What are we looking for?
The U.S. industrial sector stands out this year, with the Industrial Select Sector SPDR Fund ETF (XLI-N) up just over 15 per cent year-to-date, outpacing the Dow Jones Industrial Average, which itself reached a record high on July 7. The strength reflects renewed appetite for cyclical, economically sensitive stocks as confidence returns to the market.
Against this backdrop, we’re using a quantamental approach – blending quantitative screens with fundamental analysis – to uncover high-quality industrial stocks positioned to benefit from the sector’s momentum.
The screen
We used Trading Central Strategy Builder to screen for U.S.-listed industrial stocks with a market capitalization above US$5-billion, focusing our search on the sector’s largest and most established companies.
To identify companies efficiently utilizing shareholder equity to generate profits, we required a minimum return on equity (ROE) of 10 per cent over the past year, ensuring our screen focused on businesses demonstrating strong financial management.
We added a cap on the company’s debt-to-equity ratio at 1.0 to focus on financially stable businesses with a lower risk of financial distress.
To capture stocks with positive price momentum, we screened for companies trading within 10 per cent of their 52-week high, a sign of persistent investor demand and relative strength within the sector.
Finally, we established a minimum rating of 50 out of 100 using Trading Central’s Quantamental Rating, which evaluates stocks on a scale of zero to 100, with 100 indicating the most bullish and zero the most bearish sentiment. The rating incorporates a blend of valuation, growth, quality, price momentum and income metrics when assessing a company’s ranking – the same quantitative, systematic strategy underpinning the recently launched Trading Central Quant US 50 Equity Index ETF TCUS-T.
For informational purposes, we have also included the recent stock price, dividend yield, year-to-date, and one-year returns.
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 Copa Holdings SA CPA-N, the Panama City-based parent of Copa Airlines, which operates in the Americas through its efficient hub-and-spoke network. With the highest TC Quantamental Rating on our list at 60, the carrier pairs a 26.4-per-cent return on equity with a modest 8.6 price-to-earnings ratio and a 4.6-per-cent dividend yield. The stock is up 35.6 per cent over the past year.
Snap-on Inc. SNA-N, the Kenosha, Wis.-based maker of professional tools and diagnostic equipment, carries the lowest debt-to-equity ratio on our list at just 0.21, paired with a 17.8-per-cent return on equity and a 2.4-per-cent dividend yield – hallmarks of the century-old toolmaker’s conservative balance-sheet management. The shares are up 29 per cent over the past year.
Howmet Aerospace Inc. HWM-N, the Pittsburgh-based maker of jet engine components and airframe fasteners, is the largest company on our list at US$111.7-billion in market capitalization. It posted the highest return on equity on our list at 34 per cent as aerospace demand continues to outpace supply, and the stock has surged 51.5 per cent over the past year.
Trading Central Strategy Builder provides a backtesting 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-per-cent annualized return compared with 12 per cent for the Dow Jones Industrial Average index and 15 per cent for the S&P 500 index.
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.
Gary Christie is head of North American research at Trading Central in Ottawa.