Markets & Finance

Riding High with the "Winners"


S&P's portfolio of last year's top-performing industry groups is continuing its outperformance in 2007

From Standard & Poor's Equity ResearchSeeing a green arrow in a sea of red is as inviting as an oasis in the Sahara. While updating my S&P 500 sector and subindustry scorecard for the week ended March 16, 2007 (click here to see the performances over the past week, 13 weeks, year-to-date, and prior-year), I also saw that my "Let Your Winners Ride" portfolio was up on a year-to-date basis, while the S&P 500 was down.

If you recall, the "Winners" portfolio was created as of December 31, 2006, and consists of the 10 S&P 500 subindustry indexes that posted the strongest price appreciations in the prior calendar year. Since 1970, the "Winners" portfolio, which changes annually, posted a 13.4% compound annual growth rate (CAGR), vs. a 7.6% CAGR for the S&P 500. What's more, the risk-adjusted return of the "Winners" was higher than the S&P 500's, and it beat the market seven times out of every 10.

Well, so far this year, the "Winners" portfolio is living up to its name. The average price change for the 10 industries is a gain of 2.4%, vs. a 2.2% decline for the S&P 500. Of course, not all 10 subindustry indexes were higher on the year. In fact, five were down, even though one was off less than the overall market. Since there are more than nine months left in the year, history would say there's a good chance (but no guarantee) that one could still ride the "Winners" wave and come out ahead.

Proxy Strategy

Since there are very few exchange-traded funds that match S&P 500 subindustry indexes, one way to emulate the "Winners" portfolio is by selecting a single-stock proxy. The accompanying table (to view it, click on the image on the right) lists the industries that were the best performers in 2006, along with component companies that currently have the highest S&P STARS rankings (ties go to the company with the highest market value) within the group.

Some subindustries, such as Construction Materials, Fertilizers, and Motorcycle Manufacturers, have only one company in them, which answers why a stock with a hold or sell ranking by S&P analysts would be in a "Winners" list. In the case of Steel, all three components are ranked hold.

I'll keep you posted on the progress of this and other portfolios I have introduced to you, such as the January Barometer and Sell in May portfolios.

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry

Company

S&P STARS Rank

Price (3/16/07)

Apparel, Accessories & Luxury Goods

Coach (COH)

5

$49

Auto Parts & Equipment

Johnson Controls (JCI)

3

$95

Broadcasting & Cable TV

Comcast (CMCSA)

4

$25

Commodity Chemicals

Georgia Gulf (GGC)

3

$18

Department Stores

Nordstrom (JWN)

4

$51

Diversified Metals & Mining

Freeport McMoRan (FCX)

4

$61

Footwear

Nike (NKE)

4

$107

Independent Power Producers

AES (AES)

4

$20

Integrated Telecom. Svcs.

Citizens Communications (CZN)

5

$14

Motorcycle Manufacturers

Harley-Davidson (HOG)

2

$61

Personal Products

Avon Products (AVP)

3

$38

Steel

Carpenter Technology (CRS)

4

$115

Tires & Rubber

Goodyear Tire & Rubber (GT)

2

$28

Stovall is chief investment strategist for Standard Poor's Equity Research Services .

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