These comments will follow up on the previous blog post, which mentioned identifying stocks in selected industry groups.
To reiterate, my work combining technical and fundamental analysis shows that certain industry groups are currently the most attractive areas of the market, and we believe that portfolios should be overweighted in these areas.
The following list shows these attractive industry groups, along with specific stock picks, organized by sector.
Basic Materials Sector:
Building Materials
Installed Building Products (IBP)
Industrials Sector:
Aerospace and Defense
Huntington Ingalls (HII)
Lockheed Martin (LMT)
Business Services
Fiserv (FISV)
Global Payments (GPN)
Consumer Cyclicals Sector:
Residential Construction
D.R. Horton (DHI)
Lennar (LEN)
Pulte Home (PHM)
KB Home (KBH)
MDC Holdings (MDC)
Health Care Sector
Diagnostics and Research
Agilent (A)
Charles River Labs (CRL)
Medical Devices
Medtronic (MDT)
Financial Sector:
Asset Management
T. Rowe Price (TROW)
Credit Services
Visa (V)
Technology Sector:
Electronic Gaming
Activision Blizzard (ATVI)
Information Technology Services
Fidelity National Information Services (FIS)
Semiconductor Equipment
Ultra Clean Holdings (UCTT)
Semiconductors
Intel (INTC)
Software
Adobe (ADBE)
Salesforce.com (CRM)
Fortinet (FTNT)
Synopsys (SNPS)
These stocks were chosen based on a comprehensive review of both fundamental and technical data.
The fundamental data is from a proven quantitative stock selection model, based on factors such as earnings growth and earnings estimate revisions.
The technical data is based on identifying signs of institutional buying pressure, such as breakouts to new highs, improving money flow, and good relative strength. This is the approach that has been used very successfully over the years by Investor’s Business Daily.
This list of stocks could be considered a model portfolio for aggressive clients.
For clients who are more risk averse, or with a higher need for income, a more balanced approach would be prudent. This would involve diversifying the portfolio shown above with additional holdings in other market sectors, such as consumer staples, energy, utilities, real estate, etc.
Note on homebuilders: Recent strong data on housing starts, along with strong earnings reports, indicate that the fundamental outlook for the homebuilders is very positive. Many of the homebuilding stocks have just broken out to new highs, as seen in the following chart.
Figure 1 Homebuilders have just broken out to new highs
In the past week or two, some of these stocks have risen on big volume on multiple consecutive days, a sign of heavy institutional buying, implying that they have further to go on the upside.
In fact some of these stocks, such as PHM and DHI, have been so strong that they have become overbought on a short-term basis — but we would place buy limit orders in order to build positions when the stocks pull back.
Note: an interesting perspective is provided by long-term charts going back to the housing bubble of the 2003 – 2006 period. Some (but not all) of the homebuilders have just recently climbed back to the peak levels that they reached in that period, roughly 15 years ago.
Figure 2 Long-term perspective on homebuilder Lennar (LEN)
Market comments:
Stocks rallied back today (1/28/20), showing resilience following yesterday’s selloff due to the coronavirus in China. As mentioned last week, the market had become overbought, setting the stage for a pullback. A pullback of roughly 4% – 5% from its recent highs would bring the S&P 500 down to its 50-day moving average, which is now around 3200.
The depth of any pullback depends on the severity of the virus outbreak, its impact on China’s economy, and the extent to which it spreads to other countries, along with fourth quarter earnings reports and other news developments.
In general, market corrections often provide opportunities to buy attractive stocks on weakness (please see my report “Short-term Market Analysis” for a more detailed discussion).
Therefore if yesterday’s selloff turns into a deeper pullback, we will view it as an opportunity to buy selected stocks.
To put this investment approach to work for your clients, please contact Jonathan Strauss, CFA:
jon@straussresearch.com
513 – 379 – 2792 (cell / text).