Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message|
( followers)  

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.

(click to enlarge)

The following chart shows the average monthly relative returns for the R2K ETF (NYSEARCA:IWM) versus the S&P 500 (NYSEARCA: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 (NYSE: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 (NASDAQ: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 (NYSE:LXP) and regional banks (CATY, FFIN, BBCN) are best. In healthcare, focus on home healthcare (NASDAQ: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 (NASDAQ:NCMI) and lodging (NASDAQ:MHGC). Technical & system software (TYL, MENT), application software (PRO, EPAY), IT services (NYSE:UIS) and printed circuit boards (NYSE: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

UHAL

SERVICES

110

112.50

Amcol Int'l

ACO

INDUSTRIAL GOODS

105

102.50

Aegion Corp

AEGN

INDUSTRIAL GOODS

105

96.25

D X P Enterprises Inc

DXPE

SERVICES

105

100.00

Landauer Inc

LDR

SERVICES

105

102.50

Universal Electronics Inc

UEIC

CONSUMER GOODS

105

103.75

United Fire and Casualty Co

UFCS

FINANCIALS

105

103.75

Ehealth

EHTH

FINANCIALS

100

100.00

Entropic Comm.

ENTR

TECHNOLOGY

100

96.25

Fresh Del Monte

FDP

CONSUMER GOODS

100

85.00

Gabelli Asset

GBL

FINANCIALS

100

102.50

Granite Construction

GVA

INDUSTRIAL GOODS

100

97.50

Home Bancshares

HOMB

FINANCIALS

100

101.25

Lumber Liquidators

LL

SERVICES

100

97.50

Methode Elect

MEI

TECHNOLOGY

100

97.50

Nelnet Inc

NNI

FINANCIALS

100

81.25

Orbital Sciences

ORB

INDUSTRIAL GOODS

100

102.50

Pros Hldgs Inc

PRO

TECHNOLOGY

100

97.50

Scholastic Corp

SCHL

SERVICES

100

98.75

State Auto Financial Corp

STFC

FINANCIALS

100

97.50

Trex Co.

TREX

INDUSTRIAL GOODS

100

91.25

Source: The Best And Worst In Small Cap This Week