All-Weather Stock Selection

11/21/2011


Car designers will tell you that handling is as important as engine power. Any mechanism, from a high-performance auto to a stock-rating system, must be versatile enough to cope with a variety of conditions. Our Quadrix® system was engineered with that type of flexibility in mind.

Quadrix — both the Overall score and most category scores — has worked well after stretches when the market trends upward. Think of those periods as clear roads under sunny skies. Only when the storms come do you find out whether your ride can handle adverse conditions. And since 1992, Quadrix has performed like an all-weather investment vehicle.

We generally measure Quadrix's effectiveness based on 12-month returns. But after periods when the market has declined, investors may not want to look that far ahead. So we looked at six-month returns for stocks in the Dow Jones U.S. Index and learned that while other category scores lose effectiveness after market declines, the Value score is at its best at these times. The Overall score works fairly well after three- and six-month declines, though high Overall scorers tend to lag after 12-month declines of 10% or more.

In six-month holding periods after the market posted a six-month decline, the top 10% of stocks as measured by Value score outperformed the average stock in the index by 6.7%. Look only at periods when stocks declined fully 10% over a six-month period, and top Value scorers outperformed by more than 10 percentage points.

Given that the Dow Jones U.S. Index is down 6% over the last six months, stocks with high Value scores look like attractive options. But the index has risen 4% over the last three months. And while most Quadrix category scores work after upward market movements, one stands out from the pack — Performance. After three-month upward moves, the top 10% of stocks in the U.S. Index as measured by Performance score averaged six-month returns 1.4% above the average stock in the index.

Very few stocks earn extremely high scores in both Value and Performance. In our research universe of more than 4,400 U.S.-traded stocks, only eight earn 90 or higher in both scores. This makes sense if you consider that rising stock prices tend to boost Performance scores and reduce Value scores, while a stock decline tends to have the opposite effect.

But given the success of Value scorers after market declines and Performance scorers after market rises, there is a benefit to seeking companies that look good on both fronts. In the table below, we present 15 monitored stocks that earn solid scores for both Value and Performance, as well as the Overall score. Three such companies are reviewed in the following paragraphs.

Apple ($389; AAPL) shares are up 21% for the year, though a couple of concerns have contributed to a 4% decline so far in November. Flooding in Thailand is disrupting components suppliers and could crimp near-term production for Apple's iPhone and iPad. Some investors also worry that Amazon.com's ($218; AMZN) Kindle Fire could swipe market share from the iPad.

But Apple still stands out in our Quadrix system. All category scores rank in the top 30% of our research universe, and Apple earns maximum scores of 100 for Overall and for both sector-specific scores. Shares trade at 14 times trailing earnings, a meager 2% premium to the median for computer-hardware stocks in the S&P 1500 Index. Apple is a Focus List Buy and a Long-Term Buy. Amazon.com is rated C (below average).


CF Industries' ($170; CF) shares have rallied 47% from their October low, yet trade at just nine times trailing earnings — a 42% discount to their five-year average and 45% below the median for fertilizer and agricultural-chemical stocks. Shares also look cheap based on their enterprise and price/operating cash flow ratios compared to both historical averages and the peer group. CF Industries earns a Value score of 90 and scores at least 80 for the other five Quadrix categories used to derive the Overall score. CF's operating momentum is projected to slow next year, but the company seems capable of delivering double-digit profit growth over the long haul. CF Industries is a Focus List Buy and a Long-Term Buy.


Exxon Mobil ($79; XOM) has grown sales 28%, per-share earnings 46%, and operating cash flow 31% in the past year. For all three metrics, Exxon exceeds the average growth for integrated oil and gas companies in the S&P 500 Index. The shares have also outperformed, delivering an 11% total return in 2011, versus an average of 0% for its peer group.

Exxon's Quadrix scores have remained consistently strong. Its Value and Momentum ranks have topped 70 at the end of every month of the past year, while its Performance score has exceeded 50. Wall Street sees 2012 profits slipping 1% to $8.46 per share. Should Exxon hit that modest target and its P/E return to the three-year average of 12 (versus the current trailing P/E of 9.5), then its shares will rise 28% by early 2013. Exxon is a Focus List Buy and a Long-Term Buy.

TOP VALUE AND PERFORMANCE SCORERS
All 15 of the stocks below earn Value, Performance, and Overall scores of at least 70. An A rating equates to above average and a B rating to average. Stocks recommended for purchase are listed in bold.
Value Metrics
Performance Metrics
Price/Earnings Ratio
Total Returns
Company (Price; Ticker)
Quadrix
Value
Score
Trailing
12 Mos.
Trailing
Over 5-
Yr. Avg.
Trail. Over
Industry
Average
On Next-
Yr. Est.
Quadrix
Perfor-
mance
Score
3
Months
(%)
6
Months
(%)
12
Months
(%)
Quadrix
Overall
Score
Advice
Apple ($389; AAPL)
73
14
0.56
1.02
10
82
2
16
27
100
A
BP ($44; BP)
87
7
0.77
0.70
6
80
8
4
5
79
B
CF Industries
($170; CF)
90
9
0.58
0.55
7
80
1
27
46
100
A
Chevron ($103; CVX)
86
8
0.80
0.80
8
87
6
4
26
98
A
Cisco Systems
($19; CSCO)
81
12
0.63
0.64
10
73
20
16
(3)
88
A
ConocoPhillips
($72; COP)
86
9
0.95
0.94
8
81
9
3
20
90
A
Exxon Mobil
($79; XOM)
85
10
0.81
1.00
9
79
8
0
15
93
A
Gilead Sciences
($41; GILD)
79
11
0.54
0.56
9
72
5
0
7
96
A
Intel ($25; INTC)
82
10
0.61
0.80
10
91
23
10
23
100
A
Eli Lilly ($38; LLY)
75
8
0.75
0.67
10
78
7
(1)
15
90
B
Microsoft ($27; MSFT)
84
10
0.65
0.69
9
70
6
11
5
90
A
Nippon Telegraph
($25; NTT)
85
10
0.81
0.60
10
89
6
7
10
92
A
U.S. Bancorp ($26; USB)
76
11
0.73
0.85
10
81
16
1
4
91
A
Valero Energy
($25; VLO)
97
5
0.58
0.94
6
90
19
(3)
29
97
A
Volkswagen
($31; VLKAY)
99
3
0.21
0.21
6
73
1
(4)
14
100
A
Notes: Quadrix scores are percentile ranks, with 100 the best.      Averages exclude P/E ratios below 0 or over 75.

 


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