Consistency breeds success; with that in mind, we looked at which variables work best with stocks in the S&P SmallCap 600 Index over multiple time periods, explains Richard Moroney, small cap expert and editor of Upside Stocks.
We identified nine factors from Quadrix — our proprietary quantitative ranking system — that have proved effective with S&P 600 stocks over the past five years, 10 years, and since inception.
Meanwhile, in the last 12 rolling 12-month periods, the price/free-cash-flow ratio was the best factor in Quadrix using average returns and third-best using medians. It ranks among the top two factors on both median and average returns since our S&P 600 data begin in December 1994.
Founded nearly 60 years ago, KB Home (KBH) builds single-family homes in seven states. It focuses on mid-priced houses, with an average selling price of $363,800 last year.
The stock scores above 50 for seven of the nine Quadrix factors that have consistently worked. It scores above 80 for key valuation metrics price/free cash flow and price/sales.
For the May quarter, KB grew earnings per share 94% to $0.33, topping the consensus by $0.07. Revenue climbed 24% to $1.00 billion, ahead of the consensus of $927 million.
The backlog swelled 19% to $2.18 billion. Rising labor and raw-material costs have caused gross profit margin to contract in recent quarters.
But robust sales should support profit growth. Management expects sales to exceed $5 billion in fiscal 2019, up from $3.60 billion last year, which implies double-digit growth over the next three years. KB is being upgraded to a Best Buy.
Taylor Morrison Home (TMHC) scores above 80 for six of the nine Quadrix factors we reviewed — more than any other stock in Upside.
The stock ranks in the top quintile for all key valuation metrics: price/free cash flow, price/sales, and P/E ratio based on estimated earnings for both 2017 and 2018.
Yet the shares have surged 68% over the past 12 months and 11% in the past three months, better than at least 75% of stocks in Quadrix.
The homebuilder operates in eight states, primarily located down south and out west. About one-fifth of Taylor Morrison homes are sold to first-time homebuyers. But with an average home price of $465,000 last year, Taylor Morrison tends to address a more upscale market than KB Homes.
Conditions for the U.S. housing market remain favorable, reflected by Taylor Morrison’s backlog jumping 17% to $1.93 billion for the March quarter, equaling about half of its annual sales.
The stock dipped in late June on news of a stock offering. But Taylor Morrison, with an Overall rank of 97, is rated Buy based on its 12-month potential.
