The National Collegiate Athletic Association (NCAA) Men's Division I Basketball Tournament is underway with the champion slated to be crowned on April 4, at NRG Stadium in Houston, Texas. Being the biggest modern sporting event in the U.S. today, the fervor of this game has spread into the investment world where stocks that can generate crazy money are wagered on.
Since the basketball tournament has advanced to the ‘Sweet Sixteen,’ let’s fill in 16 stock brackets first and then compare those like we do for March Madness to get to the real winner.
Strategy of Picking ‘Sweet 16’ Stocks
Akin to the basketball championship, we have tried to choose four sectors – financials, basic materials, energy and consumer discretionary – among our 16 Zacks sectors that are highly in focus due to the rate hike uncertainty or upbeat news flows into the economy. We have picked the four best industries (within the top 30%) from each sector with the help of our Zacks Industry Rank.
Then, we have tried to pick one stock from each industry having a Zacks Rank #1 (Strong Buy) or 2 (Buy) with the highest market capitalization in order to get the ‘Sweet Sixteen’ stocks. Top-ranked stocks indicate rising earnings estimates, and those with strong earnings momentum are more likely to outpace the market. This was a cakewalk all thanks to the Zacks Stock screener.
Once the stocks were chosen, the year-to-date performance was considered for the qualifiers to the ‘Elite Eight.’ Notably, the stocks with the highest industry ranks will matchup with the stocks having low industry ranks.
Financials
The four top industries and their best stocks in the financial sector are as follows:
1. REAL ESTATE DEV: Rank in the top 11%; Stock – Brookfield Property Partners L.P. BPY
2. REIT-EQTY TRUST – RETAIL: Rank in the top 19%; Stock – Realty Income Corporation O
3. FIN-SVGS & LOAN: Rank in the top 23%; Stock – Capitol Federal Financial, Inc. CFFN
4. BANKS-MIDWEST: Rank in the top 24%; Stock – Chemical Financial Corporation CHFC
BPY vs. CHFC: Here, CHFC wins over BPY as it has returned 4.9% in the year-to-date timeframe versus a loss of 2.7% for the latter.
O vs. CFFN: O beats CFFN in the same period by a margin of 13.3%.
Basic Materials
The four top industries and their best stocks in the basic materials sector are as follows:
1. MINING -SILVER: Rank in the top 11%; Stock – Tahoe Resources Inc. TAHO
2. STEEL-SPECIALTY: Rank in the top 13%; Stock – Carpenter Technology Corp. CRS
3. MINING -NON FERR: Rank in the top 20%; Stock – First Quantum Minerals Ltd. FQVLF
4. MINING -GOLD: Rank in the top 27%; Stock – AngloGold Ashanti Ltd. AU
TAHO vs. AU: AngloGold wins over Tahoe by a wide margin of around 63% in the year-to-date timeframe.
CRS vs. FQVLF: First Quantum easily edged out Carpenter Technology by gaining 38.6% versus 16.3% gain for CRS.
Energy
The four top industries and their best stocks in the energy sector are as follows:
1. SOLAR: Rank in the top 6%; Stock – SunPower Corporation SPWR
2. OIL-C$ EXP&PROD: Rank in the top 8%; Stock – Crescent Point Energy Corp. CPG
3. E&P MLP: Rank in the top 9%; Stock – Black Stone Minerals BSM
4. OTHER ALT ENERGY: Rank in the top 27%; Stock – Ormat Technologies Inc. ORA
SPWR vs. ORA: Ormat Technologies edged past SunPower with a gain of 11.6% versus loss of 21.2% for the latter.
CPG vs. BSM: Crescent Point easily outpaced Black Stone in the same period, gaining 23.2% against loss of 3.4% for BSM.
Consumer Discretionary
The four top industries and their best stocks in the consumer discretionary sector are as follows:
1. FURNITURE: Rank in the top 6%; Stock – Leggett & Platt Inc. LEG
2. LEISURE&REC PRD: Rank in the top 9%; Stock – Pool Corp. POOL
3. CABLE TV: Rank in the top 11%; Stock – Dish Network Corp. DISH
4. TOOLS-HAND HELD: Rank in the top 13%; Stock – The Toro Company TTC
LEG vs. TTC: Here, Toro easily outpaced Leggett & Platt as it gained 17.4% compared to 12.9% for LEG.
POOL vs. DISH: Pool is clearly the winner as it returned 5.4% in the year-to-date timeframe versus a loss of 15.9% for the latter.
The winners of each industry group will compete with each other in the Elite Eight.
Elite Eight
Among the eight winning stocks, the highest average earnings surprise over the past four quarters were used to decide the winners of each sector that should advance to the Final Four.
CHFC vs. O: Chemical Financial has seen average earnings surprise of 6.45% versus 1.10% for Realty Income. Hence, CHFC wins over O.
AU vs. FQVLF: Though both stocks delivered negative average earnings surprise over the past four quarters, First Quantum turns out as the winner in the basic material space with negative surprise of 76.92% compared to 230% for AngloGold.
ORA vs. CPG: Crescent Point wins with an average positive earnings surprise of 1040.28% over the past four quarters against the negative surprise of 14.87% for Ormat Technologies.
TTC vs. POOL: Pool wins over Toro, as its average earnings surprise of 185.09% is much higher than that of 8.98% for TTC.
Final Four
We now have the best stocks in the four sectors. To advance to the next level, we have considered the year-over-year earnings growth for fiscal 2016. Let us once again see the Zacks Industry Rank of the four stocks to decide the contenders.
Chemical Financial – Zacks Industry Rank in the top 24%
First Quantum Minerals – Zacks Industry Rank in the top 20%
Crescent Point Energy – Zacks Industry Rank in the top 8%
Pool Corp. – Zacks Industry Rank in the top 9%
So in the matchups, we have Crescent Point Energy and Chemical Financial on one side and Pool Corp. and First Quantum Minerals on the other.
Crescent Point Energy Corp. (CPG) vs. Chemical Financial Corporation (CHFC): Crescent Point’s earnings growth is expected to decline 161.16% while Chemical Financial will likely see earnings growth of 5.51% for fiscal 2016. With a positive earnings growth rate, Crescent Point Energy wins and advances toward the final round to take on the winner of POOL vs. FQVLF.
Pool Corp (POOL) vs. First Quantum Minerals Ltd. (FQVLF): Here also, earnings at First Quantum are expected to decline 60.71% while POOL earnings will see a growth of 13.56%. As a result, Pool Corp. wins and will again matchup with Crescent Point Energy for the championship.
The Championship
Let’s look at our VGM score (V stands for Value, G for Growth and M for Momentum), which is simply a weighted combination of the three. The VGM score when combined with a Zacks Rank #1 or 2 offer the best upside potential with a frenzy of cheap price, robust growth and strong momentum.
Though both Crescent Point Energy and Pool Corp have a Growth Style Score of ‘B’, the latter wins with a VGM score of ‘B’ against ‘C’ for CPG.
Result
Based on our internal research and metrics, it looks like Pool Corp. (POOL) will lift this year’s trophy for March Madness in stocks. While it was exciting and fun to dribble toward the winning stock, we expect the twists and turns in the NCAA tournament to lead to some dramatic moves in the investment world.
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