Three Angles On Sector Analysis

10/2/2017


In the search for attractive sectors, we look for the same qualities we seek in high-potential stocks — healthy growth, reasonable valuations, and solid performance.

To be sure, we understand that investors may want to target sectors that check a particular box. With that in mind, we dissected the S&P 1500 Index, highlighting attractive sectors based on three key attributes:

Performance

As shown below, the average stock in the S&P 1500 has returned 8.3% in 2017. Nearly 940 of the 1,500 stocks have posted gains, with 44% of all stocks advancing at least 10%. So far this year, health care (up 20.5%) has notched the biggest average gain, followed by technology (16.8%). Both groups were also among the top performers over the last six months. 

SECTOR PERFORMANCE SNAPSHOT
--- Average Total Return ---
Year-To-Date
% Of Stocks
Outperforming
Quadrix Performance
------ Score ------
S&P 1500 Sector
(Number Of Companies)
1
Month
(%)
6
Months
(%)
Year-
To-Date
(%)
S&P
1500
(%)
Sector
(%)
Average
Number
Above 50
Cons. discretionary (250)
4.9
4.0
4.1
42
47
44
105
Consumer staples (70)
2.6
(1.0)
2.0
31
44
36
17
Energy (83)
18.4
(4.5)
(18.6)
10
47
42
27
Financials (210)
3.9
7.3
5.4
34
53
50
105
Health care (173)
3.4
12.9
20.5
69
45
52
97
Industrials (228)
9.5
9.9
10.3
54
52
55
140
Materials (90)
7.0
8.7
10.6
51
46
54
49
Real estate (105)
1.1
4.1
4.2
39
51
41
31
Technology (222)
3.6
9.3
16.8
58
47
53
126
Telecom services (15)
(1.9)
2.2
(2.2)
27
40
40
4
Utilities (54)
(1.6)
6.3
14.0
74
50
47
19
Average S&P 1500 stock
5.3
6.8
8.3
47
48
49
48
Note: Quadrix scores are percentile ranks, with 100 the best.

Against that backdrop, we identified four sectors that have delivered solid gains over the last one month, six months, and year-to-date. In addition, all four rank among the top five of the 11 broad sectors for average Quadrix Performance score.

• Health care
• Industrials
• Materials
• Technology

Growth

September-quarter results are on the horizon. Companies in the S&P 1500 are projected to deliver year-to-year median growth in earnings per share of 4.3%, with an outsized gain of 43% in the energy sector. Excluding energy stocks, earnings were expected to advance 4.1%, paced by solid growth in materials (5.7%) and financials (5.9%).

To isolate sectors with near-term earnings momentum, we considered estimated profit growth for the September and December quarters. We also looked at projected full-year growth, focusing on sectors with positive revision trends. Three groups made the cut:

• Financials
• Industrials
• Technology

Valuation

S&P 1500 stocks look expensive relative to historical norms, sporting a median price/sales ratio of 2.0, compared to the 20-year norm of 1.4. The median trailing P/E is 21.0, versus the norm of 18.3. With median P/E ratios above 27, energy, health-care, and real estate stocks look particularly pricey.

To gauge which sectors were reasonably valued, we evaluated P/E and price/sales ratios on an absolute basis, relative to historical norms, and versus the S&P 1500. We also looked for sectors that ranked well for Quadrix Value scores. Four notable sectors include:

• Consumer discretionary
• Financials
• Industrials
• Materials

Below we present four stocks from appealing sectors.

Comerica ($75; CMA) stands out from other financial stocks because of its growth potential. The consensus projects per-share-profit growth of 41% in the September quarter, 29% in the December quarter, and 72% for the full year, supported by at least 10% sales growth in all three periods. Profit growth is expected to slow to a still-solid 14% in 2018. The company has exceeded analyst profit targets in each of the last four quarters, averaging a surprise of more than 8%.

Aggressive cost cuts and higher net interest margins have widened overall profit margins. In the 12 months ended June, Comerica's operating profit margin reached 57.0%, up from 44.6% in the same period a year earlier. Comerica, which yields 1.6% after boosting its dividend 15% in July, is a Long-Term Buy.


The technology sector is among the most appealing as measured by both performance and growth. Lam Research ($179; LRCX) could serve as a poster child for the sector, as it excels in both areas. Lam shares have returned 12% over the last month and 71% so far this year, reflecting excellent recent growth — sales up 36%, per-share profits 79%, and operating cash flow 50% in fiscal 2017 ended June.

Lam, a maker of semiconductor equipment, is profiting from a pickup in demand for memory semiconductors in recent quarters, driven by the rise of cloud computing, artificial intelligence, and the need for increasingly sophisticated electronics in consumer and industrial devices. The long-term nature of these demand drivers gives us confidence Lam can achieve analysts' aggressive profit-growth targets — 29% this year and 19% next year. Lam is a Focus List Buy and a Long-Term Buy.  


Consumer-discretionary stocks as a group seem cheap, with S&P 1500 companies in the sector averaging Quadrix Value scores of 72, higher than any of the other 10 sectors. Despite solid performance (total return of 32% so far this year) auto-parts maker Lear ($173; LEA) trades at just 11 times trailing earnings, below the sector median by 37%. The stock earns a Value score of 95.

Higher volumes, cost cuts, and aggressive share buybacks (stock count down 6% over the last year) have helped keep per-share profits growing at double-digit rates. New-business wins and acquisitions are boosting Lear's market share, and we expect the company to keep growing revenue faster than its industry. Lear has topped the profit consensus in each of the last 23 quarters; the Focus List Buy and Long-Term Buy seems capable of extending that streak.


Analyst targets for Owens Corning ($77; OC) call for per-share profits to increase 15% in the September quarter, 38% in the December quarter, 19% for full-year 2017, and 14% for 2018. Estimates have risen over the last 60 days, with the 2017 target up 5% and the 2018 target 8%.

The combination of a solid market for new homes and consumers with the disposable income to spend on remodeling projects has supported recent growth for Owens Corning, which makes shingles, insulation, and composite materials. Despite an upward trend in raw-materials costs, the company's operating margins had trended upward for two years before dipping in the June quarter. Owens Corning, a Focus List Buy and Long-Term Buy, trades at 20 times trailing earnings, 11% below the sector median.

20 SECTOR STANDOUTS
---- Total Return ----
-- Valuation --
---- Estimated Earnings Growth ----
Quadrix Scores
Company (Price; Ticker)
1
Mo.
(%)
5
Mos.
(%)
YTD
(%)
P/E
Ratio
Price/
Sales
Curr.
Qtr.
(%)
Next.
Qtr.
(%)

Curr.
Year
(%)

Curr.-Yr.,
90-Day
Revision
(%)
Value
Overall
Sector
Amgen ($185; AMGN)
8
14
29
15
5.9
2.6
6.7
7.8
1.0
72
90
Health care
Applied Materials
($49; AMAT)
12
26
52
16
3.7
36.9
34.6
83.7
4.3
76
99
Technology
CDW ($65; CDW)
6
15
26
18
0.7
9.6
13.8
10.8
(0.3)
66
80
Technology
Celgene ($143; CELG)
9
15
24
21
9.2
18.9
21.4
23.3
0.4
50
91
Health care
Chemours ($50; CC)
6
39
129
22
1.7
67.6
158.6
172.4
7.6
70
97
Materials
Citizens Financial
($37; CFG)
11
7
6
16
2.9
22.5
19.4
30.3
3.5
87
99
Financials
Cognizant Technology
($72; CTSH)
3
22
29
21
3.0
11.0
12.6
9.2
1.4
59
97
Technology
Comcast ($39; CMCSa)
(4)
5
13
20
2.1
7.1
10.8
17.1
2.5
75
86
Cons. discretion.
Comerica ($75; CMA)
9
11
12
18
4.0
30.7
23.1
55.3
4.1
76
98
Financials
D.R. Horton ($38; DHI)
8
15
41
14
1.0
9.7
3.2
16.3
(0.1)
80
88
Cons.
discretion.
EQT Midstream Partners
($74; EQM)
0
1
1
15
7.7
9.8
8.7
9.6
1.1
89
96
Utilities
J.P. Morgan Chase
($95; JPM)
4
9
12
15
3.0
4.9
7.6
10.2
0.9
76
88
Financials
LabCorp of America
($149; LH)
(2)
5
16
16
1.6
8.4
12.0
8.0
1.1
74
88
Health care
Lam Research
($179; LRCX)
12
41
71
18
3.6
80.4
47.1
28.9
18.9
69
99
Technology
Lear ($173; LEA)
20
24
32
11
0.6
15.9
9.6
17.9
2.6
95
100
Cons.
discretion.
Mohawk Industries
($245; MHK)
(1)
7
23
19
2.1
7.3
1.5
7.1
1.1
60
79
Cons.
discretion.
ON Semiconductor
($18; ON)
12
19
42
18
1.5
67.7
23.6
52.5
7.5
84
99
Technology
Owens Corning ($77; OC)
10
27
51
20
1.4
14.4
37.8
18.9
3.2
74
96
Industrials
Royal Caribbean Cruises
($116; RCL)
(4)
16
43
16
2.9
7.5
3.6
22.1
2.8
81
96
Cons.
discretion.
Zions Bancorp ($47; ZION)
5
13
9
19
3.4
35.2
18.1
39.9
9.7
77
94
Financials
Note: Quadrix Scores are percentile ranks, with 100 the best.

 

SECTOR GROWTH RATES AND VALUATIONS
Median
Estimated
EPS Growth
Median Current
-----Year -----
-------- Trailing P/E Ratio --------
-------- Price/Sales Ratio --------
Median Quadrix
---- Scores ----
S&P 1500 Sector
(Number Of Companies)
Curr.
Qtr.
(%)
Next
Qtr.
(%)
Est. EPS
Growth
(%)
90-Day
Revision
(%)
Recent
Median

20-Yr.
Norm

Vs.
S&P
1500
Recent
Vs.
S&P
1500
Norm
Recent
Median
20-Yr.
Norm
Vs.
S&P
1500
Recent
Vs.
S&P
1500
Norm
Value
Overall
Consumer
discretionary (250)
3.1
7.7
5.1
(0.1)
17.5
17.4
0.83
0.94
1.1
0.9
0.55
0.64
72
67
Consumer
staples (70)
0.0
8.8
6.5
(0.2)
22.9
19.4
1.09
1.06
1.6
1.1
0.80
0.77
57
54
Energy (83)
43.3
13.5
26.7
(9.5)
29.3
17.3
1.39
0.94
1.6
1.9
0.80
1.38
50
36
Financials (210)
5.9
7.3
9.7
0.3
17.2
15.2
0.82
0.84
3.2
2.1
1.60
1.51
67
70
Health care (173)
4.4
9.2
7.7
0.6
27.8
22.3
1.32
1.22
3.0
2.3
1.50
1.63
48
56
Industrials (228)
5.5
11.7
9.3
0.2
23.2
18.5
1.11
1.00
1.5
1.0
0.75
0.72
54
58
Materials (90)

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