Sector Scores Find Top Industries

2/24/2014


Subscribers often ask us whether they should buy an industry, such as biotechnology or semiconductors. Our answer is always the same — we don't issue buy ratings on industries or sectors because even in the strongest groups you'll usually find a few stinkers. Still, our Quadrix system can identify industries that look better than others. For example:

Of all the industries within the health-care sector, stocks in the managed-care group average the highest Quadrix Overall scores (70). They also look strong as measured by our sector-specific scores. Because sector scores compare stocks only to others within their sector, they are useful for differentiating between the top and the bottom of a sector regardless of how that sector compares to the broader market.

Stocks in the health-care sector average Overall scores of 43, which might tempt investors to simply leave the sector alone. And while we'd sympathize with that thought, our sector scores have identified a few pockets of strength, including the health-care services industry. Stocks in this group average Overall scores of 48 but at least 65 in both sector scores, implying superior appeal relative to the rest of the sector. We recommend Express Scripts ($77; ESRX) in the health-care services group. It earns Overall and sector-specific scores well above the industry average and is one of only two Forecasts recommendations in the health-care sector.

The 12-Factor Sector score relies on a dozen statistics that work particularly well within the sector. The Reranked Overall score starts with the same six category scores used to derive the traditional Overall score and reweights them to favor those most effective in a given sector.

We calculate these scores in two flavors. Both sets rank stocks versus all the others in their sector, one comparing them within our universe of more than 4,600 companies (www.DowTheory.com/Go/BigSector), while another only considers stocks in the S&P 1500 Index, plus those recommended by Dow Theory Forecasts and its sister newsletter, Upside (www.DowTheory.com/Go/Sectors). Today's story focuses on scores for the broader universe.

Our 12-Factor Sector scores have predictive power in all 10 sectors, while the Reranked Overall score works in nine of the 10. The scores work even better for the larger stocks in the S&P 1500 Index.

Check out the table below for a list of 18 industries with strong sector scores, as well as A-rated stocks in several of those sectors. Three intriguing options are reviewed below.

Aflac's ($63; AFL) sales slid 6% in 2013, marking the first annual decline since 2001. The insurer's growth stalled on currency weakness in Japan (76% of total sales) and the anemic hiring environment for small businesses in the U.S. (24%). Foreign-exchange headwinds disguised solid operating results in Japan, where sales rose 8% last year at constant currency. Per-share profits also fell 6% in 2013, though they would have risen 5% at constant currency.

The Overall score is just 69, reflecting Momentum and Earnings Estimates ranks that have slipped below 15. However, currency trends began to reverse in Aflac's favor in November 2013. The company's long-term growth prospects remain intact. Aflac, with a yield of 2.3% and a Quadrix Value score of 92, is a Buy and a Long-Term Buy.


Despite being the largest consumer-finance stock in our research universe, American Express ($89; AXP), looks capable of outgrowing its industry in fiscal 2014 — its per-share profits are projected to jump 11%, nearly three times the peer-group average of 4%.

Admittedly, U.S. consumer spending remains soft, with retail sales slipping 0.4% in January. But Amex could gain market share from smaller merchants — an area where it lags Visa ($226; V) and MasterCard ($77; MA) — with a new program called OptBlue. Amex earns an Overall score of 86 and scores higher than the average consumer financial stock in our research universe in five of six Quadrix categories. Amex, yielding 1.0%, is a Long-Term Buy.


Magna International ($87; MGA) shares have generated a 6% total return this year, while auto parts and equipment stocks in the S&P 1500 Index have averaged a loss of 5%. However, four of the six S&P 1500 Index peers that have already posted December-quarter results went on to outperform the broader index since their reports.

That trend bodes well for Magna, set to report March 3. The consensus expects Magna to report an 8% decline in earnings per share for the December quarter. However, consensus estimates for 2014 see Magna's earnings jumping 20%, ahead of the 15% average for its peers. Better yet, the stock still looks cheap at 13 times trailing earnings, a 34% discount to its peer-group average. Magna, yielding 1.5%, is a Focus List Buy and a Long-Term Buy.

INDUSTRIES WITH STRONG SECTOR SCORES
We track more than 150 industry groups. Only 18 contain at least five stocks and average ranks of at least 60 in both 12-Factor Sector and Reranked Overall scores for their sectors. We cover A-rated stocks in nine of these industries. Stocks on our buy lists are presented in bold. The scores presented below compare sectors within our entire universe of more than 4,600 stocks. See a list of more than 1,000 high scorers at www.DowTheory.com/Go/BigSector.
Traditional
-- Quadrix Scores --
Quadrix Sector-
--- Specific Scores ---
Industry (No. Of Stocks)
Company (Price; Ticker)
Value
Overall
12-
Factor
Sector
Reranked
Overall
Sector
Automobile Parts (39)
61
69
62
68
Cons. Discretionary
  Lear ($77 LEA)
92
92
91
85
  Magna Int'l ($87; MGA)
78
97
95
97
Chemicals — Divers. (10)
65
62
74
62
Materials
  BASF ($114; BASFY)
70
89
65
86
  Dow Chemical ($47; DOW)
75
95
90
91
Chemicals — Agricult. (15)
71
65
64
78
Materials
  CF Industries ($226; CF)
91
90
98
95
Consumer Finance (24)
75
66
64
65
Financials
  American Exp. ($89; AXP)
50
86
89
61
  Capital One ($72; COF)
83
71
88
71
Contain. — Metal/Glass (11)
71
64
81
68
Materials
Food Distributors (6)
58
66
64
61
Consumer Staples
Forest Products (5)
60
74
70
70
Materials
Health Care — Distrib. (8)
50
56
85
78
Health Care
Health Care — Facilities (27)
56
47
67
72
Health Care
Hlth. Care — Mgd. Care (12)
85
70
86
88
Health Care
  Aetna ($69; AET)
89
98
71
100
  Cigna ($78; CI)
91
63
62
91
  WellPoint ($88; WLP)
97
73
86
96
Health Care — Services (46)
47
48
65
70
Health Care
  Express Scripts ($77; ESRX)
74
79
94
94
Ins. — Life & Health (25)
80
77
69
72
Financials
  Aflac ($63; AFL)
92
69
90
80
Insurance — Multi-line (14)
86
80
83
79
Financials
Ins. — Ppty. & Casualty (58)
78
77
79
73
Financials
  Travelers ($84; TRV)
98
99
100
99
Ins. — Reinsurance (14)
84
79
73
76
Financials
Oil & Gas — Drilling (20)
77
59
69
67
Energy
  Helm. & Payne ($93; HP)
73
98
81
90
Packaging — Paper (10)
66
69
84
73
Materials
Paper (16)
68
57
74
66
Materials

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