Hot Stocks in Hot Industries

One of the hardest things to do when evaluating a stock is to strip away preconceived notions. While some are in place for a good reason, many could be holding you back from fantastic returns because you could be avoiding the hottest stocks on the street.

By far the biggest bias I see on a day to day basis is derived from a stock's industry. Positive or negative, having a predisposition is a sure-fire way to be undiversified and end up passing on successful companies.

The easy fix to this problem is to take the emotion out of it and simply screen for industries that are doing well.

Keep an Open Mind, Stay Diversified

I like to look for industries that are ranked highly based on a earnings momentum. Usually if business is booming for a few refiners, the others are doing pretty well themselves. Simply look at the numbers, and figure out what the hot areas are.

Then What?

Well, once you whittle to universe of stocks to the top performing industries, I chose the top 50 out of 264 groups, go ahead and pick apart the individual companies. A highly ranked stock in a highly ranked sector stands to do pretty well for itself.

I am not saying redefine your strategy, just start there and do what you normally do. Make sure the valuations are decent and the story has a good chance to continue moving forward. Perhaps you like the charts and technicals are in place. Just start with hot sectors, and pick out hot stocks.

A Few Stocks in Hot Industries

Stanley Black & Decker (SWK - Analyst Report) is the top rated of 7 companies in the third ranked industry, out of 264. The well-known tool company has everything you could ask for.

On Jan 27 they posted their tenth consecutive earnings surprise thanks to a 10% increase in revenues. EPS came in at $1.05 which was 13 cents better than expected.

The Zacks Consensus Estimate jumped 22 cents for 2011, to $4.91 and 18 cents for 2012, to $5.99. Thanks to those upward revisions SWK is expected to grow 19% this year, 22% next year and is currently a Zacks #1 Rank (Strong Buy).

Measurements Specialties (MEAS - Snapshot Report) is the top rated, of 11 companies, in the 14th ranked industry. MEAS supplies technology products and systems to research, aerospace and defense/security, precision industrial and other markets.

The estimates picture looks fantastic, with upward revisions right up to and just after the Feb 2 earnings surprise. The full-year 2011 consensus is now at $1.33, which is a 22% growth rate. Next year's forecasts are up 16 cents, to $1.36 for a more modest 3% growth rate. Given MEAS's estimate history though, the consensus should rise significantly throughout the year.

Joy Global (JOYG) is the top rated of 8 companies in the 16th ranked construction and mining machinery industry.

JOYG analysts are looking for 20% growth this fiscal year and another 16% next year. The company's next quarterly report should come out in early March and should push those estimates higher.

As far as efficiency goes, it is easy to see why Joy Global is king of the hill. Its net profit margin of 12.7% and ROE of 41% are roughly double the industry average.

The Trend is Your Friend

Call it jumping on the bandwagon, but if you as long as you roll with the trend you will be in good shape. Picking areas that are doing well will improve your odds of selecting better companies and in turn, bolstering your portfolio.

Bill Wilton is the Aggressive Growth Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Small Cap Trader service

Read the full analyst report on JOYG

Read the full analyst report on SWK

Read the full analyst report on MEAS