How to Choose High Performing Stocks in the Top Performing Sectors

How to Choose High Performing Stocks in the Top Performing Sectors

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zacksThis screen looks at the top performing stock in each of the 5 top performing sectors.

It's that time again. Every few months, I like running this screen to find the new Top Sectors. And now it's especially timely after this recent pullback, which really wasn't that big a deal, but where more and more people are saying that we're looking at a sector rotation.

So, that being the case, it's important to see what new sectors and industries are being rotated into. And since roughly half of a stock's price move can be directly attributed to the group that it's in, it's important to stay on top of this.

By definition, a strong Sector or strong Industry will have more of its companies moving higher than a weak Sector or weak Industry. If the majority of stocks are going down in an industry, it can't be a strong industry. If more stocks are going up, it is a strong industry.

I've done some testing over the past and what's interesting is I found that just getting into an average stock in a strong group will often outperform the best stocks in a troubled group.

Put the odds on your side

Just because stocks in the best groups have a tendency to outperform doesn’t mean you can just pick anything and make money. Far from it. But it illustrates how powerful the underlying group is to the success of your stock picking.

There are several ways you can define the best Sectors or Industries. One of my favorite ways is to look at the percentage of stocks trading within 10% of their 52-week highs.

Specifically, I'll calculate the number of stocks trading within 10% of their 52-week highs and then divide that by the number of stocks in their group to get a percentage. The higher percentage of stocks trading near their highs, the better the group will score.

Some people like looking at the percentage price change over the last 12 or 24 weeks. And that's fine, but I don't think it's sensitive enough.

If a group has been outperforming over the last 12 to 24 weeks, but then has a significant correction, it might still be ranked a top group because the gains were so large in the first part of the 12 or 24 week period that even a large pullback over a span of many weeks can be lost within the larger run-up that preceded it.

But by checking their position in comparison to their 52-week highs, a simple 10% pullback from their 52-week high will show up right away. And if more and more companies within that group are pulling back from their highs by more than 10%, it'll be reflected in that Sector's rating and alert the investor that something systemic might be happening to that group as a whole rather than something that's just stock specific.

Groups with a higher percentage of stocks trading at or near their 52-week highs shows something positive is happening to the entire group.

Top 5 sectors

  1. Conglomerates – 70.2%
  2. Auto-Tires-trucks – 57.9%
  3. Transportation – 55.3%
  4. Finance – 54.7%
  5. Aerospace – 54.1%

We built a list using the top performer from each sector. Click on the interactive chart to see data over time.

1. Danaher Corp. (DHR, Earnings, Analysts, Financials): Designs, manufactures, and markets professional, medical, industrial, and commercial products and services primarily in North America, Europe, and Asia/Australia. Market cap at $51.22B, most recent closing price at $77.33.
 

 

2. Tower International, Inc. (TOWR, Earnings, Analysts, Financials): Operates as an integrated manufacturer of engineered structural metal components and assemblies to automotive original equipment manufacturers (OEMs) worldwide. Market cap at $444.18M, most recent closing price at $21.69.
 

 

3. Arkansas Best Corporation (ABFS, Earnings, Analysts, Financials): Engages in motor carrier freight transportation in the United States. Market cap at $856.81M, most recent closing price at $33.74.
 

 

4. Cincinnati Financial Corp. (CINF, Earnings, Analysts, Financials): Engages in the property casualty insurance business in the United States. Market cap at $8.43B, most recent closing price at $51.86.
 

 

5. Raytheon Co. (RTN, Earnings, Analysts, Financials): Provides electronics, mission systems integration, and other capabilities in the areas of sensing, effects, and command, control, communications, and intelligence systems, as well as mission support services in the United States and internationally. Market cap at $27.36B, most recent closing price at $88.78.
 

 

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available here.

 

(List compiled by Kevin Matras for Zacks Investment Research. You can find the original here.)

 

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