Planes, Trains, and Autos

10/31/2014 10:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In his Upside newsletter, Richard Moroney uses a proprietary quantitative system that screens thousands of stocks to find those best positioned for future gains; here, he highlights a trio of stocks that come from a variety of transportation related plays.

Steven Halpern:  Our guest today is Richard Moroney, editor of the very well known blue chip newsletter Dow Theory Forecasts as well as the small-cap advisory called Upside.  How are you doing today, Rich?

Richard Moroney:  Good, thanks.  Thanks for having me on.

Steven Halpern:  Now today, we’re going to focus on your Upside newsletter. Could you tell our listeners a little about the newsletter strategy as well as your proprietary screening system, which is called Quadrix?

Richard Moroney:  Okay.  Upside was really designed to leverage the strength of Quadrix—or our quantitative ranking system—in the arena of small- and mid-cap stocks, partly because those stocks are often under followed or less widely followed and because there’s so many of them.  

A quantitative screen like Quadrix can be a great way to, kind of, skim the cream off the top and narrow your universe to a select group of high potential stocks.  

The basic idea behind Quadrix is fairly straight forward.  We’re looking for as many arrows pointing up as we can, so, as many indicators pointing in a positive direction as possible.  

We don’t want just cheap stocks.  We want cheap stocks with operating momentum, with rising earnings estimates, with shares that are outperforming.  

Really, to get a very high score, you need to have broad-based strength. Quadrix looks at nearly 100 factors spread over six different categories.  We’re looking at momentum, which is recent operating results.  We’re looking at value, where we’re going to look at things like price earnings, price cash flow, price to free cash flow.  

We’ll also look at measures like that relative to historical norms.  What’s the PE now versus over the last five years?  Next category is quality, where we’re looking at the long-term track record, returns on assets, return on investment, financial strength.  

There is a relatively small weight afforded to financial strength.  There, we’re looking at margins, interest coverage, debt levels.  Earning estimates is where we look at the trend in analysts’ estimates.  

Then, we also look at the number of analysts going up versus down and then performance.  The final category is stock returns, mostly within the last 12 months.  

We’re looking for stocks that have outperformed over the last six and 12 months as our key categories for that score.  Then, we have a weighted average based on those six factors to reach an overall score.

Steven Halpern:  If I understand the system correctly, you start by applying Quadrix to a very large universe of stocks and you end up ranking them, so you end up really with the cream of the crop in terms of those that rank highest on all these factors that you look at.

Richard Moroney:  Right.  There’s about, more than 4400 stocks right now that are scored in Quadrix and we’re looking, generally, for new recommendations, ones that have an overall score of 90 or above, so the top 10% of stocks.

Steven Halpern:  Now, in your latest issue of Upside, you highlight a trio of transportation ideas in a review that’s aptly entitled Planes, Trains, and Autos. Let’s start with planes.  What’s your outlook for the airlines sector?

Richard Moroney:  Well, what got our attention in part was Quadrix and the group scores very well in Quadrix.  It’s kind of a classic Quadrix pick right now, in terms of they have very strong operating momentum.  

Stocks are cheap because people don’t really believe necessarily that they can keep up a good result.  In Quadrix, it is truly a standout of the six biggest US carriers.  Five of those earn overall scores of 97.  

We like a couple names in the group among the bigger stocks, and among the smaller stocks, for Upside, we like JetBlue (JBLU), which is really a little bit of a—I wouldn’t want to say an industry laggard—because they’re posting good growth.

But they’re really under-earning compared to some of the other major carriers and we kind of view that in a contrarian fashion, a little bit of a potential catalyst there.  


I think the company is meriting strong numbers by itself, but we think they could do better if they, for example, are the only major one, not apart from Southwest adding a baggage fee.  

They don’t insist on an overnight stay where other carriers do. Just a lot of little things.  They have some new management now, a new CEO who just came in, and Wall Street is kind of looking for him to improve their performance relative to their peers.  

That’s a classic case of a stock that scores very well in Quadrix—and we also think it has got a little bit of an unquantifiable—something that can put a little extra zip into the stock.

Steven Halpern:  Now, you also point out that rising US oil production has been a boom to railroads.  Could you share your outlook on the rail sector and perhaps tell us a little about Greenbrier (GBX), which is a lesser-known play in the area?

Richard Moroney:  Sure.  The railroads really are one of the major beneficiaries of all the North American crude that’s being produced because there are just simply not enough pipelines and pipeline companies don’t want to build pipelines for fields that may not have the longevity of the wells that we used to drill before fracking.  

For the railroads, it’s been a boom, and it’s kind of offset the losses that they’re feeling for coal.  We like a couple railroads.  We like Union Pacific (UNP) as a buy in our Dow Theory Forecast.

But there’s not really many small- or mid-cap railroads that we find attractive. There’s not that many in general, but we do like a couple names in the railroad equipment and Greenbrier that you mentioned is a best buy in Upside.

It is a company that is a leading maker of rail cars, and so, it’s not only benefiting from strong demand for shipping oil, crude, and refined products around North America like never before, it’s also benefiting from a broad upturn in rail traffic, grain, industrial products, autos.  

All those things are showing really healthy growth right now, and the oil and the tank cars, with all the safety concerns, that provides another boost for them because there’s a broad move in the industry to get rid of some of these dangerous tank cars and replace them.  

Greenbrier is really in a pretty sweet spot. Stock has gotten hammered in this recent correction before coming back and gaining about half of its recent decline back.  

The stock had a pretty good run and I think there are profits to be had.  I think there are some doubts about whether this boom is going to last but I think that stock is quite attractive—and even though it has bounced off the bottom—I still think it is a really pretty good value.

Steven Halpern:  Finally, Let’s turn to autos.  What’s your outlook on the auto sector?  Again, you pick a lesser known play here, which is a company called Visteon (VC).

Richard Moroney:  I look for autos as probably in contrast to planes and railroads.  The slowdown in Europe, weakness in China, those things are likely to be kind of a drag on worldwide auto sales, and while I still expect auto sales to be healthy, I think you do kind of want to pick your spots.

We’re not recommending General Motors (GM) or Ford (F). I think you could do better by looking for plays that have a little bit of a catalyst that allow them to grow faster than your typical major auto producer.  

What we like about Visteon, Number One, it has streamlining possibilities. The company has really gotten religion about getting rid of extra costs, focusing on the product lines where they really do best.  

Secondly, it’s got nice exposure to rising sales in China and other parts of Asia, so, while that has come off the boil a little bit perhaps there, in terms of auto sales, it’s still likely going to grow a lot faster than North American or European auto sales and I think that’s going to provide a nice catalyst for that stock.  

The stock is not as cheap as it was six months ago, but still a reasonably good value and still scores well in our Quadrix system.

Steven Halpern:  Well, we really appreciate you taking the time to join us today. Thank you so much.

Richard Moroney:  Sure.  Thanks for having me.

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