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What's New
About Quadrix
Quadrix® now considers more than 100 variables in seven categories — momentum, quality, value, financial strength, earnings estimates, performance, and volume metrics. Used together, these scores can help you find winners and avoid losers.
To be sure, no numbers-based ranking system can substitute entirely for company analysis. Stocks cannot be reduced to a series of equations. Often what really matters about a company’s stock is not on the balance sheet or income statement. For example, Quadrix can tell you which drug companies have done best in growing earnings and sales, but it cannot tell you the companies with the best new drugs in the pipeline.
Still, a numerical ranking system like Quadrix can be a great first screen
for building portfolios. Because the system uses only quantifiable factors,
it allows you to narrow your focus on companies achieving superior results.
Similarly, because Quadrix is not influenced by the fear, hope, and greed that
can occasionally cloud the judgment of all investors, the system is an excellent
tool for tracking current portfolio holdings.
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Quadrix Overview
Quadrix uses more than 100 variables to score stocks in six categories — momentum, quality, value, financial strength, earnings estimates, performance, and volume metrics. Within each category, some variables are weighted more heavily based on past effectiveness. To compute an overall score, Quadrix uses a weighted average of the seven category scores, with value, quality, and momentum receiving the biggest weightings. Based on past effectiveness or expectations regarding market conditions, weightings for the more than 100 individual variables or the seven categories may be changed.
Momentum
To compute momentum scores, Quadrix ranks the universe of more than 4,500 stocks on 10 variables related to near-term growth in earnings, cash flow, and sales. For example, a company that scores in the top 1% for 12-month sales growth receives a 100 for that variable. For a company that scores better than only 5% of the companies for 12-month sales growth, the score for that variable would be 5.
For each of the momentum variables, each stock is compared to the universe of all stocks. To calculate the momentum score, the sum of a stock’s scores for each variable is compared to the universe of stocks. For example, if a stock receives a momentum score of 75, that means the average of its momentum scores is higher than 75% of the universe.
Many investors rely solely on momentum factors when picking stocks. But we prefer a more balanced approach, partly because companies with high momentum scores often have overvalued stocks. Also, because our momentum variables look back no further than 12 months, momentum scores can unduly reward companies experiencing a temporary acceleration in business.
Still, partly because it can help eliminate companies suffering from deteriorating fundamentals, momentum receives a healthy weighting in the Quadrix system. In fact, you should be wary of stocks with high overall Quadrix scores that do not score well for momentum. Such scores sometimes reflect a temporary slowdown, but they can also point to a former blue chip headed for trouble.
By definition, momentum factors are short term in nature. So, if you buy a low-quality or overvalued stock simply because of its momentum score, the risk posed by an earnings slowdown is substantial. The shorter your time horizon, the more important is momentum.
Quality
The Quadrix quality score is an excellent gauge of a company’s track record. Of the 22 quality variables, 17 are growth rates for sales, earnings, cash flow, common equity, and dividends. The other five variables include expected profit growth, earnings consistency, profit margins, return on equity, and return on assets.
Growth rates for the past one, three, and five years are used. So, companies with outstanding 10- or 20-year track records are given no credit beyond the last five years. Companies lacking five-year track records are evaluated based on the average ranks for the quality variables for which they do have numbers, the methodology Quadrix uses for all missing variables.
Companies with the best growth records score highest for quality. While a good history is no guarantee of future success, companies with stellar growth records tend to be well-managed businesses with attractive market positions. Because Quadrix measures growth in five areas — sales, earnings, shareholders equity, cash flow, and dividends — it penalizes companies growing earnings through cost-cutting or restructuring charges.
One shortcoming of Quadrix is the reward it gives companies that have grown through acquisitions. Many of Wall Street’s best growth companies have benefited from acquisitions, including Automated Data Processing, Citigroup, and General Electric. But, in general, a company growing internally is more valuable than a company growing only through acquisitions. For that reason, we take a closer look at any high Quadrix scorer with a penchant for acquisitions. Also, Quadrix uses per-share growth rates, which tempers the scores of companies that grow through stock swaps.