3 Sector Standouts With Earnings Momentum

NEW YORK ( Real Money) -- My fellow Real Money contributor, Gary Dvorchak, recently posted a column in which he discussed the sectors that have the best earnings momentum relative to the market as a whole, and how that places them in a strong position to outperform the overall market. He also noted which sectors' earnings are lagging the market's.

He included a table by Factset using First Call Estimates from Thomson Reuters, which showed the two strongest sectors are electronic technology (mainly hardware) and commercial services, while the two weakest are communications (telecom) and non-energy minerals (metals and mining).

I think Gary makes a strong case for focusing on the outperforming sectors, and I have identified stocks in some of these sectors worth considering buying today. One is Synaptics ( SYNA), which is in the electronic technology sector and provides the human interface between portable computers and the user. Among its products is the TouchPad technology used on most laptops -- in fact, more than 1 billion devices use Synaptics interfaces. Earnings per share (EPS) for the company's most recent fiscal year were $1.80, compared to $1.50 a year earlier, which is a 20% increase.

Using automated strategies based on the thinking of some of Wall Street's best players, I find Synaptics is a favorite of my Peter Lynch-based strategy. The P/E/G ratio is the main focus of this strategy because it measures how much the investor is paying for growth by looking at the P/E ratio relative to growth. A P/E/G of 1.0 or less is acceptable and from 0.5 on down is considered especially strong. Synaptics' P/E/G is a very desirable 0.52, based on the three-, four- and five-year historical EPS growth rates. It also carries little in the way of debt, which is another factor in its favor.

In the business services sector, a standout is Maximus ( MMS), which provides program management and consulting services to government agencies engaged in health and human services, including maximizing federal funding for programs and IT design and implementation. It works with state, federal and local governments, and is the leading administrator of Medicaid/CHIP (Children's Health Insurance Program) services in the U.S. It also provides workforce-centered services in this country as well as in the U.K. and Australia. Maximus's EPS for its most recent fiscal year was $2.28, a gain of 16% from the previous year's $1.96.

Like Synaptics, Maximus earns the approval of my Lynch strategy. Its P/E/G is a solid 0.78, while its debt is also very low.

A business services sector stock earning accolades from my Warren Buffett-based strategy is Accenture ( ACN) . One of the global leaders in management consulting, Accenture operates in more than 120 countries with more than 246,000 employees. It consults in such areas as analytics, business processes, cloud services and technology. EPS for its most recent fiscal year were $3.40, a jump of 28% from the previous year's EPS of $2.66.

The Buffett strategy is a fan of Accenture because it is a leader in its market, has had an EPS increase in nine of the last 10 years, has a very low debt level, generates an annual return on equity of 48.0% and has a positive cash flow per share.

The last step of this strategy is to project how much the investor can expect to earn annually on his or her investment if buying the stock today. Accenture's projected return of return is an impressive 22.4%.

At the time of publication, John Reese and his clients were long SYNA, MMS and ACN.

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