Watch For Falling Quadrix Scores

9/26/2011


If you've been reading the Forecasts for any length of time, you know that we prefer stocks that earn high scores in our Quadrix stock-rating system.

Of course, we're always trying to improve our stock selection, and we have tested a number of ways to augment Quadrix, including a focus on stocks with rising Overall scores. Our back-tests suggest that while you can outperform the average stock in some sectors by selecting stocks with rising Overall scores, you're usually better off simply focusing on stocks with high scores.

For this story, we expanded that study to consider stocks posting improvement in our sector-specific scores. Focusing on rising sector scores worked in some sectors but not most, suggesting once again that going with straightforward high scorers is a winning approach. However, while portfolios containing stocks with rising Quadrix scores have mixed success, the data suggests a far stronger conclusion regarding stocks with falling scores — steer clear of them.

This warning holds true not only for the Overall score, but also for both sector scores. The 12-Factor Sector score considers a dozen factors that work particularly well in a sector. The Reranked Overall score considers the same six categories (Momentum, Value, Quality, Financial Strength, Earnings Estimates, and Performance) used to compute the traditional Overall score, but category scores are weighted to favor those that work best for a given sector.

Based on 12-month returns of S&P 1500 Index stocks since 1995, portfolios containing stocks that saw their Overall, 12-Factor Sector, or Reranked Overall scores fall at least five points in the prior month underperformed in almost all sectors. In contrast, stocks earning above 80 in either of the sector scores outgained the average stock in all 10 sectors, while top Overall scorers outperformed in seven sectors. To see sector-specific scores for every S&P 1500 company — plus all our monitored stocks — visit www.DowTheory.com/Go/Sector. 

This study leaves us with two key investment takeaways.

1) Buy stocks with high Quadrix scores.

2) Don't buy stocks with declining Quadrix scores.

With those two considerations in mind, we screened for A-rated stocks with high Overall, 12-Factor Sector, and Reranked Overall scores. We also required that the scores had not fallen over the last month. The table below lists 11 such stocks, and two are reviewed in the following paragraphs.

Aflac's ($35; AFL) Overall score has risen to 94 from 77 at the close of April, the result of improving operating momentum and rising analyst estimates. While Aflac's exposure to European debt and large presence in tsunami-stricken Japan has worried investors, the insurer still boasts some operating momentum. Free cash flow has advanced in five straight quarters, while revenue has grown in eight. Consensus profit estimates for the September and December quarters imply double-digit gains and have ticked higher in the past 60 days.

The valuation remains highly attractive, with shares trading at six times trailing earnings, 55% below the company's three-year average and 12% below its peer-group median. Aflac also trades at a substantial discount to its five-year averages as measured by price/sales, price/operating cash flow, and price/book.

The mood toward Europe's financial crisis has dominated the stock's movements. Aflac has bounced 6% from its September low but is still down 38% for the year. Aflac continues to prune its holdings of European bonds, and its remaining exposure does not seem overly worrisome. With both sector-specific scores exceeding 94, Aflac is a Buy and a Long-Term Buy.


AutoZone ($328; AZO) scores above 80 for Overall, Reranked Overall and 12-Factor Sector. Five of the auto-parts retailer's six category scores exceed 70. The exception is a Value rank of 34, not a surprise considering the stock's outstanding share-price action. AutoZone's stock is up 49% over the last year and 19% since we first recommended it in April, setting an all-time high this month. Economic concerns may have bolstered AutoZone, on the theory that consumers are inclined to stick with older cars that require more repairs.

AutoZone earned $7.18 per share in the August quarter, up 27% and above the consensus of $6.97. U.S. same-store sales increased 4.5%. Total revenue increased 8%, as the commercial business grew sales 23%. Despite expansion of the lower-margin commercial business, price increases helped boost operating profit margins. Shares dipped despite the solid quarter, perhaps because the company provided no profit guidance for fiscal 2012 ending August. Wall Street expects per-share-profit growth of 15% on 5% higher sales in fiscal 2012. In the year ended August, AutoZone repurchased $1.5 billion of its own shares at an average price of $262 per share, slashing the share count nearly 12%. AutoZone is a Buy and a Long-Term Buy.

SCREEN OF THE MONTH: HIGH AND STEADY QUADRIX SCORES
All 11 of the A-rated stocks below earn Quadrix scores of at least 80 Overall and 70 in both of our sector-specific metrics. None saw their scores decline over the last month, and most of the companies posted improvement in all three scores. Stocks recommended for purchase are presented in bold.
Quadrix Scores *
Overall
12-Factor
Sector
Reranked
Overall
Company (Price; Ticker)
Market
Value
($Bil.)
Div.
($)
Yield
(%)
Current
1 Mo.
Ago
Current
1 Mo.
Ago
Current
1 Mo.
Ago
Sector
Industry
Advance Auto Parts
($62; AAP)
4.8
0.24
0.4
91
85
77
68
86
69
Cons. Discret.
Spec. Retail
Aflac ($35; AFL)
16.5
1.20
3.4
94
91
95
91
99
98
Financials
Insurance
Applied Materials
($11; AMAT)
14.8
0.32
2.9
95
95
97
96
93
92
Technology
Semicond.
AutoZone
($328; AZO)
13.8
0.00
0.0
88
87
82
79
96
82
Cons. Discret.
Spec. Retail
Bed Bath & Beyond
($59; BBBY)
14.7
0.00
0.0
91
89
95
81
93
78
Cons. Discret.
Spec. Retail
Covidien
($47; COV)
23.7
0.80
1.7
96
93
73
71
92
87
Health Care
Equipment
Dell ($15; DELL)
27.8
0.00
0.0
99
98
100
97
97
96
Technology
Computers
Google
($547; GOOG)
178.2
0.00
0.0
96
93
82
80
95
94
Technology
Internet Soft.
Newmont Mining
($70; NEM)
35.0
1.20
1.7
96
94
95
91
94
94
Materials
Metals
Target ($52; TGT)
35.8
1.20
2.3
91
74
79
56
95
60
Cons. Discret.
Multi Retail
Wal-Mart Stores
($52; WMT)
182.2
1.46
2.8
82
81
88
87
87
86
Cons Staples
Food Retail
* Quadrix scores are percentile ranks, with 100 the best. 12-Factor Sector and Reranked Overall scores compare stocks only to others within  the same sector.

 


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