The frenzy of the National Collegiate Athletic Association (NCAA) Men's Division I Basketball Tournament goes beyond the sporting space. “March Madness” is often felt in the investment world where investors want to bet on the stock that could generate crazy money.
As the basketball tournament 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 chosen four sectors – technology, energy, medical, and basic materials -- among our 16 Zacks sectors that are currently hogging investor attention. We have picked the four best industries (within the top 35%) from each sector with the help of our Zacks Industry Rank.
Then, we have picked 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, 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 with the low industry ranks.
Technology
The four top industries and their best stocks in the technology sector are as follows:
1. Computer-Optical Recognition: Top Rank; Stock - Mitek Systems Inc (NASDAQ:MITK)
2. COMP-MAINFRAME: Rank in the top 2%; Stock - Lenovo Group Ltd PK (OTC:LNVGY)
3. ELEC MISC SERVICES: Rank in the top 2%; Stock - Jack Henry & Associates Inc (NASDAQ:JKHY)
4. ELEC-CONNECTORS: Rank in the top 2%; Stock - Methode Electronics Inc (NYSE:MEI)
MITK vs. MEI: Here, MEI wins over MITK as it has returned 24.2% in the year-to-date timeframe versus a loss of 5.1% for the latter.
LNVGY vs. JKHY: LNVGY beats JKHY in the same period by a margin of more than 260 bps.
Energy
The four top industries and their best stocks in the energy sector are as follows:
1. Oil Refining & Marketing MLP: Rank in the top 5%; Stock - Western Gas Equity Partners (WGP)
2. E&P MLP: Rank in the top 6%; Stock - Cypress Energy Partners (CELP)
3. Oil Refining & Marketing: Rank in the top 6%; Stock - Valero Energy (NYSE:VLO)
4. Emerging Markets Integrated: Rank in the top 11%; Stock - Petroleo Brasileiro Petrobras SA (NYSE:PBR)
WGP vs. PBR.A: Western Gas edged past Petrobas with a gain of 1.3% versus loss of 19.3% for the latter.
CELP vs. VLO: Valero easily outpaced Cypress Energy in the same period, gaining 28.8% against gain of 13.6% for CELP.
Medical
The four top industries and their best stocks in the medical sector are as follows:
1. Medical-Outpnt/Hm Care: Rank in the top 14%; Stock - Quest Diagnostics (NYSE:DGX)
2. Medical Services: Rank in the top 14%; Stock - Quintiles Transnational Holdings (NYSE:Q)
3. MED-HMO: Rank in the top 25%; Stock - Anthem Inc. Anthem Inc (NYSE:ANTM)
4. MED-BIOMED/GENE: Rank in the top 29%; Stock - Illumina Inc (NASDAQ:ILMN).
DGX vs. ILMN: Quest Diagnostics wins over Illumina by a wide margin of around 14% in the year-to-date timeframe.
Q vs. ANTM: Anthem easily edged out Quintiles by gaining 22.9% versus 12.6% gain for Q.
Basic Materials
The four top industries and their best stocks in the basic material sector are as follows:
1. Fertilizers: Rank in the top 15%; Stock – The Mosaic Company (NYSE:MOS)
2. MINING -NON FERR: Rank in the top 20%; Stock - Energy Fuels (AMEX:UUUU)
3. MINING –GOLD: Rank in the top 26%; Stock - Newmont Mining (NYSE:NEM)
4. MINING –SILVER: Rank in the top 33%; Stock - First Majestic (MX:AG)
MOS vs. AG: Here, First Majestic easily outpaced The Mosaic as it gained 18.9% compared to 1.9% for MOS.
UUUU vs. NEM: MEM is clearly the winner as it returned 18.9% in the year-to-date timeframe versus a loss of 24.4% 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 positive earnings estimate revisions over the past 30 days were used to decide the winners of each sector that should advance to the Final Four.
MEI vs. LNVGY: Methode Electronics has seen solid earnings estimate revision of 9.6% for fiscal 2016 while Lenovo Group has seen no revision. Hence, MEI wins over LNVGY.
WGP vs. VLO: Western Gas has seen earnings estimate revision of 3.93% for fiscal 2015 while Valero Energy 2015 earnings estimate has gone up by 7.74%. As a result, VLO turns out as the winner in the energy sector.
DGX vs. ANTM: Quest Diagnostics wins despite no earnings estimate revision for fiscal 2015. This is because Anthem has seen its 2015 earnings estimate going downward by 3 cents over the past 30 days.
AG vs. NEM: Newmont Mining wins over First Majestic, as its fiscal 2015 earnings estimates have been revised up by 6.36% while no revision activity was seen for AG.
Final Four
We now have the best stocks in the four sectors. To advance to the next level, we have taken the year-over-year earnings growth. Let us once again see the Zacks industry ranks of the four stocks to decide the contenders.
Methode Electronics – Zacks industry Rank in the top 2%
Valero Energy – Zacks industry Rank in the top 6%
Quest Diagnostics– Zacks industry Rank in the top 14%
Newmont Mining – Zacks industry Rank in the top 26%
So in the matchups, we have Methode Electronics and Newmont Mining on one side, and Valero Energy and Quest Diagnostics on the other.
Methode Electronics vs. Newmont Mining: Earnings will likely grow 6.9% for MEI and 7.3% for NEM. With a higher earnings growth rate, Newmont wins and advances towards the final round to take on the winner of VLO vs. DGX.
Valero Energy (VLO - Analyst Report) vs. Quest Diagnostics (DGX - Analyst Report): VLO earnings growth is expected to decline 6.36% while DGX will likely see earnings growth of 16.19% for fiscal 2015. Here, Quest Diagnostics wins and will again matchup with Newmont for the championship.
The Championship
Let’s look at the P/E and P/B ratio and compare them with the industry averages. A lower ratio indicates that the stock is undervalued and has the potential to move much higher than its counterpart in the coming months.
While Newmont Mining has a lower P/B ratio of 0.9 versus the industry average of 1.7, P/E ratio is higher at 19.2 versus 17.6. On the other hand, Quest Diagnostics has a P/E of 15.9 and P/B of 2.5 – a massive discount to the industry average P/E ratio of 21.9 and P/B ratio of 4.0.
This suggests that in the stock world, Quest Diagnostics will likely win the championship for 2015 March Madness based on our internal research and metrics.