Looking For Top Stocks In The Strongest Performing Sectors

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Includes: BIIB, BX, GIB, MU, OZK, TX, UFPI, UTHR
by: John P. Reese
Summary

Several key sectors have experienced excellent returns in 2017, so finding value and interesting opportunities have gotten more difficult.

Using a series of quantitative models, inspired by great investors, we uncover a few names worth taking a look at.

Micron and Blackstone are few of the names on the shortlist.

As discussions concerning the ever-rising stock market continue to flourish, so do opinions and observations about how the tech sector is generating most of the gains. It stands to reason, given that the tech behemoths have enjoyed such dramatic growth and are so heavily weighted in the S&P 500. But while the tech sector continues to reign supreme on the performance front, 2017 has been a good year for several sectors.

As of the end of the third quarter, for example, healthcare, financials and materials have also showed well (data provided by FactSet and Fidelity Investments):

Sector

YTD performance

Q3 ended 9/30/17

Technology

27.4%

8.6%

Healthcare

20.3%

3.7%

Financials

12.5%

5.2%

Materials

15.8%

6.0%

Clearly, the strongest sectors in 2017 may not necessarily hold their ranks going forward, so the data (in a vacuum) should not serve as fodder for investment decisions. There are myriad factors at play for each separately as well as broader market issues that should be considered. That said, there are still attractive stocks in sectors that have been bid up and performed well, and often times such strong sectors experience both secular and cyclical tailwinds.

Outlined below are some factors pertinent to each of these sectors. Using stock screening models I created for Validea-- based on the strategies of some of the most successful investors of all time—I have identified two high-scoring names in each:

Technology

Ongoing research, consumer product development and inroads in the areas of robotics, augmented reality and cognitive technologies (i.e. speech and language processing) are all likely to fuel future growth in the tech sector. As companies strive to remain competitive (capital spending has been relatively low in recent years), investment in upgrading technology may also serve as a boost to the sector.

Micron Technology (MU): This semiconductor company earns high marks from three of our screening models (those based on the strategies of Peter Lynch, David Dreman and John Neff). Our Lynch-based model finds the company's share well-priced based on the ratio of price-earnings to EPS growth (P/E/G) of 0.33—anything under 0.50 is considered best case according to this model. Our Dreman-based model likes the company's liquidity and EPS growth trends, and our Neff-inspired screen favors the company's sales growth and free cash flow.

CGI Group Inc. (GIB), which provides information technology and business process services, scores well according to both our Lynch- and Joel Greenblatt-based models. The company passes the Lynch-inspired model given its P/E ratio of 19.93 relative to its level of sales, with sales growth that outpaces inventory growth considered a plus. Our Greenblatt-based strategy likes the company's earnings yield of 8.34%.

Healthcare

Debate and questions surrounding the Affordable Care Act will continue to fuel uncertainty in this sector, but increased demand for health care goods and services (in large part due to the aging population) and health care companies' generally strong balance sheets are positive indicators. While volatility is likely to continue as healthcare policy uncertainty looms, this could also present investment opportunities for the patient investor.

Biogen (BIIB) is a biopharmaceutical company that earns high marks from our Warren Buffett-inspired investment strategy based on its predictable and consistently growing earnings, ability to pay off debt with earnings in under two years, and management's use of retained earnings which reflects a return of 19.9%. Our Lynch-based model favors the P/E/G of 0.67.

United Therapeutics (UTHR), a biotechnology company focused on treatments for chronic and life-threatening conditions, earns a perfect score under our Greenblatt-based screen in light of its earnings yield (22.19%) and return-on-total capital (50.46%), which together rank it 9th among the stocks in our database. Our Lynch-based model gives the company high marks for its P/E/G of 0.27.

Financials

Interest rate hikes by the Fed have helped the sector, along with increased loan demand (including mortgages) fueled by improved credit worthiness of both consumers and businesses. Potential easing of regulatory burdens could serve to further bolster the sector.

Bank of the Ozarks Inc. (OZRK) is a state-chartered bank that provides both retail and commercial banking services. The company scores well under our models based on the strategies of Buffett, Lynch and Martin Zweig due to earnings consistency and growth, P/E ratio (17.84), and 10-year average return-on-equity (15.2%).

Blackstone Group LP (BX) is a global alternative asset manager that earns high marks from our Lynch-and Neff-inspired screens. The Lynch-based model favors the company's P/E/G (0.57) and EPS of $2.32, and the Neff-based strategy gives a thumb's up to historical earnings persistence, EPS growth (16.6%) and free cash flow ($0.46).

Materials

The upbeat economic picture in the U.S. is a plus for materials and could potentially produce tailwinds for the sector. An improving global economic outlook will also translate into increased demand for materials needed to support the building of infrastructure.

Universal Forest Products (UFPI), through its subsidiaries, supplies wood and other products to the retail, construction and industrial markets. The company earns a perfect score from our James O'Shaughnessy-inspired stock screening model for its persistent and growing EPS as well as its price-sales ratio of 0.62 (anything under 1.5 passes this screen). Our Kenneth Fisher-based model likes the company's modest leverage (debt-equity ratio of 18.67%) and long-term average EPS growth of 50.07%.

Ternium SA (TX), a producer of steel products, passes our Lynch-inspired screen due to its P/E/G ratio of 0.30 and earnings-per-share of $4.20, and our Joseph Piotroski-based strategy likes the company's book-market ratio of 0.88, which places it in the top 20% of the market based on that criterion.

Disclosure: I am/we are long BIIB,GIB,MU,OZRK,TX,UFPI,UTHR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.