Industrial Stocks with High Quant Scores

Positive economic signs appear to be sprouting up like blades of grass. Recent good news has included increases in construction spending, durable goods, leading indicators, and even new car sales (we're talking month-to-month increases, of course).

However, as well-respected investor Mario Gabelli recently put it: "The question is whether the government will be able nurture the 'green shoots' or will accidentally spray them with weed killer that also kills grass." Although Standard & Poor's economists predict a 3.1% decline in gross domestic product in 2009, they expect 1.3% growth in 2010.

I believe that current low interest rates and economic stimulus packages, along with the need for companies to restock depleted inventories, will help jump-start the economy and lead to a slow recovery in spending by both consumers and businesses. Early indicators are certainly pointing in this direction.

Usually, when the economy starts showing signs of recovery, financial, consumer discretionary, and technology stocks are the first groups to show strength. That's certainly what we've witnessed recently.

We've also seen strength in industrial sector stocks lately, which may be a barometer reading of increased demand to come. Although industrial companies do benefit from the early stages of an economic recovery, their stocks usually don't start to outperform until there is evidence of real economic growth.

The Dictates of International Demand

However, the cycles may be different this time around due to the increasing influence of international markets on U.S. companies. As developing markets, such as China, India, and Brazil, need materials and capital goods to fuel economic growth, the industrials, energy, and materials sectors increasingly appear to reflect a market cycle dictated by international demand.

The screen that follows focuses solely on the industrials sector. It is based on a proprietary model used by S&P and developed based on the quantitative factors identified in my book, Quantitative Strategies for Achieving Alpha. (For more information about S&P's approach to quantitative analysis, see Picking Stocks the Quant Way.)

The model includes 11 investment factors that work particularly well in predicting excess returns for stocks within the industrials sector. The factors included in the model are used to rank individual companies within the industrials sector on characteristics such as valuation, profitability, cash flow generation, capital allocation, and price momentum.

A company's ranking on the 11 individual factors is calculated, using specific factor weightings, and compared with the ranking of all other companies in the industrials sector. (One-hundred is the highest model score.) We've back-tested the model and it shows good results, in terms of positive excess returns over time, although the investor should always keep in mind that past results never guarantee future performance.

Here are 13 stocks that were chosen from the those in the top decile of our model, primarily through technical analysis.

Industrial Stock Screen
Name Ticker Model Score Market Cap ($mil) Price 6/1/09
Chart Industries GTLS 89.49 393 22.36
RR Donnelley & Sons RRD 87.46 2,391 14.43
School Specialty SCHS 86.78 353 19.75
Thomas & Betts TNB 86.44 1,656 31.93
Excel Maritime Carriers EXM 86.10 328 11.04
Robbins & Myers RBN 85.76 622 20.84
Masco MAS 84.07 3,184 11.05
Brady BRC 83.73 1,006 25.69
Powell Industries POWL 83.39 411 40.70
Oshkosh OSK 83.05 715 12.54
LB Foster FSTR 82.71 332 30.32
Timken TKR 82.37 1,557 18.35
Gardner Denver GDI 82.03 1,382 30.07

In case you’re curious, here’s how the stocks chosen in our screen published Apr. 3, 2009 have performed:

Company Ticker Price 4/3/2009 Price 6/3/2009 % Change
Autodesk ADSK 17.99 22.08 22.7%
Robert Half Intl. RHI 19.95 22.14 11.0%
T. Rowe Price TROW 32.24 42.65 32.3%
Adobe Systems ADBE 24.16 29.06 20.3%
EZCORP EZPW 12.45 12.99 4.3%
QLogic QLGC 11.87 13.79 16.2%
Sapient SAPE 5.01 5.28 5.4%
Comfort Systems USA FIX 11.47 10.08 -12.1%
Accenture ACN 28.04 30.37 8.3%
NeuStar NSR 17.73 20.44 15.3%
Net 1 UEPS Technologies UEPS 16.43 14.21 -13.5%
Teradata TDC 16.38 22.68 38.5%
Average       12.4%
S&P 500 Index   842.5 931.76 10.6%
Excess Return       1.8%
Excess Return - Annualized       10.7%

Disclosure: Richard Tortoriello owns shares of Masco (MAS) and Thomas & Betts (TNB).

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