Leuthold Names Keepers For Bull Market Finale

Amid expanding PE ratios in a market that is now up 150% since this bull run began more than 4 ½ years ago (175% with dividends reinvested) it would seemingly be rational to consider trimming some winners.

But a provocative new piece of research from The Leuthold Group makes an interesting case for letting recent winners keep on running. Poring over data from the past 16 cyclical bull markets, the Leuthold folks found that in the last year of a bull market, high momentum stocks outperformed the laggards by 18 percentage points. The big ‘mo stocks had an average final year bachannal of +35% compared to 16.4% for stocks with low price momentum.

The added kicker to the research is that industries with the big momentum in the late stage of the bull market also do well on a relative basis when the bull cedes to the bear; high momentum has on average lost 10 percentage points less than stocks with low momentum. The only time momentum works against you is at a bear market bottom; the stocks leading the fall at that late stage have underperformed in the first year of a new bull market by 25 percentage points.

There is, alas, a caveat to consider: There’s no way to know if we’re in fact in the last year of this particular bull run, no matter what the calendar says. “We’d certainly argue that -- based on longevity, valuations and, perhaps, recent retail flows into equity funds -- the bull market is now very mature. But late-inning bull markets can have a maddening way of turning into extra inning affairs,” Doug Ramsey, chief investment officer at Leuthold wrote in a research note titled “Industry Groups: No Need to Bottom Fish.”

If you’re interested in pursuing the concept, Leuthold pulled out its list of industries that it rates as fundamentally attractive and overlaid that with its industry list ranked by 12-month price momentum. The implicit idea being that stocks “twice blessed” are areas worthy of more financial research.

Using the YCharts Stock Screener you can drill down to an industry-level vetting of Leuthold’s twice blessed industries: Autos and Containers and Packaging are the two groups with the highest price momentum over the past 12 months that also get an attractive rating. Other strong performers that made the list include Auto Components, Household Durables, Managed Health Care, MultiLine Insurance and Aerospace & Defense.

At the Screener, under the Sectors drop down, Automobiles and Containers/Packaging are both found within the Consumer Cyclicals grouping.

The price charts for General Motors (GM) and Ford (F) are textbook momentum as annual U.S. auto sales are climbing back to near their pre-crisis level.

GM Chart

GM data by YCharts

Yet both stocks have trailing PE ratios below 12. That said, the foreign auto manufacturers Daimler (DDAIY), Volkswagen (VLKPY), and Toyota (TM) are still churning out better profit margins:

GM Profit Margin TTM Chart

GM Profit Margin TTM data by YCharts

In the Auto Components group, TRW Automotive (TRW) is also a high flyer with a down to earth valuation.

The Containers and Packaging industry group has doubled the return of the broad market over the past year, riding the pick-up in consumer spending.

This is mostly a smaller cap niche of the market; among the 24 stocks in the YCharts database, only seven companies have market caps above $4 billion. Among the larger names Crown Holdings (CCK) and Rock-Tenn (RKT) with sub-15 trailing PE’s are the cheapest of the group, with MeadWestvaco (MWV) at the other end of the pendulum with a 45 PE. Looking at price/sales trends, all three stocks have become less attractive in 2013; though Crown Holdings -- which manufacturers steel and aluminum cans for food, drinks and other consumer products -- is clearly the cheapest by that metric.

RKT Price / Sales Ratio TTM Chart

RKT Price / Sales Ratio TTM data by YCharts

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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