On August 25th, I recommended avoiding margin, selling second-tier stocks into strength, and limiting exposure to short-term call options because our overbought signal was at levels only previously seen in January 2020 and February 2018, two periods preceding short-term stock market tops.

This indicator is still flashing warning signs, but green shoots are emerging. After six consecutive weeks of over 50% of stocks in our 1,500 stock universe trading more than 5% above their 200-day moving average, the measure slipped below 50% this week.

Typically, readings range from 20% to 40% during bull markets, so we’re still overbought, but we’re moving in the right direction. Importantly, we don’t necessarily need another big leg down to get back to more desirable risk to reward levels. We can also get there by trading sideways or remaining rangebound, which can allow the 200-DMA to catch up to current prices on many stocks.

Progress toward normalizing this indicator isn’t the only green shoot, though.

On September 11, I wrote:

“Many leading stocks may officially bottom before the market, so selectively buying leaders could be the best approach for investors.”

We’ve started to see that strategy pan out. The S&P 500 has lost more ground, but individual stocks have done better. The highest-scoring stocks in our research on that day generated an average 2.5% of excess return to the SPDR S&P 500 Trust ETF (SPY), and the leading stocks that fell most through September 11 have rebounded nicely. Of the five stocks I used as example of pain already inflicted in that article, four are trading higher and the overall return is 8.2%.

9/11/2020 9/25/2020* Change % Change
(ZM) $383.00 $464.98 81.98 21.40%
(W) $252.28 $283.86 31.58 12.52%
(SHOP) $914.50 $927.83 13.33 1.46%
(TSLA) $372.72 $401.07 28.35 7.61%
(AAPL) $112.00 $109.83 -2.17 -1.94%
*As of 10:40 am EDT

Source: Top Stocks for Tomorrow.

Overall, the broader stock market could remain choppy and we still want to see our overbought indicator move back to more favorable levels, but these emerging green shoots suggest buying top-rated large-cap stocks, rather than selling them.

The best large-cap sectors

We rank major sectors weekly to know what baskets have tailwinds or headwinds, and to spot emerging positive or negative sector trends. Once we rank the sectors, we highlight the highest scoring stocks within the strongest sectors to help members compile their watch lists.

Our scoring system, which we explain more here, is based on the following factors:

  • Forward earnings growth expectations
  • Historical trends in reporting earnings that beat Wall Street estimates
  • Insider buying
  • Short-term and long-term institutional money flow
  • Forward valuation relative to historical valuation
  • Contra-trend short interest analysis
  • Quarterly seasonality over the past decade

This week, the best large-cap sectors and the strongest-scoring stocks within those sectors (in parenthesis) are industrials (Old Dominion Freight Lines (ODFL), Middleby Corp. (MIDD), and BWX Technologies (BWXT)), technology (Black Knight (BKI), NICE Ltd. (NICE), and Fortive Corp. (FTV)), services (IHS Markit (INFO), Domino’s Pizza (DPZ), and Dollar General (DG), basic materials (Sherwin-Williams (SHW) and CF Industries (CF)), and consumer goods (Constellation Brands (STZ), Sysco Corp. (SYY), and Procter & Gamble (PG)).

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Healthcare and financials score average, while utilities, REITs, and energy score below average. In those groups, its best to remain industry or stock specific (see further below).

Source: Top Stocks for Tomorrow.

The best and worst scoring stocks now

Our system offers an objective way to rank over 1,500 high-quality stocks, and because stock prices follow earnings over time, insiders buy for one reason; money flow reflects institutional sentiment, and seasonal patterns can rhyme, our approach provides a consistent stream of high-quality investment ideas.

This week, over 150 high-scoring and low-scoring large-cap, mid-cap, and small-cap stocks were highlighted for members, including these 70 large-cap stocks. I’ve highlighted stocks making the biggest jump in score for convenience.

Also, you’ll see the highest-scoring large-cap industries below in this table, helping you narrow down the best ponds to fish in even more.

LARGE

9/24/2020

4 WEEK MA

Company Name

Symbol

Sector

INDUSTRY

SCORE

SCORE

BEST

Black Knight, Inc.

(BKI)

TECHNOLOGY

SOFTWARE-INFRASTRUCTURE

105

103.75

FactSet Research Systems Inc.

(FDS)

FINANCIALS

FINANCIAL DATA & STOCK EXCHANGES

105

101.25

Alexion Pharmaceuticals, Inc.

(ALXN)

HEALTHCARE

BIOTECHNOLOGY

100

97.50

Aon plc

(AON)

FINANCIALS

INSURANCE BROKERS

100

102.50

Booz Allen Hamilton Holding Corporation

(BAH)

SERVICES

CONSULTING SERVICES

100

97.50

Bank of Montreal

(BMO)

FINANCIALS

BANKS-DIVERSIFIED

100

101.25

Brown & Brown, Inc.

(BRO)

FINANCIALS

INSURANCE BROKERS

100

101.25

BWX Technologies, Inc.

(BWXT)

INDUSTRIALS

AEROSPACE & DEFENSE

100

91.25

Comcast Corporation

(CMCSA)

SERVICES

ENTERTAINMENT

100

100.00

Dollar General Corporation

(DG)

SERVICES

DISCOUNT STORES

100

98.75

Domino’s Pizza, Inc.

(DPZ)

SERVICES

RESTAURANTS

100

85.00

DexCom, Inc.

(DXCM)

HEALTHCARE

DIAGNOSTICS & RESEARCH

100

98.75

Fortive Corp.

(FTV)

TECHNOLOGY

SCIENTIFIC & TECHNICAL INSTRUMENTS

100

103.75

IHS Markit Ltd.

(INFO)

SERVICES

CONSULTING SERVICES

100

96.25

The Middleby Corporation

(MIDD)

INDUSTRIALS

DIVERSIFIED MACHINERY

100

102.50

NICE Ltd.

(NICE)

TECHNOLOGY

SOFTWARE-APPLICATION

100

97.50

NovoCure Limited

(NVCR)

HEALTHCARE

MEDICAL DEVICES

100

96.25

Old Dominion Freight Line, Inc.

(ODFL)

INDUSTRIALS

TRUCKING

100

101.25

Penumbra, Inc.

(PEN)

HEALTHCARE

MEDICAL DEVICES

100

90.00

Dr. Reddy’s Laboratories Limited

(RDY)

HEALTHCARE

DRUG MANUFACTURERS

100

98.75

Royal Bank of Canada

(RY)

FINANCIALS

BANKS-DIVERSIFIED

100

98.75

Constellation Brands, Inc.

(STZ)

CONSUMER GOODS

BEVERAGES

100

101.25

Arthur J. Gallagher & Co.

(AJG)

FINANCIALS

INSURANCE BROKERS

95

92.50

AMETEK, Inc.

(AME)

INDUSTRIALS

INDUSTRIAL ELECTRICAL EQUIPMENT

95

97.50

ANSYS, Inc.

(ANSS)

TECHNOLOGY

SOFTWARE-APPLICATION

95

97.50

Arconic

(ARNC)

INDUSTRIALS

SPECIALTY INDUSTRIAL MACHINERY

95

98.75

Activision Blizzard, Inc.

(ATVI)

SERVICES

ELECTRONIC GAMING & MULTIMEDIA

95

93.75

AstraZeneca PLC

(AZN)

HEALTHCARE

DRUG MANUFACTURERS

95

80.00

Brunswick Corporation

(BC)

SERVICES

LEISURE

95

96.25

Cognex Corporation

(CGNX)

TECHNOLOGY

SCIENTIFIC & TECHNICAL INSTRUMENTS

95

97.50

Emerson Electric Co.

(EMR)

INDUSTRIALS

INDUSTRIAL EQUIPMENT & COMPONENTS

95

97.50

Elastic NV

(ESTC)

TECHNOLOGY

SOFTWARE-APPLICATION

95

96.25

Edwards Lifesciences Corporation

(EW)

HEALTHCARE

MEDICAL DEVICES

95

96.25

The Home Depot, Inc.

(HD)

SERVICES

HOME IMPROVEMENT RETAIL

95

96.25

Intercontinental Exchange, Inc.

(ICE)

FINANCIALS

FINANCIAL DATA & STOCK EXCHANGES

95

97.50

Illinois Tool Works Inc.

(ITW)

INDUSTRIALS

DIVERSIFIED MACHINERY

95

97.50

CarMax, Inc.

(KMX)

SERVICES

AUTO & TRUCK DEALERSHIPS

95

95.00

Lowe’s Companies, Inc.

(LOW)

SERVICES

HOME IMPROVEMENT RETAIL

95

96.25

Marsh & McLennan Companies, Inc.

(MMC)

FINANCIALS

INSURANCE BROKERS

95

98.75

MSCI Inc.

(MSCI)

FINANCIALS

FINANCIAL DATA & STOCK EXCHANGES

95

86.25

Mettler-Toledo International Inc.

(MTD)

HEALTHCARE

DIAGNOSTICS & RESEARCH

95

95.00

Vail Resorts, Inc.

(MTN)

SERVICES

RESORTS & CASINOS

95

96.25

Nasdaq, Inc.

(NDAQ)

FINANCIALS

FINANCIAL DATA & STOCK EXCHANGES

95

92.50

Palo Alto Networks, Inc.

(PANW)

TECHNOLOGY

SOFTWARE-INFRASTRUCTURE

95

98.75

Paychex, Inc.

(PAYX)

INDUSTRIALS

STAFFING & EMPLOYMENT SERVICES

95

87.50

The Procter & Gamble Company

(PG)

CONSUMER GOODS

HOUSEHOLD & PERSONAL PRODUCTS

95

97.50

Parker-Hannifin Corporation

(PH)

INDUSTRIALS

INDUSTRIAL EQUIPMENT & COMPONENTS

95

96.25

Republic Services, Inc.

(RSG)

INDUSTRIALS

WASTE MANAGEMENT

95

98.75

Shopify Inc.

(SHOP)

TECHNOLOGY

SOFTWARE-APPLICATION

95

96.25

The Sherwin-Williams Company

(SHW)

BASIC MATERIALS

SPECIALTY CHEMICALS

95

96.25

Square, Inc.

(SQ)

TECHNOLOGY

SOFTWARE-INFRASTRUCTURE

95

92.50

STERIS plc

(STE)

HEALTHCARE

MEDICAL INSTRUMENTS & SUPPLIES

95

85.00

Stanley Black & Decker, Inc.

(SWK)

INDUSTRIALS

TOOLS & ACCESSORIES

95

97.50

Sysco Corporation

(SYY)

CONSUMER GOODS

FOOD DISTRIBUTION

95

90.00

Target Corporation

(TGT)

SERVICES

DISCOUNT STORES

95

87.50

Take-Two Interactive Software, Inc.

(TTWO)

SERVICES

ELECTRONIC GAMING & MULTIMEDIA

95

91.25

Visa Inc.

(V)

FINANCIALS

CREDIT SERVICES

95

88.75

Verizon Communications Inc.

(VZ)

TECHNOLOGY

TELECOM SERVICES

95

96.25

Zoetis Inc.

(ZTS)

HEALTHCARE

DRUG MANUFACTURERS

95

93.75

WORST

AvalonBay Communities, Inc.

(AVB)

REITS

REITS

10

20.00

1Life Healthcare

(ONEM)

HEALTHCARE

HEALTH INFORMATION SERVICES

10

20.00

Exxon Mobil Corporation

(XOM)

ENERGY

OIL & GAS INTEGRATED

10

12.50

Fomento Economico Mexicano, S.A.B. de C.V.

(FMX)

CONSUMER GOODS

BEVERAGES

15

15.00

M&T Bank Corporation

(MTB)

FINANCIALS

BANKS-REGIONAL

15

21.25

Essex Property Trust, Inc.

(ESS)

REITS

REIT-RESIDENTIAL

20

22.50

Transocean Ltd.

(RIG)

ENERGY

OIL & GAS DRILLING

20

21.25

Tenaris S.A.

(TS)

ENERGY

OIL & GAS EQUIPMENT & SERVICES

20

20.00

Wells Fargo & Company

(WFC)

FINANCIALS

BANKS-DIVERSIFIED

20

26.25

Zions Bancorporation, National Association

(ZION)

FINANCIALS

BANKS-REGIONAL

20

28.75

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The best and worst scoring industries

Similar to our sector ranking, our industry ranking is compiled by aggregating individual stock scores by basket. Once we’ve aggregated scores, we rank industries from best to worst by sector and then, we highlight the best-scoring individual stocks in the top industries (again, in parenthesis).

For example, the best large cap industries this week are insurance brokers (Brown & Brown (BRO), Aon Plc (AON), and Marsh & McLennan (MMC)), financial data/stock exchanges (FactSet (NYSE:FDS), Nasdaq (NDAQ), and MSCI Inc. (MSCI)), consulting services (IHS Markit and Booz Allen Hamilton (BAH)), industrial equipment/components (Parker-Hannifin (PH), Emerson Electric (EMR), and Pentair (PNR)), and tools/accessories (Stanley Black & Decker (SWK) and Toro (TTC)).

The worst large-cap industries are office REITs, REITs, and residential REITs.

Source: Top Stocks for Tomorrow.

Drilling down even deeper, here are the best industries within each sector and the highest-scoring stocks within those industries (in parenthesis):

  • The best baskets in basic materials are steel (U.S. Steel (X) and Nucor (NUE)) and gold (Agnico Eagle Mines (AEM)).
  • Packaging/containers (Ball Corp. (BLL), Packaging Corp. of America (PKG), and Crown Holdings (CCK)), farm products (Bunge (BG) and Archer-Daniels-Midland (ADM)), and household/personal products (Procter & Gamble and Estee Lauder (EL)) are top-rated in consumer goods.
  • There are no energy groups that score above average.
  • Focus on insurance brokers, financial data/stock exchanges, and credit services (Visa (V), PayPal (PYPL), and Mastercard (MA)) in financials.
  • The highest scoring in healthcare are medical devices (Penumbra (PEN), NovoCure (NVCR), and Edwards Lifesciences (EW)) and diagnostics (DexCom (DXCM) and Mettler-Toledo (MTD).
  • Industrial equipment, tools/accessories, and waste management (Republic Services (RSG), Waste Connections (WCN), and Waste Management(WM)) offer upside in industrials.
  • There are no REITs baskets that score above average.
  • The greatest scoring services groups are consulting services, restaurants (Domino’s Pizza, Chipotle Mexican Grill (CMG), and Restaurant Brands (QSR)), and discount stores (Dollar General, Target (TGT), and Costco Wholesale (COST)).
  • The top technology industries are electronic components (Littelfuse Inc. (LFUS) and Amphenol (APH)), semiconductor specialized (Nvidia Corp. (NVDA), Monolithic Power Systems (MPWR), and Microchip Technology (MCHP)), and information technology services (Infosys Ltd. (INFY) and Fidelity National Information Services (FIS)).
  • There are no utilities that score above average.
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Those are the highest-scoring industries, but if you’re interested in where another particular industry ranks within a sector, you can find that information in this next table, which ranks the best to worst industries by sector. This can be particularly useful if your investment portfolio focuses on a specific sector.

Source: Top Stocks for Tomorrow.

Never miss a money-making idea. Get all the ideas we sent to members this week, plus weekly large cap, mid cap, small cap and ADR rankings. Know what sectors, industries, and stocks to buy and when to buy them. Over 400 bps of excess return in the following 52 weeks since 2017. Free trial, special introductory pricing, and you can cancel anytime. Join the conversation. Sign up for Top Stocks For Tomorrow.

Disclosure: I am/we are long DXCM, NVCR, ESTC, SHOP, SQ, V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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