Markets & Finance

Industrial Stocks with High Quant Scores


S&P analyst Richard Tortoriello finds 13 stocks showing fundamental strength, good value, and price strength

Positive economic signs appear to be sprouting up like blades of grass. Recent good news has included increases in construction spending, durable goods, leading indicators, and even new car sales (we're talking month-to-month increases, of course).

However, as well-respected investor Mario Gabelli recently put it: "The question is whether the government will be able nurture the 'green shoots' or will accidentally spray them with weed killer that also kills grass." Although Standard & Poor's economists predict a 3.1% decline in gross domestic product in 2009, they expect 1.3% growth in 2010.

I believe that current low interest rates and economic stimulus packages, along with the need for companies to restock depleted inventories, will help jump-start the economy and lead to a slow recovery in spending by both consumers and businesses. Early indicators are certainly pointing in this direction.

Usually, when the economy starts showing signs of recovery, financial, consumer discretionary, and technology stocks are the first groups to show strength. That's certainly what we've witnessed recently.

We've also seen strength in industrial sector stocks lately, which may be a barometer reading of increased demand to come. Although industrial companies do benefit from the early stages of an economic recovery, their stocks usually don't start to outperform until there is evidence of real economic growth.

The Dictates of International Demand

However, the cycles may be different this time around due to the increasing influence of international markets on U.S. companies. As developing markets, such as China, India, and Brazil, need materials and capital goods to fuel economic growth, the industrials, energy, and materials sectors increasingly appear to reflect a market cycle dictated by international demand.

The screen that follows focuses solely on the industrials sector. It is based on a proprietary model used by S&P and developed based on the quantitative factors identified in my book, Quantitative Strategies for Achieving Alpha. (For more information about S&P's approach to quantitative analysis, see Picking Stocks the Quant Way.)

The model includes 11 investment factors that work particularly well in predicting excess returns for stocks within the industrials sector. The factors included in the model are used to rank individual companies within the industrials sector on characteristics such as valuation, profitability, cash flow generation, capital allocation, and price momentum.

A company's ranking on the 11 individual factors is calculated, using specific factor weightings, and compared with the ranking of all other companies in the industrials sector. (One-hundred is the highest model score.) We've back-tested the model and it shows good results, in terms of positive excess returns over time, although the investor should always keep in mind that past results never guarantee future performance.

Here are 13 stocks that were chosen from the those in the top decile of our model, primarily through technical analysis.

Industrial Stock Screen

Name

Ticker

Model Score

Market Cap ($mil)

Price 6/1/09

Chart Industries

GTLS

89.49

393

22.36

RR Donnelley & Sons

RRD

87.46

2,391

14.43

School Specialty

SCHS

86.78

353

19.75

Thomas & Betts

TNB

86.44

1,656

31.93

Excel Maritime Carriers

EXM

86.10

328

11.04

Robbins & Myers

RBN

85.76

622

20.84

Masco

MAS

84.07

3,184

11.05

Brady

BRC

83.73

1,006

25.69

Powell Industries

POWL

83.39

411

40.70

Oshkosh

OSK

83.05

715

12.54

LB Foster

FSTR

82.71

332

30.32

Timken

TKR

82.37

1,557

18.35

Gardner Denver

GDI

82.03

1,382

30.07

In case you’re curious, here’s how the stocks chosen in our screen published Apr. 3, 2009 have performed:

PERFORMANCE OF STOCKS IN APR. 3 SCREEN

Company

Ticker

Price 4/3/2009

Price 6/3/2009

% Change

Autodesk

ADSK

17.99

22.08

22.7%

Robert Half Intl.

RHI

19.95

22.14

11.0%

T. Rowe Price

TROW

32.24

42.65

32.3%

Adobe Systems

ADBE

24.16

29.06

20.3%

EZCORP

EZPW

12.45

12.99

4.3%

QLogic

QLGC

11.87

13.79

16.2%

Sapient

SAPE

5.01

5.28

5.4%

Comfort Systems USA

FIX

11.47

10.08

-12.1%

Accenture

ACN

28.04

30.37

8.3%

NeuStar

NSR

17.73

20.44

15.3%

Net 1 UEPS Technologies

UEPS

16.43

14.21

-13.5%

Teradata

TDC

16.38

22.68

38.5%

Average

12.4%

S&P 500 Index

842.5

931.76

10.6%

Excess Return

1.8%

Excess Return - Annualized

10.7%

Disclosure: Richard Tortoriello owns shares of Masco (MAS) and Thomas & Betts (TNB).


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