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We have discussed the Institute for Supply Management (ISM) reports and explored the relationships between the reports and the general health of the economy over the last two years. After first exploring the December reports, this post will explore a new area of research along with some stock suggestions related with the ISM research.

Good but is that Good Enough?

Both headline indexes increased month over month for December reports although non-manufacturing did not make up the ground it lost in November. The non-manufacturing increased 0.6–52.6% in December from a loss of 0.9% in November. The manufacturing index continued its rise of 1.2%–53.9% in December after the gain of 1.9% which was on the high side of the consensus range of 52.5–54% with a consensus point of 53.2%. The non-manufacturing index was below the consensus of 53.4% but within the consensus range of 52–57.5%.

Although the economy is still apprehensive about the European debt crisis, there has been some recent good news on jobs and the unemployment rate with ADP reporting strong job growth in December. The unemployment rate dropped to 8.5%. The employment index in manufacturing continues to be the stronger of the two indexes and last month, it showed a strong increase of 3.3–55.1%, but non-manufacturing continued to be sub-50 at 49.4% even with an increase of 0.5% last month. Respondent comments are also not very encouraging on the jobs front.

Comments from respondents include: “Retirees not being replaced” and “Still in holding pattern; positions are available, but are not being filled.”

Respondents’ comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment.”

“Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by eurozone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election.” (Computer & Electronic Products)

This just shows that there is still economic uncertainty and the European situation along with a divided government has not helped to increase positive expectations. A hindrance to economic growth that has shown signs of finally fading away for the moment, are prices. The converging direction of the price indexes is good on both sides. After the dramatic drop in the manufacturing price in index in October, 2011 by 15 points, last month it continued its upward trend with an increase of 2.5% to 47.5%. While rising prices can hinder economic growth by raising uncertainty, declining prices does not necessarily translate to stable growth either. Stable prices over time is more consistent with maximum economic growth. The non-manufacturing price index was lower by 1.3% to 61.2% last month.

Along with the price indexes in the reports, the Macro View has also been interested in the total number of commodity prices going up and commodities that have multiple months of increasing prices. Nothing unusual about the non-manufacturing numbers with 3 multiple month commodities and 9 in total, but for manufacturing there were more commodities going down in price for both categories. Multiple month higher price commodities was 3 and 7 for lower prices and total number of prices going up was 9 compared to 10 in commodities with prices going down.

“Haters” and “Lovers” of the ISM Manufacturing Index

One of the tools we use to development trading models is regression analysis. We find sets of stocks that through back-testing perform better than the comparable index. One set is the lovers that, like the name implies, love the independent variable(s) as it goes up, and the other set is a group of stocks that perform well when the independent variable is low (haters). In other words, we find stocks that perform well when the economic index is high or rising and also stocks that perform well when the index is low or declining.

With a simplistic model, the non-manufacturing group performed badly in the lovers group, and the haters beat the index. But since the data only goes back to the spring of 2005 and overall, the manufacturing performed better, let me use that model to provide a few stock ideas based on a regression back test over the last 11 years. Since these results are independent of our ranking system, I also filtered for Strong Buy ratings on the lovers side and Strong Sell along with Sell ratings on the haters side. These results take into account the latest releases by the ISM which were positive as noted above. If the upward trend of the indexes and the overall manufacturing sectors continues to perform well then the lovers group would be expected to outperform the markets.

Lovers:

  • (NASDAQ:SCSC) ScanSource, Inc
  • (NYSE:VCI) Valassis Communications, Inc.
  • (NYSE:RHT) Red Hat, Inc.
  • (NASDAQ:GPOR) Gulfport Energy Corporation
  • (NYSE:GCI) Gannett Co., Inc.
  • (NYSE:LAD) Lithia Motors, Inc.
  • (NYSE:LNC) Lincoln National Corporation
  • (NYSE:SNX) SYNNEX Corporation
  • (NYSE:HIG) Hartford Financial Services Group, Inc.
  • (NYSE:AGCO) AGCO Corporation
  • (NYSE:PRU) Prudential Financial, Inc

Haters:

  • (NYSE:HCP) HCP, Inc.
  • (NASDAQ:LLTC) Linear Technology Corporation
  • (NASDAQ:VRSN) VeriSign, Inc.
  • (NASDAQ:CTXS) Citrix Systems, Inc.
  • (NYSE:SHAW) Shaw Group Inc.
  • (NYSE:T) AT&T Inc.

Disclaimer: This article is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Source: ISM Report: Our Picks In The Index