15)
DirecTV Group
($46; DTV)
98
65
78
61
96
100
3.09
25
15
Cable & Satellite (15)
Consumer Staples
Walgreen
($40; WAG)
88
52
77
66
94
95
2.61
20
15
Retail — Drugstores (5)
Energy
Chevron ($107; CVX)
97
81
76
67
100
98
11.37
21
9
Oil & Gas —
Integrated (26)
Exxon Mobil
($83; XOM)
97
81
77
67
97
99
7.71
24
11
Oil & Gas —
Integrated (26)
Hess ($83; HES)
95
81
83
67
94
100
6.92
34
12
Oil & Gas —
Integrated (26)
Vaalco Energy
($8; EGY)
89
44
72
32
84
94
0.65
0
12
Oil & Gas —
Expl./Prod. (148)
Financials
Aflac ($52; AFL)
97
73
98
89
85
98
6.20
12
8
Insurance —
Life & Health (26)
Ameriprise Fin'l
($61; AMP)
93
61
86
54
89
97
5.58
25
11
Asset
Management (66)
BlackRock
($199; BLK)
95
61
69
54
97
91
12.36
13
16
Asset
Management (66)
Calamos Asset
Mgmt.
($16; CLMS)
92
61
86
54
100
96
1.07
8
15
Asset
Management (66)
NASDAQ OMX
($26; NDAQ)
96
61
90
55
100
100
2.46
23
10
Finance —
Specialized (24)
World Acceptance
($65; WRLD)
97
71
74
63
91
98
5.59
29
12
Consumer Finance (21)
Health Care
UnitedHealth Group
($44; UNH)
92
84
85
80
96
94
3.79
(10)
12
Health Care —
Mgd. Care (17)
Industrials
AMERCO ($96; UHAL)
97
47
87
52
100
100
8.05
194
12
Trucking (28)
CSX ($80; CSX)
93
64
51
46
92
95
5.03
24
16
Railroads (9)
Great Lakes Dredge
($7; GLDD)
98
50
95
56
96
100
0.61
3
12
Construction/
Engineering (31)
MasTec ($20; MTZ)
96
50
63
56
99
99
1.24
18
16
Construction/
Engineering (31)
Materials
Cabot ($46; CBT)
95
64
72
59
97
92
3.15
4
15
Chemicals —
Diversified (16)
Freeport-McMoRan
($54; FCX)
95
47
75
34
91
99
5.92
27
9
Metals/Mining (44)
Technology
Apple ($351; AAPL)
98
62
65
56
99
91
22.93
51
15
Computer
Hardware (13)
Applied Materials
($16; AMAT)
99
79
84
64
99
95
1.52
48
10
Semiconductor
Equip. (49)
Corning ($21; GLW)
97
69
85
56
85
93
2.02
(2)
10
Electronic
Components (19)
Dell ($15; DELL)
95
62
95
56
98
85
1.70
7
9
Computer
Hardware (13)
Entegris ($9; ENTG)
99
79
83
64
89
98
0.85
20
10
Semiconductor
Equip. (49)
Intel ($20; INTC)
96
67
95
56
90
83
2.04
0
10
Semiconductors (107)

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