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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 in 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.
Richard Moroney, CFA, is the editor of Dow Theory Forecasts and the Upside newsletter; the vice president of research for Horizon Publishing Company; and vice president of Horizon Investment Services.
About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.