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I know a slick top-down stock selection tactic. Using 2 simple tables, I put it to work to find 5 hot stocks.
Each quarter, a fresh earnings season arrives. We get 500 new and insight-filled reports from large-cap S&P 500 companies. For free, investors can mine a trove of useable top-down information from them. This is available in S&P 500 sector form at Zacks and a number of other outlets that specialize in earnings reports. “Top-down” simply means the reporting companies are explicitly collected into meaningful economy-wide performance groups for you.
You don’t have to be too careful with this data. Standard and Poor’s (aka S&P) carefully selects the 500 companies, culls out and adds names each quarter. U.S.-based companies chief financial officers (CFOs) must adhere to tough Sarbanes-Oxley reporting requirements, too.
I have reproduced 2 tables of usable S&P 500 sector info. The first table shows recent q/q earnings growth from the 11 sectors S&P collects earnings data for. S&P hived off Real Estate from Financials recently. I am only interested in the most recent quarter (Q4-16) and the outlook companies provided for Q1-17.
The measure that matters is a calculation of the Q4-16 to Q1-17 difference. That calculation represents the immediateincremental growth in earnings growth.
We want to invest in sectors of the global economy increasing their share in the profitable earnings stream available now. Large caps are both U.S. and non-U.S. earnings and revenue collectors.
This rank-order table shows. Top sectors are Energy, Materials and Info Tech.
S&P500 Sector
Q4-16
Q1-17
Difference
Energy
-4.9
40.9
45.8
Materials
4.2
13.1
8.9
S&P500
4.6
10.8
6.2
Info Tech
7.3
11.5
4.2
Con. Disc.
0
2.3
2.3
Con. Staples
4.1
5.6
1.5
Industrials
-6.1
-4.9
1.2
Real Estate
6
6.8
0.8
Health Care
4.9
3.9
-1
Financials
19.9
15.3
-4.6
Utilities
20.3
1.8
-18.5
Telcos
29.4
-2.9
-32.3
Study the weights closely. The current S&P 500 operating environment is going to produce (6.2) incremental earnings growth. Energy (+45.8), Materials (+8.9), and Info Tech (+6.2) concentrate this incremental S&P 500 earnings pick-up. This immediate pickup becomes available to forward-looking investors in the next few months, not the next few years.
The next table tightens and confirms top-down sectors. The 2 tables, when pulled together, show the best sectors to invest our money.
I add S&P 500 information on:
(1) Percentage (%) of S&P 500 companies issuing “Positive Guidance” on Q1-17.
(2) Amount of “International (non-U.S.) Exposure” each S&P 500 sector has.
S&P500 Sector
% Positive Guidance on Q1-17
Inter-national Exposure
Energy
0
43
Materials
40
49
S&P500
32
30
Info Tech
50
58
Con. Disc.
29
25
Con. Staples
0
29
Industrials
33
38
Real Estate
0
16
Health Care
31
18
Financials
0
24
Utilities
0
6
Telcos
0
3
What do we learn from this second rank and sort exercise?
There is zero added positive guidance coming from Energy sector companies. Let’s take that sector off our “hot” list this quarter.
We confirm. Materials (+40% offered positive guidance on Q1-17) and Info Tech (+50%) look better than the S&P 500 average (+32%), once again. That closes it out. These 2 sectors have to be where we want to look for stock picks.
Finally, we learn of a key dimension to the earnings growth story, from the second column. It tabulates international earnings exposure in the S&P 500.
The Energy (43%), Materials (49%), and Info Tech sectors (58%) are tops for “International Exposure.” The 3 sectors heavily exceed the S&P 500 average of 30% international (non-U.S.) in their earnings streams.
That tells us something very, very interesting. The truth about the improvement in S&P 500 earnings is this: Big U.S. multi-nationals – operating businesses inside sectors with the most NON-U.S. exposure – look best now.
So much for the domestic Trump trade! Trade wars could potentially block access to this immediate build-up in non-U.S. earnings growth for the biggest U.S.-based companies.
This top-down analysis showed us a hidden, or at least under-reported truth. Materials and Info Tech companies do the most business with customers outside the U.S. They claim to feel the strongest earnings growth pulse in the coming quarter.
My key top-down finding: Non-U.S. growth arriving RIGHT NOW for large cap Materials and Info Tech stocks is the top earnings driver to play. This is the strongest immediate pulse we can take advantage of – as individual players in specific stocks.
Here are 5 top Zacks Rank Materials and Info Tech firms. My top-down tactics found them:
Image: Bigstock
Picking 5 HOT Stocks with Top-Down Tactics
I know a slick top-down stock selection tactic. Using 2 simple tables, I put it to work to find 5 hot stocks.
Each quarter, a fresh earnings season arrives. We get 500 new and insight-filled reports from large-cap S&P 500 companies. For free, investors can mine a trove of useable top-down information from them. This is available in S&P 500 sector form at Zacks and a number of other outlets that specialize in earnings reports. “Top-down” simply means the reporting companies are explicitly collected into meaningful economy-wide performance groups for you.
You don’t have to be too careful with this data. Standard and Poor’s (aka S&P) carefully selects the 500 companies, culls out and adds names each quarter. U.S.-based companies chief financial officers (CFOs) must adhere to tough Sarbanes-Oxley reporting requirements, too.
I have reproduced 2 tables of usable S&P 500 sector info. The first table shows recent q/q earnings growth from the 11 sectors S&P collects earnings data for. S&P hived off Real Estate from Financials recently. I am only interested in the most recent quarter (Q4-16) and the outlook companies provided for Q1-17.
The measure that matters is a calculation of the Q4-16 to Q1-17 difference. That calculation represents the immediate incremental growth in earnings growth.
We want to invest in sectors of the global economy increasing their share in the profitable earnings stream available now. Large caps are both U.S. and non-U.S. earnings and revenue collectors.
This rank-order table shows. Top sectors are Energy, Materials and Info Tech.
S&P500 Sector
Q4-16
Q1-17
Difference
Energy
-4.9
40.9
45.8
Materials
4.2
13.1
8.9
S&P500
4.6
10.8
6.2
Info Tech
7.3
11.5
4.2
Con. Disc.
0
2.3
2.3
Con. Staples
4.1
5.6
1.5
Industrials
-6.1
-4.9
1.2
Real Estate
6
6.8
0.8
Health Care
4.9
3.9
-1
Financials
19.9
15.3
-4.6
Utilities
20.3
1.8
-18.5
Telcos
29.4
-2.9
-32.3
Study the weights closely. The current S&P 500 operating environment is going to produce (6.2) incremental earnings growth. Energy (+45.8), Materials (+8.9), and Info Tech (+6.2) concentrate this incremental S&P 500 earnings pick-up. This immediate pickup becomes available to forward-looking investors in the next few months, not the next few years.
The next table tightens and confirms top-down sectors. The 2 tables, when pulled together, show the best sectors to invest our money.
I add S&P 500 information on:
(1) Percentage (%) of S&P 500 companies issuing “Positive Guidance” on Q1-17.
(2) Amount of “International (non-U.S.) Exposure” each S&P 500 sector has.
S&P500 Sector
% Positive Guidance on Q1-17
Inter-national Exposure
Energy
0
43
Materials
40
49
S&P500
32
30
Info Tech
50
58
Con. Disc.
29
25
Con. Staples
0
29
Industrials
33
38
Real Estate
0
16
Health Care
31
18
Financials
0
24
Utilities
0
6
Telcos
0
3
What do we learn from this second rank and sort exercise?
There is zero added positive guidance coming from Energy sector companies. Let’s take that sector off our “hot” list this quarter.
We confirm. Materials (+40% offered positive guidance on Q1-17) and Info Tech (+50%) look better than the S&P 500 average (+32%), once again. That closes it out. These 2 sectors have to be where we want to look for stock picks.
Finally, we learn of a key dimension to the earnings growth story, from the second column. It tabulates international earnings exposure in the S&P 500.
The Energy (43%), Materials (49%), and Info Tech sectors (58%) are tops for “International Exposure.” The 3 sectors heavily exceed the S&P 500 average of 30% international (non-U.S.) in their earnings streams.
That tells us something very, very interesting. The truth about the improvement in S&P 500 earnings is this: Big U.S. multi-nationals – operating businesses inside sectors with the most NON-U.S. exposure – look best now.
So much for the domestic Trump trade! Trade wars could potentially block access to this immediate build-up in non-U.S. earnings growth for the biggest U.S.-based companies.
This top-down analysis showed us a hidden, or at least under-reported truth. Materials and Info Tech companies do the most business with customers outside the U.S. They claim to feel the strongest earnings growth pulse in the coming quarter.
My key top-down finding: Non-U.S. growth arriving RIGHT NOW for large cap Materials and Info Tech stocks is the top earnings driver to play. This is the strongest immediate pulse we can take advantage of – as individual players in specific stocks.
Here are 5 top Zacks Rank Materials and Info Tech firms. My top-down tactics found them:
Vale SA (VALE - Free Report)
Steel Dynamics (STLD - Free Report)
Brooks Automation
Advanced Energy Information Systems (AEIS - Free Report)
Texas Instruments (TXN - Free Report)