Best Values in the Dow
10/26/2015 10:00 am EST
Chuck Carlson, editor of the blue chip-focused DRIP Investor, applies his firm's proprietary Quadrix rating system to evaluate the best current investment values in the Dow industrial and utility averages.
Steven Halpern: Our guest today is Chuck Carlson, editor of DRIP Investor and one of the newsletter industry’s most respected advisors. How are you doing today, Chuck?
Chuck Carlson: I’m fine, Steve. Thank you.
Steven Halpern: With so much skepticism in the current market, I was particularly impressed by the opening statement in your latest research report, in which you said, and I quote “Other than 2008 and 2009, I can’t remember a time when so many blue chips were trading at such substantial discounts.” Could you expand on that?
Chuck Carlson: Sure, I mean you really do have to go back to 2008-2009 to see stocks that are trading this far off their 52-week highs. Now, I wrote this a few weeks ago and stocks have bounced up a little bit.
But nevertheless, when you go through the Dow Jones industrial average for example—which is kind of an expression of blue chip stocks—or the Dow transports, blue chip transport stocks—or the Dow utilities, which are kind of the blue chips in the utility sector—what you find are nearly one-third of all those stocks in those averages are trading 15% to 20% or more off their 52-week highs.
And I have not seen that type of thing again since 2008-2009, so yes, I think the environment is such that you are seeing opportunities developing in a lot of the blue chip areas and investors need to take advantages of those opportunities.
Steven Halpern: Now, to avoid what you call value traps, you use what’s called a Quadrix Stock Rating System. Could you give our listeners a brief overview of this proprietary system?
Chuck Carlson: Sure. Our firm developed, over 15 years, a stock rating system and we call it Quadrix, and in essence, Quadrix allows us the ability to evaluate more than 5,000 stocks. For each of those 5,000 stocks, we’re scoring more than 90 different variables and those 90 variables are grouped along six major categories.
We’re looking at value, variables, operating momentum, earnings estimates, financial strength, quality, and relative price performance, so there are a lot of fundamental as well as technical indicators that we’re weighting and scoring.
And those scores funnel up to give us the category scores such as a value score or its momentum score and then those category scores funnel up to give an overall score which is a score from zero to 100, with 100 being the highest score.
We have a very consistent, very disciplined way to evaluate a large universe of stocks. Now getting back to your question of how to avoid value traps, I mean, simply because a stock is trading well off its pervious price levels does not necessarily make it a value.
Again, cheap stocks can get cheaper, and cheaper, and cheaper if there’s problems with the fundamentals and inability for the company to turn around. That’s where Quadrix can come in. We can look at, for example, a stock that scores well on its overall score and also has confirming scores in other categories such as value.
We typically don’t recommend stocks where the value score might be 80 and above, but with the overall score is 20 or 30 out of a possible 100. Those tend to look more like value traps.
What we try to do are find stocks that are trading at pretty good overall scores, as well as good value scores, and some of the other categories as well, to give us a little bit more confidence that there is a true value stock.
Steven Halpern: You recently applied this stock rating system to assess the major averages, and within the Dow industrials, you note that a number of technology companies stand out as decent value plays. Could you walk us through some of those ideas.
Apple is a very high scoring stocks in the Quadrix system. Its overall score, I believe, right now is about 98 out of a possible 100. Cisco is also a stock that is scoring quite well in our Quadrix system.
Both companies offer decent yields. Both have what I think are decent operating momentum and earnings growth prospects, and those are two stocks that are trading off their highs and look especially attractive to us among those stocks in the Dow Jones Industrial
Steven Halpern: Now, you also suggested that investors consider Caterpillar (CAT), with a caveat that the company does indeed face some challenges. What’s the outlook here?
Chuck Carlson: You know that’s one of those kind of, if you’re willing to be on the patience side, there are some things to like about the company. It scores exceptionally well in the value category.
Its overall score is a smidgen below where we would like to see it, but it is still in the top half of all the stocks in the Quadrix universe in terms of the overall score.
Its overall score is okay, not great, but okay, and I think you’re looking at a stock where there’s still plenty of headwinds there. China, the headwind, the volatility in the energy sector is certainly a headwind, but the stock is also, you know, trading at 30 points or more off its 62-week high, so its stock that’s already down over 30%.
Can it get cheaper? Sure, it can go down further, but I think most of the damage or the biggest part of the damage has been done, and I think there’s room for a rebound here, especially as we start to see some bottoming in the China growth rate and we start to see some improvement in some of the commodities and materials areas, which I think is just quite possible in 2016.
Steven Halpern: Now, you have also applied this stock rating system to the utility average, and you note that your favorite utility component is NextEra Energy (NEE). What’s the attraction here?
Chuck Carlson: The stock scores very well in our Quadrix system, and I can’t say that’s the case for a lot of utilities, the way we score stocks. Utilities typically don’t score particularly well in our system and NextEra is one that does, so that’s one of the reasons I like it.
I also like it because it gives you a bit of a broad-based play in the utility sector and some clean energy areas. For example, they do have their Florida Power and Light business, which is a large regulated electricity business in—obviously—Florida, but they also have a division that focuses on wind and solar energy.
In fact, NextEra Energy is one of the largest, if not the largest provider, of wind and solar energy in the United States.
So, for folks out there that are looking for kind of a different way to play the utility sector and have a bend toward kind of clean energy and are looking for quality plays in that space which there aren’t a lot, in my opinion, NextEra Energy is a company that does that.
Steven Halpern: Again, our guest is Chuck Carlson, editor of DRIP Investor. Thank you so much for your time, today.
Chuck Carlson: Thank you, Steve.