E Weekly Report: Alpha Generating Ideas

Top scoring weekly returns:  Buy and Hold 1 Year

 

• The best sector is industrial goods

The best scoring sector remains industrial goods heading into Q4 earnings season.  Managers should remain overweight on potential European recovery.

Consumer goods, services and healthcare also score above the universe average score.  In healthcare, managers should tilt toward large cap.

 

Financials, technology, basics, and utilities score below average.  Managers should buy large and small cap financials, rather than mid cap.  Stay industry specific in basics, which offer solid seasonality across energy during the first quarter.  
 

 

Industrial Goods
 

One of the most intriguing opportunities for industrial goods companies this year is a return to growth in Europe.  Nascent signs of strength (similar to the U.S. in 2009) are developing, including rising productivity, falling labor costs, and a deceleration in credit tightening for enterprises, suggesting headwinds may ease and industrials with EU exposure may benefit given easy comparisons.   Aerospace remains one of the best scoring industrial baskets thanks to rising production at OEMs.  Construction machinery — think cranes — could see demand lift this year as construction spending increases.   Construction spending rose 5.9% year-over-year in November and has increased 5% in the first 11 months versus a year ago.  Compared to last year, nonresidential private spending grew more than 20% for lodging, office, and commercial.  Residential housing, which had been dormant for months, is re-exerting as managers increasingly embrace the idea home buyers will adjust to higher rates thanks to job growth.  November private residential construction spending was 16.6% higher than last year.
 

Consumer Goods
 

Some of the top scoring stocks across consumer goods include auto parts and textiles.  Auto sales growth is maturing and will likely decelerate in the U.S. this year; however opportunity for growth remains in Europe where registrations have been showing improvement.   Full year 2013 U.S. auto sales will likely total 15.6 million, the best showing since 2007.  Commercial vehicle and passenger vehicle registrations in the EU rose 8.9% and 1.2% YoY in November, respectively.  Low cotton prices and solid retail apparel turnover support textiles stocks through the Q4 EPS reporting season.  “A” index cotton prices per pound fell to 84.65 cents in November, down from 89.35 cents in October and 93.08 cents in June.