The Best Big Cap Stocks To Buy

So far, stock market tailwinds because of end of year bonuses, retirement plan contributions, and institutional re-positioning have offset data suggesting the market is overbought. However, a 3% to 5% correction is getting more likely as the rally broadens out (excluding energy), suggesting investors ought to play a little defense by reducing margin and unwinding shares in second-tier stocks moving up because of a rising tide, rather than fundamental underpinnings, such as earnings growth.

A potential retreat could wind up being blamed on skittishness caused by the emerging coronovirus scare, or a shift in expectations regarding the ongoing impeachment trial, or lost confidence in further trade progress. In reality, pullbacks are usually due to mean reversion, rather than a specific event, regardless of where the blame lands.

The reason for our growing skepticism stems from a simple measure of market optimism and pessimism: The number of stocks in our universe trading more than 5% above their 200 day moving average is historically high. In fact, we’ve only seen a reading above our current 55% reading once since 2013 (February 2018). Admittedly, there’s no reason why this ratio can’t go higher. Stocks can remain overbought (and oversold) for much longer than anyone anticipated. Nevertheless, these levels could make it increasingly important to focus on the best sectors, industries, and stocks.

Source: Limelight Alpha

The top sectors to buy

Just about every widely-traded stock in the country gets run through our scoring system every week. The methodology is explained more here, but our scores incorporate future earnings growth, historical earnings beats, insider buying, short-term and long-term money flow, forward valuation relative to historical valuation, contra-trend short interest analysis, and quarterly seasonality over the past decade.

Once we’ve scored each stock, we aggregate the score by sector to identify the best pools to fish in.

This week, the best-ranked large cap sectors are industrial goods (Snap-on (SNA), Raytheon (RTN), Roper Technologies (ROP)), healthcare (Centene (CNC), Johnson & Johnson (JNJ), WellCare Health (WCG), PerkinElmer (PKI), Jazz Pharmaceuticals (JAZZ), DexCom (DXCM), DaVita (DVA)), services (Trinity Industries (TRN), Paychex (PAYX), Old Dominion Freight (ODFL), Interpublic Group (IPG), Henry Schein (HSIC), Cintas (CTAS), Cardinal Health (CAH), AmerisourceBergen (ABC)), and technology (StoneCo Ltd. (STNE), Open Text (OTEX), ServiceNow (NOW), Fiserv (FISV), Akamai (AKAM)).

Meanwhile, financials and consumer goods rank neutral and utilities, REITs, and basics score below average. In these groups, concentrate on the strongest rated industries and stocks (see below).

Source: Limelight Alpha

The best scoring big cap stocks

Stocks historically follow earnings over time, insiders only buy for one reason, money flow reflects institutional optimism or pessimism, and seasonal patterns often rhyme, making top-scoring large-cap stocks best positioned for upside, especially in the strongest sectors and industries.

This week, the following large-cap stocks rank best and worst in our universe. AmerisourceBergen, Cardinal Health, Henry Schein, Kimberly-Clark (NYSE:KMB), and Square (SQ) saw the biggest increase in scores to join our best scoring list this week.

LG CAP

1/23/2020

4 Week MA

Company Name

Symbol

Sector

INDUSTRY

SCORE

SCORE

BEST

Centene Corp.

(CNC)

HEALTHCARE

HEALTH CARE PLANS

115

113.75

Equifax Inc.

(EFX)

FINANCIALS

CREDIT SERVICES

110

86.25

Johnson & Johnson

(JNJ)

HEALTHCARE

DRUG MANUFACTURERS

110

107.5

Newell Rubbermaid

(NWL)

CONSUMER GOODS

HOUSEWARES & ACCESSORIES

110

108.75

AmerisourceBergen

(ABC)

SERVICES

DRUGS WHOLESALE

105

85

Akamai Tech

(AKAM)

TECHNOLOGY

INTERNET SOFTWARE & SERVICES

105

91.25

Cardinal Health

(CAH)

SERVICES

DRUGS WHOLESALE

105

90

Carlisle Co’s

(CSL)

CONSUMER GOODS

RUBBER & PLASTICS

105

102.5

Cintas Corp.

(CTAS)

SERVICES

BUSINESS SERVICES

105

91.25

DaVita Inc.

(DVA)

HEALTHCARE

SPECIALIZED HEALTH SERVICES

105

97.5

DexCom

(DXCM)

HEALTHCARE

MEDICAL INSTRUMENTS & SUPPLIES

105

101.25

Fiserv

(FISV)

TECHNOLOGY

BUSINESS SOFTWARE & SERVICES

105

103.75

Hormel Foods

(HRL)

CONSUMER GOODS

MEAT PRODUCTS

105

96.25

Henry Schein

(HSIC)

SERVICES

MEDICAL EQUIPMENT WHOLESALE

105

82.5

Interpublic Group of Companies Inc.

(IPG)

SERVICES

ADVERTISING AGENCIES

105

96.25

Jazz Pharma

(JAZZ)

HEALTHCARE

BIOTECHNOLOGY

105

102.5

Kellogg Company

(NYSE:K)

CONSUMER GOODS

PROCESSED & PACKAGED GOODS

105

103.75

Kimberly-Clark Corp.

(KMB)

CONSUMER GOODS

PERSONAL PRODUCTS

105

83.75

Lazard LTD.

(LAZ)

FINANCIALS

ASSET MANAGEMENT

105

105

Nasdaq OMX Group

(NDAQ)

FINANCIALS

DIVERSIFIED INVESTMENTS

105

98.75

ServiceNow

(NOW)

TECHNOLOGY

INFORMATION TECHNOLOGY SERVICES

105

100

Old Dominion Freight Line Inc.

(ODFL)

SERVICES

TRUCKING

105

103.75

Open Text

(OTEX)

TECHNOLOGY

INTERNET SOFTWARE & SERVICES

105

103.75

Paychex

(PAYX)

SERVICES

STAFFING & OUTSOURCING SERVICES

105

83.75

PerkinElmer

(PKI)

HEALTHCARE

MEDICAL INSTRUMENTS & SUPPLIES

105

97.5

Phillips van Heusen

(PVH)

CONSUMER GOODS

TEXTILES

105

106.25

Roper Industries

(ROP)

INDUSTRIAL GOODS

INDUSTRIAL EQUIPMENT & COMPONENTS

105

88.75

Raytheon

(RTN)

INDUSTRIAL GOODS

AEROSPACE/DEFENSE PRODUCTS & SERVICES

105

103.75

Snap-on Inc.

(SNA)

INDUSTRIAL GOODS

SMALL TOOLS & ACCESSORIES

105

96.25

Square, Inc.

(SQ)

FINANCIALS

CREDIT SERVICES

105

78.75

StoneCo

(STNE)

TECHNOLOGY

APPLICATION SOFTWARE

105

100

Trinity Industries Inc.

(TRN)

SERVICES

RAILROADS

105

105

T. Rowe Price Group

(TROW)

FINANCIALS

ASSET MANAGEMENT

105

105

WellCare Health

(WCG)

HEALTHCARE

HEALTH CARE PLANS

105

103.75

WORST

Slack Technologies

(WORK)

TECHNOLOGY

APPLICATION SOFTWARE

15

18.33333333

Black Stone Minerals LP

(BSM)

BASIC MATERIALS

OIL & GAS EXPLORATION & PRODUCTION

20

27.5

Pinterest Inc.

(PINS)

SERVICES

INTERNET CONTENT & INFORMATION

20

18.33333333

The best industries to buy

The strongest industries vary by market cap, but the best big cap industries right now are wholesale drugs (Cardinal Health, AmerisourceBergen, McKesson (MCK)), industrial equipment (Roper Tech, Parker-Hannifin (PH), Emerson Electric (EMR)), healthcare plans (Centene, WellCare Health, UnitedHealth Group (UNH), Molina Health (MOH), Anthem (ANTM)), staffing (Paychex, Robert Half (RHI), Manpower Group (MAN)), and residential construction (PulteGroup (PHM), Toll Bros. (TOL), NVR Inc. (NVR)).

Source: Limelight Alpha.

Taking this one step further, we can identify top industries to target within each major sector:

  • None of the basic materials baskets rank above average this week.
  • Concentrate on trucks (Paccar (PCAR), Oshkosh Corp. (OSK)), auto parts (Gentex (GNTX), BorgWarner (BWA)), and personal products (Kimberly-Clark, Estee Lauder (EL)) in consumer goods.
  • Focus on insurance brokers (Marsh & McLennan (MMC), Arthur J. Gallagher (AJG), Brown & Brown (BRO)), property managers (Jones Lang LaSalle (JLL)), and asset managers (T. Rowe Price (TROW), Lazard (LAZ). Eaton Vance (EV)) in financials.
  • The best healthcare industries are healthcare plans, generic drugs (Mylan (MYL), Catalent (CTLT)), and medical appliances (Masimo Corp. (MASI), Hologic (HOLX), Edwards Lifesciences (EW), Align Technology (ALGN)).
  • Industrial equipment, residential construction, and diversified machinery (Illinois Tool Works (ITW), Flowserve (FLS). Dover Corp. (DOV), Brunswick (BC)) offer upside in industrial goods.
  • The strongest services industries are wholesale drugs, staffing, and railroads (Trinity Industries, Kansas City Southern (KSU), CSX Corp. (CSX)).
  • The top technology industries include semi equipment (Teradyne (TER), Entegris (ENTG), Lam Research (LRCX), KLA Corp. (KLAC), Applied Materials (AMAT)), scientific & technical instruments (Mettler-Toledo (MTD), Cognex (CGNX), Agilent (A)), and multimedia & graphics software (Activision Blizzard (ATVI), Electronic Arts (EA)).

Source: Limelight Alpha

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Disclosure: I am/we are long DXCM, PVH, SQ, ALGN. 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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