E Weekly Investment Report: Stocks To Watch

Top scoring weekly returns:  Buy and Hold 1 Year

 

 

The best scoring sector across our universe is industrial goods. Financials have moved into the top scoring this week — increase your weights. Healthcare and consumer goods also score above average. In healthcare, tilt weight to large cap. In consumer goods, focus more on mid cap. Services score in line. Technology, basics, and utilities score below average.  Stay industry specific in technology. Semi and software score strong.
 

The following chart visualizes score by market cap and sector.

 

The following chart shows historical four, eight, and 12 week moving average scores for our universe.  Historically, risk/reward shifts bullish when the blue line crosses above the red and green lines.
 

Industrial Goods
 

Aerospace (BEAV, HON, TDG, ESL) and defense (GD, LMT, NOC) shares tend to move up in the second quarter ahead of air show order season. Rising backlog at commercial OEMs continues to prompt production rate increases, driving supplier’s revenue growth. BA’s 737’s per month production rate, for example, is expected to hit 42 per month in Q2, up from 38 currently (and up 33% since 2010). That number may climb to 47 planes per month in 2017 and to 52 planes per month in 2018-2019.  Similarly, Airbus is boosting production too.  Airbus plans to bump up A320 production from its current 42 per month rate to 46 per month by Q2 2016.  China’s defense budget is being guided to expand by 12.2% to $132 billion this year, marking the biggest annual increase in three years and suggesting Western spending will maintain or grow. U.S. defense spending is $526 billion this year. Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) stand to continue to benefit from a rising share of the budget.  Sales to European and Middle East allies also offer opportunities for contractors.

 
Global industrial production growth continues to support demand for machinery (ITT, FLS, MIDD, SPW) and equipment (BDC, LFUS, ETN). Mexico’s industrial production grew 0.7% in January, led by a 2.5% lift in manufacturing.  The country is expected to see GDP expand from 1.1% in 2013 to 3.9% in 2014. Brazil’s industrial production increased the most in a year in January, climbing 2.9% month-over-month, led by a 10% jump in capital goods. U.K. manufacturing output grew 0.4% month-over-month in January, or 2.2% year-over-year. Japan’s industrial production grew 10.3% year-over-year in January. 
 

 

Healthcare
 

Profit taking in biotech continues following a major run since fall. However, medical instruments (BDX, TFX, BCR, VASC) and medical appliances (EW, GMED, STJ, ZMH) remain high scoring and under-owned by managers. Funds broadly shifted away from instruments, appliances, and equipment on reform/tax fear. However, as managers increasingly become comfortable with companies ability to offset risk and innovate for pricing power, interest is returning.  Boost your exposure to these companies.  The strongest healthcare plans are those with robust private Medicaid market share (MOH, CNC). Reform driven enrollment supports earnings growth at Medicaid insurance providers this year. That’s in contrast to the anticipated profit pause at large diversified insurers. Watch medical loss ratios at related insurers to see how rising enrollment, mix of enrollees, impacts the ratio. If younger enrollees end up on Medicaid, rates may fall, providing earnings tailwinds.
 

 
Financials
 

Financials are improving ahead of positive second quarter seasonality. Banks (JPM, FHN, WTFC, CFNL, PNC) continue to see loan books grow thanks to rising commercial and industrial loan activity. C&I loans at commercial banks grew to 1,613 billion in January, up from 1,569 billion in September.  According to the Senior Loan Officer Survey, the number of banks tightening consumer loan standards was -7%, suggesting easing credit markets offer additional opportunity for loan portfolio growth; offsetting narrowing NIMs.  Such loans are increasingly profitable given consumer loan charge off rates have dropped to 1.98% in Q4, down from a peak of 6.73% in early 2010, and the lowest reading since 2006.
 

 
Consumer Goods
 

Textiles are among the top scoring groups in consumer goods. While “A” index cotton prices climbed year-over-year from 85.51 cents per pound in 2013 to 90.96 cents per pound in January 2014; prices remain significantly below the January 2011 and 2012 averages of 178.9 cents and 101.1 cents, respectively.  Retail sales of clothing and accessories grew 2.6% year-over-year in February, and have grown 1.9% year-over-year in the 3-months ending February 28th.  Auto parts remain strong on solid production and sales rates. North American auto production in January marked the highest January production level since 2003.  Mexican light vehicle production rose 2.3% YoY in January. More profitable light truck sales in the U.S. are 11% higher this year than last year. European auto/truck recovery offers considerable opportunity. Commercial truck registrations were up 4.7% year-over-year in January, its 5th consecutive month of expansion.  Passenger car registrations grew 5.5%.