What the Market Wants: Three Good Stock Ideas and a Contoversial Fourth

Monday was yet another up-day for the S&P 500 Index as it reached 1704.95, narrowly missing its all-time high of 1709.67 set in August, but the index closed at 1697.60, up +0.57%. The Dow was also up, +0.77%, but the Nasdaq fell -0.12%

The day’s strength was chiefly attributed to a combination of Larry Summers stepping aside as the likely nominee for the new Fed chief and the signing of the agreement between Russia and the US on a method to require Syria to turn over its chemical weapons to the international control. Summers had been under fierce opposition even from Democrats, after being favored by President Obama.

Economic news of the day was positive with solid readings from Empire Manufacturing, industrial production and capacity utilization.  At 6.3, the Empire Manufacturing  reading was a bit below last month’s 8.2 and the expected 9.0, but still quite robust.

Last week was yet another stellar week for small-cap growth, which led all style/caps with a solid +2.59%. Large-cap value trailed the style/caps, up only +1.90%. Not too shabby.

Industrials (+3.24%) was the leading sector followed closely by Consumer Cyclicals (+2.75%) and Non-Cyclicals (+ 2.65%). Utilities stayed at the bottom but still gained +1.13% as funds continued their flow from fixed income into equities, as treasuries remain weak. Our forward looking SectorCast model shows Financials, Energy, Healthcare, Industrials, and Basic Materials as the likely leaders over the next month.

The market closed on a receding note when bonds rallied after the President warned in an afternoon speech that he was not going to step aside in his pursuit of the raising the US debt ceiling, a move fiercely opposed by the Tea Party and others. During the next month Congress must settle its budget battle and those prickly issues about the continuing sequestration, Obamacare, and raising the debt ceiling. Each new rhetorical outburst related to these hot political issues could be a market-moving event.

We continue to seek well-priced growth, especially in small-cap stocks, while remaining cautious.  Nevertheless, in the absence of a major jolt, the market is likely to move ahead as funds continue to flow into equities in response to the likelihood of weak treasuries overhanging the fixed income market.

4 Stock Ideas for This Market

This week’s selections are all small-cap stocks with great numbers, but one is tagged with a bit of controversy.

Methode Electronics, Inc. (MEI) – Industrials (Machinery Equipment Components)
Price when selected on 9/16/13: $25.26   Website: http://www.methode.com
Methode Electronics is a leading developer of custom-engineered and application-specific products and solutions in the market areas of user interfaces, power, data, and sensor and switches.  MEI has had positive earnings surprise in four of the past four quarters, and analysts have raised estimates for the next quarter this year, and next year. Earnings are expected to grow 169.20% this quarter, 266.70 next quarter, and 166.10% this year; then tapering off to 15.00% per year over the next five years. All this growth, and the forward P/E is only 13.29.  MEI also pays a small dividend, for a 1.10% yield.

CECO Environmental Corp. (CECE) -- Industrials Sector (Pollution & Treatment Controls)
Price when selected on 9/16/13: $12.92   Website: http://www.cecoenviro.com
CECO Environmental Corporation provides clean air solutions for various industries worldwide. CECO has had positive earnings surprise in three of the past four quarters. Earnings are expected to increase 15.80% t his quarter, 44.40% next quarter, and 47.70% this year, settling down to a 20% per year growth rate over the next five years. A forward P/E of 12.07 means you’re only paying 12x these earnings. CECO also has a dividend yield of 1.50%.

Republic Airways Holdings Inc. (RJET) -- Industrials (Regional Airlines)
Price when selected on 9/16/13: $12.16   Website: http://www.rjet.com
Based in Indianapolis, Indiana, Republic Airways Holdings is an airline holding company that owns Chautauqua Airlines, Frontier Airlines, Republic Airlines and Shuttle America. RJET has had positive earnings surprises in three of the last four quarters. Its projected earnings growth rate is 23.50% for this quarter, 22.90% for next quarter, 41.40% for this year, and tapering off to 14.60% for next year. The stock is nicely undervalued with a forward P/E ratio of 6.76.

Bio-Reference Laboratories Inc. (BRLI) -- Healthcare (Healthcare Provider Services)
Price when selected on 9/16/13: $29.36   Website: http://www.bioreference.com
Bio-Reference Laboratories, Inc. provides clinical laboratory testing services for the detection, diagnosis, evaluation, monitoring, and treatment of diseases primarily in the greater New York metropolitan area. The company provides its services directly to physicians, geneticists, hospitals, clinics, and correctional and other health facilities. Despite the fact that BRLI has a high short interest (over 40%), which makes it a controversial pick, its earnings numbers and valuation are compelling (20 percent expected growth rate for this quarter, next quarter and next year, with a forward P/E of 14.25. We’ve included it for your consideration, but we encourage you to read the stories floating around out there. Perhaps there’s a good opportunity here—or a reason to steer clear.

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems
 

http://www.sabrientsystems.com

Follow us on Twitter: @sabrientsystems and @ScottMartindale

Full disclosure:  The author does not hold positions in any of the stocks mentioned in this article.

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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