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What are we looking for?

The Dow Jones Industrial Average has been leading major U.S. indexes higher with a return of about 9.9 per cent over the past three months, edging out the S&P 500 index (8.6 per cent) and well ahead of the Nasdaq Composite Index (3.2 per cent) over the same period. The S&P 500 industrial sector has moved from lagging to leading the overall S&P 500 over the past three months with a gain of 14.4 per cent, according to a relative rotation graph, which shows what sectors are weakening or improving relative to the S&P 500. This week we look for opportunities in this outperforming U.S. sector.

The screen

We will be using Trading Central Strategy Builder to search for U.S. industrial stocks. We will focus on companies with market capitalization of more than US$5-billion to limit our results to the larger and more established stocks in the sector.

To select companies that appear to be well valued, we can choose only companies with price-to-earnings ratios of 27 or less. The average P/E ratio of companies in the S&P 500 industrial sector is about 28.9.

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To focus on companies with profitable businesses and a track record of growing earnings, we will also select only stocks with five-year historical growth rates in earnings per share of 5 per cent or more, on an annualized basis.

Finally, to select stocks with strong upward price momentum, we will select only stocks whose prices have increased by 10 per cent or more year-to-date.

For informational purposes, we have also included the recent stock price, dividend yield and one-year price return.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is TFI International Inc., a transport and logistics company based in Montreal with a dual listing on the NYSE and TSX. The company has the best year-to-date performance on our list at 49.6 per cent. The current five-year EPS growth rate is 21.3 per cent and its P/E is at 25.5. TFI is slated to report its first-quarter earnings on April 27.

Livonia, Mich.-based Masco Corp., a maker of building and home improvement products, has the highest five-year EPS growth rate on our list at 35.1 per cent. The company is due to report its first-quarter earnings on April 28.

Earnings season is upon us and so far the earnings trend has been positive. As of this writing, 17 industrial companies out of 91 in the S&P 500 have reported their earnings, with an average earnings and sales surprise of 5.7 per cent and 4.3 per cent, respectively.

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Trading Central Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 19.9 per cent annualized total return compared with 13.7 per cent for the Dow Jones Industrial Average.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Select U.S. industrial stocks 

RankCompanyTickerMkt. Cap. (US$ Bil.) P/E 5Y EPS Grth. Rate (%)YTD Price Perf. (%)1Y Price Perf. (%)Div. Yld. (%)Recent Price (US$)
1TFI International Inc.TFII-N7.125.521.349.6206.21.177.61
2Snap-On Inc.SNA-N12.920.77.138.5108.32.1238.16
3Masco Corp.MAS-N16.321.135.116.663.21.564.29
4Agco Corp.AGCO-N11.226.213.043.7206.40.4149.23
5Cummins Inc.CMI-N38.621.98.915.881.52.1264.03
6Huntington Ingalls Ind.HII-N8.412.215.422.312.02.2208.54
7Oshkosh Corp.OSK-N8.426.510.242.696.51.1122.91
8Stanley Black & DeckerSWK-N33.226.66.115.692.21.4206.91
9BWX Technologies Inc.BWXT-N6.423.319.012.432.11.267.78
10Maximus Inc.MMS-N5.826.87.628.847.41.293.64
11Northrop GrummanNOC-N55.618.212.913.41.01.7343.83
12Knight-Swift Transport.KNX-N7.719.411.111.332.10.946.59

Source: Trading Central 

Gary Christie is head of North American research at Trading Central in Ottawa.

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