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In the last post (9 Stocks That Should Perform Well When The ISM Index Rises) about the ISM reports for May, I included the results from regressing stock returns in the S&P 1500 versus the ISM manufacturing report headline index (PMI), with 5 additional factors being 5 lags. This post will present some of the findings based on the non-manufacturing ISM report.

Since the Institute for Supply Management has only recently presented the composite index ((NYSE:NMI)) since 2008, it limits the ability to back-test over the desired 10 year duration. The underlying indexes have been supplied since around mid-1997, so a composite index is possible to derive from the data, as the ISM states.

The new Non-Manufacturing Index, NMI, consists of:
Business Activity 25%
New Orders 25%
Employment 25%
Supplier Deliveries 25%

I ran two regressions from mid-2000 to May 2012 using the four indexes above and adding the price index. The price index would be the most likely to be non-linear, and in any case, we would expect a negative correlation with the market overall. The second regression I ran used the composite along with the 5 underlying indexes and achieved a 10% annual gain. Good, but inflation being mixed in with the other with opposite expected signs could have limited its forecasting abilities.

The first regression used the 5 indexes and then added the business activities index again, which essentially doubled its input. The results were better with returns closely matching the ISM manufacturing at 12% annualized returns. Below are some of the picks from the first regression, with the first set being Strong Buys rated by Sabrient Systems.

  • Cascade Corporation (NYSE:CASC)
  • Deluxe Corporation (NYSE:DLX)
  • Helix Energy Solutions Group, Inc. (NYSE:HLX)
  • MarineMax, Inc. (NYSE:HZO)
  • Masco Corporation (NYSE:MAS)
  • Tyson Foods, Inc. (NYSE:TSN)
  • Wyndham Worldwide Corporation (NYSE:WYN)

As expected, the results from manufacturing and non-manufacturing would overlap, and the above list is simply a subset of the manufacturing list enumerated in the last blog post of Strong Buys from Sabrient Systems. The list below are Buys as rated by Sabrient Systems derived from the above regression.

  • Crocs, Inc (NASDAQ:CROX)
  • Coventry Health Care, Inc.(CVH)
  • The Hartford Financial Services Group, Inc. (NYSE:HIG)
  • JetBlue Airways Corporation (NASDAQ:JBLU)
  • M/I Homes, Inc. (NYSE:MHO)
  • Prudential Financial, Inc. (NYSE:PRU)
  • PrivateBancorp, Inc. (NASDAQ:PVTB)
  • Select Comfort Corporation (NASDAQ:SCSS)
  • Skechers U.S.A., Inc. (NYSE:SKX)
  • Wynn Resorts, Limited (NASDAQ:WYNN)
  • Caterpillar Inc. (NYSE:CAT)
  • Health Management Associates, Inc. (NYSE:HMA)
  • Humana Inc. (NYSE:HUM)
  • Myers Industries, Inc. (NYSE:MYE)
  • Norfolk Southern Corporation (NYSE:NSC)
  • Smithfield Foods, Inc. (NYSE:SFD)
  • Stone Energy Corporation (NYSE:SGY)

Disclosure: I am long DLX.

Disclaimer: The Rock Solid Yield portfolio newsletter 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.