Quadrix: The Best of the Best

07/15/2005 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

In a report entitled "The Best of the Best," Richard Moroney looks at the stocks that score the highest in his proprietary Quadrix rating system, and then selects those issues that are within the three sectors that received the highest overall grades.

"Although our Quadrix system grades each stock solely on its own merits, the system also has a good record of highlighting attractive industry groups. To quantify how much of Quadrix’s power reflects its ability to pick the right groups—and how much comes from picking the best stocks within a group—we back-tested the system in the 18 market sectors of the Dow Jones Total Market Index and found that emphasizing top-ranked stocks from top-ranked sectors can amplify your gains. Using three-month holding periods, a portfolio limited to stocks with overall Quadrix scores above 80 from the top three sectors returned an annualized 22.0%. With these conclusions in mind, we screened for top-ranked stocks from top-ranked sectors.

"The insurance sector ranks best for overall Quadrix scores and Selective Insurance Group (SIGI NASDAQ) ranks near the top of the sector, thanks to high marks for momentum, value, and quality. A property-casualty insurer with a focus on Mid-Atlantic and New England markets, Selective has delivered solid revenue growth and improved underwriting margins. With a history of beating expectations, Selective seems capable of exceeding consensus profit-growth estimates. Over the last ten years, per share earnings have grown at a 13% annualized rate while revenue has grown 7% annually. Selective trades at 13 times trailing earnings. With slightly better-than-expected earnings and a flat P/E ratio, a 12-month move above $58 seems achievable. The stock is being upgraded to a Best Buy rating.

"The oil and gas sector ranks second and Cal Dive International (CDIS NASDAQ) earns the maximum score of 100. Cal Dive offers a range of marine contracting services. With high oil and gas prices encouraging producers to boost capital spending, demand for Cal Dive’s services is improving. A June agreement to purchase mature Gulf of Mexico properties should fuel healthy volume growth in 2006. Cal Dive is also using acquisitions to expand its marine-contracting business. Partly because of the acquisitions, profit estimates for Cal Dive have been rising. Per-share earnings are now expected to reach $3.35 in 2006, up from the $2.93 expected for 2005 and $2.10 reported for 2004. Trading at 18 times expected year-ahead earnings, a discount to the five-year average of 23, the stock represents a Best Buy.

"The personal and household goods sector ranks third and Timberland (TBL NYSE) shows strong scores for value, quality, and financial strength. Timberland has compiled a good track record, largely because of growth in US sales of its core boot line. But Timberland boots now dominate their category in the US, so the company is turning to apparel and overseas expansion to sustain growth. Overseas sales rose 15% in the March quarter, and continued growth seems likely. At 16 times trailing earnings, the stock trades in line with the footwear and apparel group. But Timberland is debt-free and has more than $200 million, or roughly $3 per share, in cash. Excluding cash from the stock’s price, Timberland trades at 14 times expected 2005 earnings of $2.49 per share. Timberland, attractively valued, remains a Best Buy."

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