Quant Model Picks Best & Worst Industries
BOSTON (
) -- Now that stocks are up about 50% from their low in March, a bull-bear debate is polarizing investors.
Some say economic growth has returned, and it's here to stay, suggesting the stock-market rally still has legs. Others claim it's an aberration in a larger downward trend -- a so-called bear-market rally -- and equities will collapse under their own weight.
The advantage of TheStreet.com Ratings' quantitative model is that it removes the trend-following and emotional elements of stock-picking, enabling investors to focus on the best
fundamental, risk-adjusted
investments, companies with clean balance sheets, ample margins and consistent growth.
The model, which is neither a bull nor a bear, is urging a switch into defensive stocks. I broke down our 5,000-strong coverage universe by industry group and identified the 10 industries with the highest percentage of "buy" recommendations.
The model is bullish on utilities, household products, multi-line retail, containers and packaging, food and staples, and health-care providers. Those industries provide the absolute necessities for living. Does that imply an imminent correction or a revival of quality stocks?
The model's tilt toward utilities indicates a movement into companies that will benefit from the next stage in the economic cycle. However, favoritism toward food and household products, and multi-line retail (mostly discounters), suggests caution.
Here is a look at our top 10 industries and how they compare to the "buy" list.
Stock-pickers should use this table as a starting point for research. Industries with the highest share of "buys" still offer discounts. These vanilla businesses don't generate much buzz, but they pay hefty dividends and generate consistent growth.
Returning to the debate between sector rotation and correction, the bottom 10 industries point to the latter. The model is pessimistic about automobiles, real-estate management and development, metals and mining, and construction materials.
These industries boast a line-up of the summer screamers. But fundamentals don't lie. These speculation havens are dangerous places for individual investors. Here is a look at our bottom 10 industries and how they compare to the "buy" list.
Even in the weakest industries, there are great companies. But further scrutiny is disconcerting. For example, all of the metals and mining stocks rated "buy" are plays on gold. And gold is surging on economic pessimism and inflation fears.
Automobiles emit another sound of caution. The model doesn't recommend buying a single car stock. Yet analysts are predicting a third-quarter GDP boon from the government's so-called cash-for-clunkers program, and "sell"-rated
Ford
(F) - Get Report
has enjoyed a 350% clip since February. Evident in this result: Our investment strategy runs contrary to vulture investing.
Although the March dogs deserved their day, individual investors should buy stocks that offer safety and value. Whether we correct, consolidate or churn upwards, the best stocks to buy are those in the bargain bin, trading at a discount to the market and peers.
If a company increased its revenue and dividend over the past year, it offers security. If it sells products considered necessary, add another layer of safety. Investigate neglected sectors, scale into positions, appreciate dividends and remain skeptical of high-flyers.
Three of our favorite defensive plays are convenience-store operator
Casey's General Stores
(CASY) - Get Report
, utility
PG&E
(PCG) - Get Report
and can maker
Ball Corp.
(BLL) - Get Report
. Those stocks trade at a discount based on trailing and forward profit, offer a stable dividend and possess cyclical resilience.
-- Reported by Jake Lynch in Boston.
