Across more than 500 small-cap stocks screened for fundamental, technical and seasonal characteristics at my firm, the top scoring small-cap sector entering this week is industrial goods.
Weekly, we pass stocks through our Power 7 model - outlined in my book here. The model includes earnings growth and beats, insider buying, short- and long-term money flow, days to cover short, PE analysis and seasonal trading trends.
What sectors are strongest?
Aggregating scores across major sectors, industrial goods score best. Financials, basic materials and utilities also score above the universe average. Services score in line. Consumer goods, technology and healthcare score below average.
Short interest dropped for a second consecutive month.
In the past month, average small-cap days to cover fell -1.38 days. This follows a -0.91 day drop in the prior 30-day period.
The most dramatic covering occurred in small-cap financials, which saw days to cover fall by -4.48 days ahead of earnings reports. Industrial goods short positions also fell significantly, dropping -2.49 days. The short covering brings short interest to 0.50 days higher than last November, suggesting investors are repositioning ahead of the typical end of year small-cap rally.
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The following chart shows the average monthly relative returns for the R2K ETF (IWM) versus the S&P 500 (SPY) since 2000. Small cap historically leads in November and December.
The next chart shows absolute average returns for the IWM since 2000. Typically, October, November and December are strong return months.
Source: Seasonal Investor
Small-cap average scores are at their highest since spring and are behaving similarly to last fall.
Source: E.B. Capital Markets, LLC
Over the past 4 quarters, small-cap services has been best at outpacing analyst forecasts with the average services stock beating in 2.29 of the past 4 quarters.
Basics and utilities have done worst. Consumer, technology and healthcare have also been solid, nicely outpacing the average 1.98 reading for the entire universe. Those baskets offer upside support from positive EPS revisions.
What are the best small cap industries?
The best scoring industry in small cap is property and casualty insurers (UFCS, STFC). Price strength and coverage demand supports profit growth post prior year catastrophic claims. Traveler's (TRV) handily beat, reporting $2.21 vs. $1.61 estimates, suggesting strength down the food chain. Synthetics (POL, MTX, GGC) are also strong scoring. Aerospace and defense (ORB, LMIA), research services (LDR, PRXL) and farm products (FDP, CQB) round out the best industry list.
What are the best industries by sector?
In small-cap basics, synthetics, oil & gas equipment & services (WRES) and steel & iron (ZEUS, ROCK) score above average.
In consumer, buy farm products, sporting goods (SWHC, RGR) and processed & packaged goods (SMBL). In financials, P&C insurers, REITs (LXP) and regional banks (CATY, FFIN, BBCN) are best. In healthcare, focus on home healthcare (GTIV) and medical instruments (MGCD, MMSI, HAE). Large and mid cap healthcare offer more choices.
In industrials, every industry is at or above average. Aerospace/defense, heavy construction machinery (AEGN, GVA), diversified machinery (MIDD, COGO, BGG) and industrial electrical equipment (FSIN, BDC) score highest. In services, buy research services, staffing (BBSI, ASGN), marketing services (NCMI) and lodging (MHGC). Technical & system software (TYL, MENT), application software (PRO, EPAY), IT services (UIS) and printed circuit boards (BHE) are best in technology.
What are the best-scoring stocks across the entire small-cap universe?
Finally, the following table includes the top scoring small cap stocks across our small cap universe, listed descending by their score. For consideration, I've also included the 4 week moving average of scores for those interested in trends.
SMALL CAP | 10/18/2012 | 4 Week MA | ||
Company Name | Symbol | Sector | SCORE | SCORE |
Amerco Inc | SERVICES | 110 | 112.50 | |
Amcol Int'l | INDUSTRIAL GOODS | 105 | 102.50 | |
Aegion Corp | INDUSTRIAL GOODS | 105 | 96.25 | |
D X P Enterprises Inc | SERVICES | 105 | 100.00 | |
Landauer Inc | SERVICES | 105 | 102.50 | |
Universal Electronics Inc | CONSUMER GOODS | 105 | 103.75 | |
United Fire and Casualty Co | FINANCIALS | 105 | 103.75 | |
Ehealth | FINANCIALS | 100 | 100.00 | |
Entropic Comm. | TECHNOLOGY | 100 | 96.25 | |
Fresh Del Monte | CONSUMER GOODS | 100 | 85.00 | |
Gabelli Asset | FINANCIALS | 100 | 102.50 | |
Granite Construction | INDUSTRIAL GOODS | 100 | 97.50 | |
Home Bancshares | FINANCIALS | 100 | 101.25 | |
Lumber Liquidators | SERVICES | 100 | 97.50 | |
Methode Elect | TECHNOLOGY | 100 | 97.50 | |
Nelnet Inc | FINANCIALS | 100 | 81.25 | |
Orbital Sciences | INDUSTRIAL GOODS | 100 | 102.50 | |
Pros Hldgs Inc | TECHNOLOGY | 100 | 97.50 | |
Scholastic Corp | SERVICES | 100 | 98.75 | |
State Auto Financial Corp | FINANCIALS | 100 | 97.50 | |
Trex Co. | INDUSTRIAL GOODS | 100 | 91.25 |
Disclosure: I am long TREX.
