Industrial Stocks with High Quant ScoresRichard Tortoriello
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.
|Name||Ticker||Model Score||Market Cap ($mil)||Price 6/1/09|
|RR Donnelley & Sons||RRD||87.46||2,391||14.43|
|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|
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|
|Robert Half Intl.||RHI||19.95||22.14||11.0%|
|T. Rowe Price||TROW||32.24||42.65||32.3%|
|Comfort Systems USA||FIX||11.47||10.08||-12.1%|
|Net 1 UEPS Technologies||UEPS||16.43||14.21||-13.5%|
|S&P 500 Index||842.5||931.76||10.6%|
|Excess Return - Annualized||10.7%|
Disclosure: Richard Tortoriello owns shares of Masco (MAS) and Thomas & Betts (TNB).