Quadrix Thrives At The Top

7/25/2011


Rainforests cover less than 2% of the Earth’s surface area but house about 50% of all plants and animals on the planet. Knowing where to look is as important for an investor as it is for a biologist, and the Quadrix Overall score can help you zero in on the best opportunities available in the U.S. stock market.

Remember that within the rainforest, about 90% of all life is found in the canopy, the highest level. History suggests looking for life at the very top is also wise practice in the stock market, as many of the valuation ratios and other statistics used in Quadrix are most effective among extreme scorers.

To capitalize on this effect, we devised a four-part search for the perfect stock, based on results for S&P 1500 stocks since the index’s 1994 launch:

1) We started with the Overall score. In rolling 12-month periods since 1994, the top one-tenth of S&P 1500 Index stocks as measured by Overall score averaged a return of 17.5%, versus 14.4% for the next-best decile and 13.2% for the average stock in the index.

2) Next we moved on to individual Quadrix statistics, considering 12-month returns for the top 10% of S&P 1500 stocks as measured by each metric.

3) We further analyzed the 18 particularly effective individual statistics, breaking the S&P 1500 into 33 equal-numbered baskets based on the stats.

4) Lastly, we screened our Monitored List for stocks with ranks of 91 or higher in one of the five best-performing statistics. To avoid stocks with weak fundamentals, we limited our screen to companies with Overall scores of at least 80. Listed in the table below are 11 stocks that passed our screen, including a few facing substantial doubts regarding their prospects. Only two of the 11 are recommended on our buy lists. But all 11, including the four A-rated stocks reviewed below, merit watching.

Alliance Data Systems ($98; ADS) shares have gained 38% so far this year. The rally has put a dent in the stock’s Value score, currently 66, down from 80 to start the year. But the shares still look attractive from multiple angles. Alliance earns a Quadrix rank of 91 for price/free cash flow, one of the statistics with the most predictive power. At 15 times trailing earnings, shares trade 31% below their five-year average.

The consensus estimate, drifting higher in the past month, forecasts 21% growth in June-quarter profits to $1.67 per share on 8% higher sales. Alliance has topped Wall Street’s profit estimates in four consecutive quarters. The company planned to announce June-quarter results on July 21, after the Forecasts went to press. At less than 14 times estimated 2011 earnings, the stock trades at a 15% discount to its peer group in the S&P 1500 Index. If the company meets the consensus 2011 profit estimate of $7.13 and its P/E rises to the peer-group average of 16, the shares would surge another 20% by early 2012. Alliance Data is a Focus List Buy.


Aflac ($45; AFL) has been jolted by the devastating earthquake in Japan and Europe’s ongoing debt problems. Management professes confidence in its Japanese business while paring exposure to the troubled European bonds. But the shares, down nearly 20% since April, have been hurt by disappointing profit guidance, partly reflecting further deleveraging of Aflac’s investment portfolio.

Aflac seems capable of absorbing the investment losses. Net cash equals $1.74 billion, or $3.68 per share. Despite management’s cautious forecast, earnings are still projected to grow 14% in the June quarter and 13% for full-year 2011. Aflac’s fundamental business remains intact, and its outlook could prove conservative.

Aflac’s outstanding Value score of 98 reflects broad-based strength. Of the individual factors comprising Aflac’s Value rank, nearly 88% are above 80, while half are 90 or higher. At seven times estimated 2011


profits, Aflac trades 6% below its peer-group average. Aflac is a Buy and a Long-Term Buy.

Applied Materials ($13; AMAT), the largest U.S.-traded semiconductor-equipment maker as measured by both revenue and market capitalization, in July stood by an earlier projection for lower revenue in the August quarter than in the May quarter. The company cited weak demand in the U.S. and Europe. Trading at nine times trailing earnings, 46% below the average for the technology sector, the stock already reflects plenty of pessimism.

Applied Materials earns a Quadrix factor score of 94 for price/sales divided by the five-year average, a top indicator of outperformance in the past 12 months. Applied Materials trades at less than nine times projected current-year earnings and is projected to grow per-share earnings at a 9% annual rate over the next five years. The stock’s price/earnings-to-growth (PEG) rate of 0.9 is well below the sector average of 1.1. Applied Materials is rated A (above average).


Nippon Telegraph & Telephone ($25; NTT), the biggest telecommunications company in Japan, scores in the top 10% of our research universe for three of the five key value factors in the table below. NTT’s low price/book value ratio of 0.7 reflects concerns about potential government regulation. Seeking more independence from the government, which owns about 37% of NTT’s shares, the company plans to buy back at least $3.5 billion of those shares. Japanese law requires the government to own at least one-third of NTT. The company generated $15.24 billion in free cash flow in fiscal 2011 ended March, up 10% and equaling $5.76 per share. Earning an Overall score of 95, NTT is rated A (above average).

SCREEN OF THE MONTH: STOCKS WITH TOP SCORES IN KEY STATS
All 11 of the stocks below earn at least 91 in one of five valuation metrics for which high scorers perform particularly well. With valuation ratios, the lower the ratio, the higher the score. To avoid stocks that are cheap for a good reason, we required Overall scores of at least 80 to weed out companies with weak fundamentals. An A rating equates to above average, B to average. Stocks recommended for purchase are presented in bold.
Price/Free
Cash Flow
Price/Sales To
5-Year Avg.
Ent. Value/
EBITDA
Price/Book
Price/Sales
Quadrix
Overall
Score
Company (Price; Ticker)
Ratio
Quadrix
Score
Ratio
Quadrix
Score
Ratio
Quadrix
Score
Ratio
Quadrix
Score
Ratio
Quadrix
Score
Rating
Adobe Systems
($29; ADBE)
13.3
70
0.6
92
9.7
46
2.8
32
3.7
22
98
A
Aflac ($45; AFL)
2.9
97
0.8
85
NA
NA
1.9
48
1.0
65
89
A
Alliance Data Sys.
($98; ADS)
6.4
91
1.0
59
12.9
27
103.7
0
1.7
46
96
A
Applied Materials
($13; AMAT)
11.7
75
0.6
94
5.2
86
2.0
46
1.5
51
97
A
Best Buy ($29; BBY)
9.6
81
0.7
91
3.8
93
2.0
48
0.2
95
88
B
Gilead Sciences
($42; GILD)
12.1
74
0.5
96
8.8
54
5.7
11
4.2
19
86
A
Medco Health
($55; MHS)
12.6
72
0.7
87
9.3
50
6.3
9
0.3
92
82
B
Nippon Telephone
& Tele. ($25; NTT)
4.2
95
0.9
68
2.6
97
0.7
94
0.5
85
95
A
Research In Motion
($27; RIMM)
5.2
93
0.2
99
2.2
98
1.5
60
0.7
76
86
B
Valero Energy
($26; VLO)
6.5
90
1.0
66
5.1
86
1.0
82
0.2
98
89
A
WellPoint
($74; WLP)
13.1
70
1.1
42
3.5
94
1.2
72
0.5
86
93
A
Note: Quadrix scores are percentile ranks, with 100 the best.     NA Not Available.

 


Quadrix to the extreme

Quadrix Scores
Company (Price; Ticker)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
Altera ($44; ALTR)
95
56
99
97
76
67
97
Apple ($377; AAPL)
98
73
100
95
97
65
99
BASF ($95; BASFY)
93
84
88
56
84
87
99
DirecTV ($53; DTV)
85
69
99
55
95
85
98
Exxon Mobil
($84; XOM)
92
84
72
73
77
68
97
Intel ($23; INTC)
87
91
87
95
68
57
99
Oracle ($33; ORCL)
86
68
96
86
96
48
97
Walter Energy
($121; WLT)
98
85
100
96
92
27
99
Note: Quadrix Scores are percentile ranks, with 100 the best.

In the main story we address the strength of stocks that score high in individual statistics. But there is more than one way to earn outsized returns from extreme scorers.

Readers who prefer a simpler research strategy may choose to begin and end with the Quadrix Overall score. Overall is the most important Quadrix score, taking into account dozens of statistics and ranking stocks against a universe of about 4,500 U.S.-traded stocks.

We divided the S&P 1500 Index into 33 equal-numbered groups based on the Overall score. The top-scoring group — with an average score of 98 — averaged 12-month returns of 19.0% in rolling periods since 1994, versus 15.9% for the top one-fifth.

A stock need not score well in every variable to earn a high Overall score. On average, stocks earning Overall scores of 97 or higher score below 90 on at least three of the six category scores. The table above lists eight recommendations with Overall scores of 97 or higher — stocks with very few weak spots.


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