We Buy Stocks, Not Sectors

6/6/2016


Don't ask us to pick our favorite sector or industry, because we don't have one.

Many subscribers ask us whether they should buy or sell a sector, such as health care or energy. We tend to respond by saying that even the strongest sectors have their pigs, while the weakest sectors may boast a few eagles. The goal isn't to get into the best sectors, but the best stocks.

All that said, some sectors and industries offer a richer selection of quality stocks than others. While we won't set a 25% allocation target for technology, then back-fill with stocks to meet the target, we're quite comfortable overweighting a sector relative to the market if we find a lot of appealing choices in that space.

Our recommended lists currently hold larger stakes in consumer-discretionary and industrials stocks than the broad S&P 1500 Index. While our Focus List underweights technology, the Buy and Long-Term Buy lists are overweight. On the other hand, we don't recommend any materials, telecom, or utility stocks.

Stocks in the energy, materials, telecom, and utilities sectors average the lowest Overall scores and contain very few high-scoring stocks. Not surprisingly, we don't find much to like in those groups.

In the table below, we list our recommended stocks from the three top-scoring sectors and the 16 top-scoring industry groups. Three of those stocks are reviewed below:

Alaska Air Group ($66; ALK) earns an Overall score of 93, powered by scores of 93 for Value and 98 for Quality. Airlines as an industry average Overall scores of 79, reflecting the group's impressive growth, improving profitability ratios, and attractive valuations. Check out our Group Studies Report (www.DowTheory.com/Go/Group) for data on airlines and more than 100 other industries.

In May, Alaska earned the highest customer-satisfaction rank in the J.D. Power 2016 North America Airline Satisfaction Study, its ninth consecutive year in first place. The company also earned the top award for its mileage and customer-loyalty program.

Such operational advantages increase our confidence in Alaska's ability to exceed expectations. The consensus projects sales growth of 4% and per-share-profit growth of 14% this year. The 2017 consensus calls for 6% higher sales but just 3% higher profits, most likely because of concerns that margins will be hurt by a rebound in aviation-fuel prices. In our view, the pessimism is overdone, considering strong demand for air travel and Alaska's efforts to improve operating efficiency. The stock is a Buy and a Long-Term Buy.


Auto-parts distributor LKQ ($33; LKQ) scores 80 or higher in four of the six Quadrix category scores — Momentum, Quality, Earnings Estimates, and Performance — contributing to an Overall score of 92. LKQ also earns ranks of at least 95 in both of our sector-specific scores.

Analysts expect robust growth at LKQ, projecting sales growth of 27% this year and 12% next year, with per-share profits up 28% and 16%, respectively. The profit targets for both 2016 and 2017 have risen at least 10% over the last 60 days.

We believe in LKQ's double-digit growth potential in part because global trends point to good times ahead. Drivers are holding onto their cars longer these days, and researcher IHS Automotive expects the number of cars more than 12 years old to keep rising. Old cars mean new business for LKQ, which distributes mostly aftermarket, recycled, or remanufactured parts. LKQ is a Focus List Buy and a Long-Term Buy.


Owens Corning ($52; OC), a maker of insulation, shingles, and composite reinforcement materials, earns an Overall score of 96. Four of its six category scores are above 80, and all of them exceed 45. The average building-products stock in the S&P 1500 Index earns an Overall score of 74, and 46% earn scores above 80.

In the March quarter, U.S. construction spending rose 8.6% from the year-earlier period. Growth has averaged 9.9% for the last 10 quarters, which explains why so many companies in the building-products group have managed solid profit gains.

Owens Corning delivered March-quarter earnings of $0.53, up 179% and 56% above expectations. Lowered full-year guidance for insulation sales helped drive the shares down despite the strong quarter and optimistic statements about roofing and composites. Five weeks after the earnings announcement, Owens Corning had rallied back to its price before the news broke. The stock, yielding 1.4%, is a Focus List Buy and a Long-Term Buy.

STOCKS FROM STRONG SECTORS AND INDUSTRIES
All 15 of the recommended stocks below hail from one of the three sectors with the top Quadrix Overall scores (consumer discretionary, financials, or industrials) or one of the 16 highest-scoring industries.
12-Month
----- Growth -----
Est. Profit
----- Growth -----
Company (Price; Ticker)
Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Sales
(%)
Per-
Share
Profits
(%)
Curr.
Year
(%)
Next
Year
(%)
Quadrix
Overall
Score
Industry
Sector
Alaska Air Group
($66; ALK)
1.7
8.3
5
45
14
4
93
Airlines
Industrials
Amerco ($377; UHAL)
0.0
7.4
7
25
6
21
85
Trucking
Industrials
C.H. Robinson
($74; CHRW)
2.3
10.7
(3)
15
8
7
71
Air freight
Industrials
CBRE Group ($30; CBG)
0.0
10.1
26
16
13
7
83
Real estate svcs.
Financials
Centene ($63; CNC)
0.0
7.9
35
34
38
18
96
Mgd. health care
Health care
Comcast ($64; CMCSa)
1.7
156.9
9
(1)
9
10
75
Cable & satellite
Cons. discretionary
Disney ($99; DIS)
1.4
161.9
8
24
13
6
80
Movies & entertain.
Cons. discretionary
Foot Locker ($55; FL)
2.0
7.6
4
17
10
10
84
Apparel retail
Cons. discretionary
Goodyear Tire ($27; GT)
1.0
7.4
(9)
36
17
4
77
Tires & rubber
Cons. discretionary
J.P. Morgan Chase
($66; JPM)
2.9
242.8
(4)
0
(5)
13
74
Diversified banks
Financials
Lear ($117; LEA)
1.0
8.9
3
22
17
10
99
Auto parts
Cons. discretionary
LKQ ($33; LKQ)
0.0
10.1
7
12
27
15
92
Distributors
Cons. discretionary
Owens Corning
($52; OC)
1.4
6.0
4
58
19
15
96
Building products
Industrials
Robert Half Int'l
($42; RHI)
2.1
5.4
8
16
10
10
85
Human resource
Industrials
Southwest Airlines
($43; LUV)
0.9
27.6
5
55
20
9
93
Airlines
Industrials
Note: Quadrix scores are percentile ranks, with 100 the best.

 


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