Updated with earnings results from AGCO and TransDigm.
NEW YORK (
) -- Find out what to extract from stock performance so far this year, as well as what Wall Street is saying about aerospace, financial and media stocks.
1) Almanac Tricks
One of the most popular adages at the beginning of the year is "as goes January, so goes the year." Most of Wall Street knows this phenomenon as the January Barometer. But Sam Stovall, chief equity strategist with S&P Capital IQ, points out another historic trend that investors should know about. This one is called the January Barometer Portfolio, which looks to sector performances in January for clues of what will happen the following 12 months.
"Since 1990, a portfolio consisting of an equal weighting to the three best performing sectors in January posted a compound annual growth rate of 8% in the following 12 months (February through January), versus 6.6% for the S&P 500, and beat the market in nearly two of every three years," writes Stovall.
Narrowing down to sub sectors tends to yield even more returns. Stovall adds that "a portfolio consisting of an equal weighting to the 10 S&P 500 sub-industries with the best January performances went on to post a 12-month compound annual growth rate of 14.4% versus 6.8% for the S&P 500 (excluding dividends)," according to data since 1970. "What's more, this January Barometer Portfolio of sub-industries beat the market nearly 70% of the time."
Stovall warns, of course, that what works in the past doesn't always work again in the future.
Case in point -- last year both the sector and sub industry portfolios underperformed the broader index. Investors using the January Barometer Portfolio strategy would only have seen the three best sectors gain 0.5% and the ten best sub-industries gain 0.6%. By contrast, the S&P 500 notched 2% in the year ending Jan 31, 2012. The three best sectors last January were consumer staples, telecommunications and utilities.
Nevertheless, for investors wanting to give this almanac trick a try this year, the three best performing sectors in January were financials, informational technology and material stocks. The ten best performing sub industries, also on the S&P 500 index, were aluminum, construction & farm machinery & heavy trucks, diversified metals & mining, fertilizers & agricultural Chemicals, internet retail, investment banking & brokerage, life sciences tools & services, multi-sector holdings, other diversified financial services, and real estate services.
Only a few ETFs track the S&P 500 sub sectors, so Stovall picks 10 individual stocks to serve as proxies:
. Stovall picked these stocks using the MarketScope Advisor's screening tool, which selects the stocks with the highest S&P STARS, or highest market value.
2) Credit Card Check
At the end of January, we wrote that Citigroup
analysts liked credit card companies relative to other financial stocks. The firm raised the question of whether signs of stabilization might make room for investing opportunities. The firm picked
Capital One Financial
as stocks that may benefit from loan growth.
Now, Citigroup has updated its perspective on credit conditions. The firm says that the senior loan officers' survey from the Federal Reserve suggests that "European banks have pulled back additionally due to internal capital needs and US banks have backed off European lending, dragging down overall conditions."
However, the firm concludes that "recessionary trends seem far off especially as ISM and ECRI leading indices rebound and stock prices are not set to plunge even as some consolidation of gains seems probable."
The firm adds that recent data from the Federal Reserve showed "some lessening of eased credit for the small business sector," although it also says "the recent National Federation of Independent Business surveys do not look worrisome on the credit front. Indeed, some pickup in lending activity was noted."
The takeaway is that investors should still be fairly confident about credit conditions. The rebound in loans is usually considered a lagging indicator since credit card trends are a "key precursor" to business investment activity.
"Arguably some slowdown
in loan growth is anticipated from the faster pace and easier credit seen in the past two years while comps are more difficult, but U.S. recession calls seem as premature as they did months ago," writes Citigroup.
3) Bright Outlook for Machine Manufacturing at Home
Analysts at UBS say look for opportunities in machinery companies exposed to the North American market. "
Agricultural equipment manufacturers, equipment rental companies and truck names as channel checks have remained supportive of solid demand," writes the firm.
UBS says its bullish on
, a manufacturer of commercial and military trucks, which holds its investor day Wednesday:
"We have viewed NAV as well positioned to North American truck rebound, with underappreciated expansionary businesses elsewhere. We view natural gas engines as a potentially important secular growth opportunity for NAV. Additionally, as NAV submitted an emission compliant engine to EPA for certification, investor concerns over long term future of the engine business should begin to subside. Both developments could lead investors to reassess NAV and ultimately lead to a higher multiple."
Other manufacturing news worth paying attention to this week include
earnings on Tuesday and
report on farm equipment sales on Friday.
Agriculture equipment manufacturer AGCO reported adjusted net income of $1.44 a share and net sales of $2.5 billion for the fourth quarter of 2011, up 16.1% compared to a year earlier. Analysts were looking for $2.54 billion in revenue and earnings of $1.33 per share..
"We finished 2011 on a strong note, setting sales and earnings records for both the fourth quarter and full year," said CEO Martin Richenhagen. "Attractive farm economics supported robust global demand for agricultural equipment and produced sales growth for AGCO of over 27% for 2011 compared to the full year of 2010."
Regarding the North American market, the company said that "improvement in the dairy and livestock sector contributed to higher industry unit retail sales of mid-range tractors and hay equipment, both of which increased compared to 2010 levels. The high level of profitability for row crop farmers also produced growth in industry sales of high horsepower tractors and sprayers."
One good sign for the equipment industry was strong fourth quarter results from
. The company sells engine-related products to equipment manufactures. On Thursday, Cummins beat the consensus forecast of $2.23 in earnings per share by reporting $2.56 per share, while posting record sales. The company's 2012 guidance was below analysts' expectations, but shares nevertheless rose, suggesting the report helped ease fears about weakness in the fourth quarter.
4) Margins Set Off Good Advertising Agency Stocks From Bad
Deutsche Bank analysts say that a few stocks in the advertising space might be able to distinguish themselves from the pack. Assumptions are conservative for the industry overall, but there's enough evidence to justify a small revenue upgrade, according to the firm:
"We have raised our 2012 organic revenue forecast from 1% to 2.5-3% on average or the sector. In summary, this incorporates -1.5% for Europe, +2-5% U.S., +5-8% rest of the world."
Margins set off good performers from the bad in 2011 and that will likely again be the case this year. Deutsche writes: "We are not saying that margin expansion should be managements' paramount strategic priority: we believe investors, in any case, attach higher importance to organic revenue as the driver of multiples (even though this is not an audited figure). But we do believe that, if revenue growth remains healthy, operating leverage should also be a consideration for the investment case."
The firm is a buyer of European firms
, and New York based
. For Omnicom, the analysts are targeting $50 per share on the stock. Shares now trade near $47.
5) Aerospace Manufacturing Preview
This week is a key week for earnings from aerospace and defense companies, with a slew of names speaking at investor conferences. The rundown for earning reports includes
on Thursday and
on Friday. The analysts at UBS have a mixed preview of the stocks.
TransDigm beat estimates earlier today, reporting earnings, excluding items, of $1.42 a share compared to the forecast of $1.25 a share. Sales rose 51% to $352 million, north of the $345.8 million forecast. As expected, the company raised its guidance for 2012 in light of its closed acquisition of Harco.
Prior to Tuesday's earnings report,
TheStreet rated TransDign a buy. Out of 14 analysts, 7 rate the stock at a strong buy, 1 at a moderate buy and 6 at a hold.
rated a strong buy by 13 of 20 analysts following the company. "While SPR has had a good run it still trades at a sizeable discount and we see upside on an in line guide with positive
free cash flow," writes UBS in a recent report.
rated a hold stock.
-- Written by Chao Deng in New York.
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