Rules of the Game: Industrial Strength

 | Nov 30, 2012 | 4:00 PM EST
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Although consumer discretionaries were dented Thursday after disappointing retail sales data, it remains the No. 1 sector performer month to date. But as of Thursday, industrials were holding the No. 2 spot with a November gain of 1.08%.

It's sometimes a little surprising to see how various companies are classified by Standard & Poor's. Cummins (CMI), Deere (DE), Emerson Electric (EMR), Joy Global (JOY), United Technologies (UTX) -- those all make sense. But Priceline (PCLN) and Dun & Bradstreet (DNB)? Industrials seem to be a catchall sector for companies that analysts aren't quite sure where to put.

In any event, the S&P sector data got me curious about which industrials were contributing to the November gain. I put together a scan of the S&P Industrials to get a bead on what was leading and what was lagging. The best technical performer, as of Thursday, is a company with exposure to the red-hot housing industry. Masco (MAS) is a mid-cap that moves 5.5 million shares per day, on average. It has a high beta, 2.18, indicating its volatility relative to the broader index. While a high-beta stock brings extra downside risk, it also brings additional upside potential. Masco has advanced 63% year-to-date, and 13% this month, closing at $17.08 Thursday. The fundamental case for this stock is good. Analysts have pegged 2012 earnings at $0.27 per share, up 2,600% from the year-ago quarter. That's seen doubling again next year, to $0.56 per share.

Returning to the theme of industrials as a potpourri (or smorgasbord, if you prefer) of sectors, another November price leader is security company ADT (ADT). The stock began trading on Sept. 28, after it was spun off from Tyco International (TYC). ADT rallied to a new high of $45.21 Thursday. Right now, this is still basking in the glow that many newly public stocks enjoy. Technically, it's been a juggernaut, although revenue and earnings performances have been slowing, with both showing single-digit increases over the past year, down from more robust gains in 2010. Analysts expect ADT to report 2013 earnings of $1.79 per share, a yearly increase of 3%. That's seen rising to $2.01 in 2014, a 12% year-over-year gain. As of now, ADT is overextended, and potential buyers may want to wait for a moving-average pullback. In addition, the stock does not quite yet have 50 days of trading history, so giving it a bit more time to establish itself would also be a good idea.

Also from the S&P Industrials, Flowserve (FLS) has been a solid technical performer, with a year-to-date gain of 41%. Month-to-date, it's up 3%. This fits more in the classic definition of "industrial" (to me, anyway). The company makes pumps, valves and other equipment for the construction and engineering markets. The stock rallied to an all-time high of $147.10 on Nov. 7, a couple days after RBC raised its price target to $154 from $140. But the stock reversed to finish lower in the same session. Analysts see the company growing earnings by 9% this year and 22% in 2013. The stock is currently hovering about 0.4% above its 5-day line, and is significantly above its 50- and 200-day lines. Longer-term investors may want to keep this on a watch list, and wait for a more significant pullback before attempting a purchase.

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