Where Quadrix Works Best

7/18/2011


While you can find attractive equities in just about every corner of the market, the most effective metrics for identifying likely winners depend on the type of stock you seek.

The Quadrix Overall score works for most stocks but tends to work best with larger companies, as shown below. In a back-test of 12-month returns since 1995 for stocks with market values above $50 billion, the top one-fifth of Overall scorers outperformed the average stock by 8.8%. In contrast, top Overall scorers outperformed by 2.0% for stocks with market values below $1 billion.

RETURNS BY STOCK SIZE
The Quadrix Value score helps identify outperformers in all market-capitalization categories but works best with small stocks. The top one-fifth as measured by Value averaged a return of 23.2% in rolling 12-month periods since 1995, versus 17.9% for all stocks with market values of less than $1 billion. In contrast, the Quality and Financial Strength scores tend to increase in effectiveness with bigger stocks.
Group
Avg.
12-Mo.
Return
(%)
Avg. 12-Month Return Of Top One-Fifth As Measured By . . .
Market-Capitalization
Group
Momen-
tum
(%)
Value
(%)
Quality
(%)
Fin'l
Str.
(%)
Perfor-
mance
(%)
Overall
(%)
Smaller Than
$1 Billion
17.9
20.4
23.2
16.0
16.4
18.4
19.9
$1 Billion To
$3 Billion
11.6
13.5
16.4
12.6
13.4
14.5
15.5
$3 Billion To
$10 Billion
12.1
16.1
14.5
15.8
13.3
15.4
18.2
$10 Billion To
$50 Billion
10.7
13.0
13.0
13.3
13.2
14.1
15.6
$50 Billion
Or Larger
10.8
15.0
13.1
17.6
18.0
13.5
19.5

Of course, smaller stocks have averaged substantially higher returns than larger stocks, which explains why many investors like them despite their higher volatility. For a comparison of stocks in different weight classes, check out the table below. Regardless of your investment preferences, Quadrix can help.

BIGGER LOOKS BETTER

The largest stocks are cheaper than smaller stocks on an absolute basis and trade at a larger discount to historical norms. On average, stocks with market capitalizations of $50 billion or more trade at 14 times trailing earnings, well below the average of 19 or more for stocks with market values below $50 billion. Megacaps chart a similar pattern based on price/sales and price/cash flow.

On average, both Quadrix Overall and Value scores rise along with market capitalization. The largest stocks average Overall and Value scores above 70, while those with market values below $1 billion average less than 50 in both metrics. Since 1995, the smallest stocks have substantially outperformed larger stocks, at the cost of higher volatility.

Number Of
Stocks
Avg.12-
Mo. Return
Since 1995
(%)
P/E Ratio
Price/Sales
1-Yr. Sales
Growth
1-Yr. EPS
Growth
Current Average
Quadrix Scores
Market-Capitalization Group
Curr.
Avg.
Since
1995
Curr.
Avg.
Since
1995
Curr.
Avg.
Since
1995
Curr.
(%)
Avg.
Since
1995
(%)
Curr.
(%)
Avg.
Since
1995
(%)
Momen-
tum
Value
Overall
Smaller Than
$1 Billion
2,588
4,312
17.9
20.3
19.9
2.2
2.1
11
5
5
7
46
48
44
$1 Billion To
$3 Billion
811
718
11.6
21.6
21.8
2.8
2.4
15
10
15
10
53
48
53
$3 Billion To
$10 Billion
609
410
12.1
21.8
22.0
2.8
2.3
15
10
17
10
57
51
59
$10 Billion To
$50 Billion
391
207
10.7
19.6
22.4
2.5
2.4
14
11
16
11
57
58
65
$50 Billion
Or Larger
109
61
10.8
14.2
22.8
2.2
2.9
15
11
21
14
55
72
73
Note: Quadrix scores are percentile ranks, with 100 the best.

The Overall score and Quadrix category scores identify stocks that outperform in most market-capitalization segments. Based on average returns, Momentum, Value, Quality, Financial Strength, and Performance scores have predictive power in four groups — $1 billion to $3 billion, $3 billion to $10 billion, $10 billion to $50 billion, and over $50 billion. In the mid-1990s, there weren't as many stocks with market values above $50 billion, so the earliest periods feature some very small sample sizes. Among the tiniest stocks, stocks that score well for Quality and Financial Strength underperform.

The picture changes when you consider median returns that de-emphasize the effects of outliers, the relatively small numbers of stocks with extremely high returns that skew averages upward. With median returns, the Value score is more effective and the Momentum score less effective than is the case with average returns. While it is worthwhile to consider medians, outliers are both tangible and important to long-term stock returns — and averages take that into account.

Baiting your hook

If you like to fish for minnows, give extra consideration to good values. The Momentum score, which measures recent growth in sales, profits, and other operating statistics, also works quite well with small stocks.

Investors who prefer larger prey may want to use a different approach. Quality (measuring long-term growth and returns on equity, assets, and investment) and Financial Strength (debt positions, interest coverage, and profit margins) work best with the big boys.

While Overall remains the most important Quadrix score, the table below lists stocks that not only earn high Overall scores but also score well in the two category scores with the most predictive power for each market-cap group. In the following paragraphs, we review a stock from each of the five groups.

STRONG STOCKS OF ALL SIZES
Our back-tests show that Value scores tend to work better for small stocks than for large stocks, while Quality and Financial Strength scores increase in effectiveness along with the size of the stock. Below, we list 23 recommended stocks in five market-capitalization groups that earn strong Overall scores and solid scores in the two Quadrix categories with the most stock-selection power in their group. Stocks in bold are recommended by our sister newsletter, Upside.
Stock-Market
Value
($Mil.)
Div.
Yield
(%)
12-Month
Change
Quadrix Scores *
Market-Cap. Group
(Most Effective Scores)
Company (Price; Ticker)
Trailing
P/E Ratio
Sales
(%)
EPS
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Smaller Than $1 Billion (Value, Momentum Scores)
DG FastChannel
($30; DGIT)
851
0.0
16
27
64
90
82
92
96
12
37
94
Five Star Quality Care
($6; FVE)
218
0.0
8
6
82
82
94
69
29
27
24
85
Metropolitan Health
($5; MDF)
194
0.0
7
4
54
80
93
97
53
63
55
98
Newport ($18; NEWP)
694
0.0
14
30
NC
96
72
81
68
66
73
96
$1 Billion To $3 Billion (Value, Performance Scores)
Ascena Retail
($34; ASNA)
2,785
0.0
15
41
37
68
72
86
65
87
85
95
Buckeye Technologies
($28; BKI)
1,113
0.7
15
17
80
89
75
86
60
72
87
97
Cash America Int'l
($58; CSH)
1,845
0.2
15
15
15
73
71
84
64
92
94
96
Entegris ($9; ENTG)
1,163
0.0
12
46
NC
96
72
86
91
97
97
99
MasTec ($20; MTZ)
1,679
0.0
16
43
56
94
74
90
34
25
82
94
$3 Billion To $10 Billion (Momentum, Quality Scores)
Alliance Data Sys.
($95; ADS)
5,264
0.0
15
34
43
85
66
92
47
94
90
97
Amerigroup
($72; AGP)
3,711
0.0
12
12
138
93
65
94
59
94
96
98
MetroPCS Commun.
($17; PCS)
6,129
0.0
21
17
100
87
70
78
56
13
85
88
RPC ($25; RES)
3,648
1.1
18
102
NC
100
46
99
93
86
91
97
$10 Billion To $50 Billion (Quality, Performance Scores)
Agilent Technologies
($48; A)
17,065
0.0
19
31
135
96
46
89
70
71
89
92
Altera ($45; ALTR)
14,773
0.5
17
57
114
95
48
99
97
76
83
96
DirecTV ($52; DTV)
41,779
0.0
19
11
51
85
72
99
55
95
85
99
Dover ($66; DOV)
12,557
1.7
18
26
59
93
56
80
59
90
81
93
MasterCard
($304; MA)
39,812
0.2
20
9
26
89
43
96
97
70
90
93
$50 Billion Or Larger (Quality, Financial Strength Scores)
Apple ($354; AAPL)
331,090
0.0
17
71
78
98
75
100
95
97
60
99
Exxon Mobil
($82; XOM)
407,075
2.1
12
21
58
92
85
72
73
77
57
97
Intel ($22; INTC)
125,855
3.2
10
21
46
87
91
87
95
68
58
99
IBM ($174; IBM)
215,822
1.5
14

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