Only The Best Industries Will Do

3/6/2017


If you use a big enough magnet, you can probably find the lone needle in a haystack.

Our Quadrix system is a magnet with the power to sort through even the hugest haystack. But why bother, when you can look for needles somewhere easier, like a pincushion? Today we're focusing on industry groups with high average Quadrix Overall scores, which suggests they contain companies with strong fundamentals.

We break up our research universe of roughly 5,000 U.S.-traded stocks into nearly 160 industries. Of those 160, and excluding the 11 with four or fewer stocks, only 14 average Overall scores of 70 or higher. Not surprisingly, while those 14 groups contain just 14% of the stocks in our universe, they are home to 29% of our recommended stocks.

The table below presents numbers on each group, as well as for our stocks inhabiting those groups.

In the following paragraphs, we profile a stock from three top-scoring groups.

The skies have been friendly for investors in Alaska Air Group ($100; ALK). The shares have rallied 13% so far this year, building on last year's 12% return. The company topped the profit consensus by 11% in the December quarter, capping off a string of 14 straight profit surprises. Analysts expect per-share profits to rise 10% this year and 8% next year, and estimates are on the rise.

In the wake of Alaska's price gains, the shares trade at 12 times the 2017 profit target, cheap relative to the broad market but 11% above the industry median. However, the valuation doesn't scare us. The stock's PEG (price/earnings-to-growth) ratio of 1.0 is in line with the industry because analysts expect Alaska to manage superior long-term profit growth.

Last year, Alaska boosted its capacity 10% but grew traffic 11%, leading to a rise in the load factor, a key efficiency metric for airlines. These numbers include results for recently purchased Virgin America as if it had been part of the company all year. Alaska, which raised its quarterly dividend 9% this year and now yields 1.2%, targets a payout ratio of 10% to 20% of earnings. Alaska is a Buy and a Long-Term Buy.


Our growth-at-a-good-price approach tends to lead us to stocks delivering above-average growth but trading at below-average valuations. Such stocks aren't always easy to find, but Lear ($144; LEA) still qualifies after its 37% gain over the last year.

The consensus projects 12% growth in per-share profit for Lear this year, while the average auto-parts stock in the S&P 1500 Index is expected to deliver 9% growth. Per-share-earnings targets for this year are on the rise; and given Lear's consistent profit-margin expansion and stock buybacks, the 2017 number still seems conservative. Blue Chip Economic Indicators' consensus targets for economic growth in North America, Europe, and Asia have increased over the last two months, suggesting an improvement in the world's overall financial condition, which in turn may set the stage for increasing demand for automobiles.

At 10 times trailing earnings, Lear trades 22% below the industry median. The stock also commands a discount of at least 30% relative to peers for price/sales, price/operating cash flow, and enterprise value. Lear, a Focus List Buy and a Long-Term Buy, yields 1.4%.


Zions Bancorp ($47; ZION) has returned 17% over the last three months. Credit those gains to several factors:

• The election of Donald Trump, who has talked about reducing the regulatory burden on banks.

• Expectations for additional interest-rate increases.

• December-quarter earnings that topped the consensus by 15%. The company provided encouraging guidance regarding both operating results and the credit quality of loans made to energy companies. Since announcing results, analyst profit targets have risen 3% for 2017 and 4% for 2018.

Not surprisingly, Zions isn't cheap. It trades at 19 times expected 2017 earnings, roughly in line with the industry average. However, Zions' robust growth suggests the stock deserves to trade at a premium to its peers. The stock yields 0.7%, fairly low relative to its peers. But, the company has raised the payout at least 33% in each of the last two years, and more growth is likely in coming quarters.

Last year, Zion managed 5% growth in loans, 6% in deposits, 7% in total revenue, and 9% in net interest income. Profitability also improved, but the biggest driver of last year's 60% growth in per-share profits was improved returns in the bank's securities portfolio. The consensus calls for earnings growth of 24% in 2017 and 19% in 2018, well above the industry average target of 12% for both years. Zions is a Focus List Buy and a Long-Term Buy.

TOP STOCKS IN TOP INDUSTRIES
The 14 industry groups that average Quadrix Overall scores of 70 or higher account for just 14% of our research universe but 29% of the stocks on our recommended lists. All numbers for industry groups are averages. The 12-Factor and Reranked Overall scores compare stocks only to others in the same sector. For the industry averages, we expanded the sector-specific scores to include the entire research universe.
Exp. Profit
-- Growth --
----------------------------------------- Quadrix Scores -----------------------------------------
Industry
Company (Price; Ticker)
Div.
Yield
(%)
Trailing
P/E Ratio
This
Year
(%)
Next
Year
(%)
Momen-
tum
Value
Quality
Fin'l
Str.
Earns.
Ests.
Perfor-
mance
Overall
12-
Factor
Sector
Reranked
Overall
Airlines
0.8
11
(6)
13
52
85
76
57
49
62
83
44
84
Alaska Air Group
($100; ALK)
1.2
14
10
8
56
83
95
80
77
84
96
96
97
Southwest Airlines
($59; LUV)
0.7
16
4
20
66
83
99
71
78
88
98
97
99
Automobile Parts
0.9
14
6
16
56
76
69
48
47
53
74
60
67
Lear ($144; LEA)
1.4
10
12
6
82
97
95
50
86
72
100
97
100
Automobiles
2.0
13
14
10
55
79
68
49
62
55
77
36
71
Banks
3.3
16
15
13
52
79
47
64
68
64
72
37
60
J.P. Morgan Chase
($94; JPM)
2.1
15
9
12
70
72
60
90
82
84
89
71
74
Banks — Regional
1.6
21
10
14
63
61
61
89
67
68
73
40
52
Citizens Financial
($40; CFG)
1.4
20
18
17
94
74
68
98
74
92
96
65
91
Zions Bancorp ($47; ZION)
0.7
23
22
19
93
62
67
95
64
89
91
98
73
Broadcasting/Cable
Television
1.4
18
5
13
57
73
60
52
51
58
70
48
59
CBS ($67; CBS)
1.1
16
6
17
22
73
88
49
15
72
66
28
46
Health Care —
Managed Care
0.4
21
5
17
59
67
67
44
51
50
72
82
76
Centene ($72; CNC)
0.0
17
6
13
89
94
91
28
27
60
96
95
99
Home Furnishings
1.4
17
3
20
52
80
76
53
41
31
73
51
59
Mohawk ($232; MHK)
0.0
18
5
8
81
74
95
70
83
57
96
25
94
Homebuilding 
0.3
15
9
19
63
78
78
37
41
50
78
60
68
D.R. Horton ($33; DHI)
1.2
13
15
10
71
89
97
52
64
51
96
92
89
Housewares & Specialties
2.0
14
(10)
20
50
78
58
43
61
39
70
41
57
Insurance —
Life & Health
1.9
17
11
6
64
70
55
53
54
60
70
56
58
Insurance —
Reinsurance
2.7
19
11
6
49
72
61
63
59
52
77
55
63
Retail — Automotive
0.4
20
7
14
59
71
78
42
50
36
72
48
63
Retail — Homefurnishing
1.2
17
(10)
16
52
89
75
66
35
31
78
72
56
Notes: Quadrix scores are percentile ranks, with 100 the best.  Some outliers are excluded from industry averages.

 


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