Returns for our weekly best scoring by market cap:  Buy and Hold 1 Year, 0% turnover

•  The best sector is industrial goods
•  Focus Picks: ASBC & LII

The top sector overweight remains industrial goods heading into the final weeks of 2013.

Healthcare, services, consumer goods and financials also score high.  In healthcare, focus on large and mid cap.  In services, concentrate on large and small cap.  Across consumer goods, buy mid cap.  And in financials, own large and small cap rather than mid cap. 

Technology, basic materials and utilities continue to score below average.
 

The following chart visualizes score by market cap and sector.



This next chart shows historical average scores for our 1800 company universe and a comparison of the SPX to our scores historical trend.
 

In large cap, concentrate on asset managers, aerospace/defense and healthcare plans.  In mid cap, the best industries are drug makers, small tools and specialty chemicals.  The top scoring small cap industries are consumer services, metal fabrication and home healthcare.
 

Industrial Goods

The following industrial goods stocks offer the best seasonality for the 3-month period beginning December and ending February 28th.  Aerospace related companies (HON, CAE, CIR) are well represented.
 

 Among the top scoring industrial goods companies are aerospace/defense and diversified machinery (MIDD, TWIN, PLL).  Aerospace/defense sand suppliers benefit from rising OEM plane production and optimism over Washington budget negotiations.  Diversified machinery benefits from rising manufacturing activity and signs of European manufacturing recovery.   Broadly, demand for equipment, machinery, tools, and construction services benefit as residential construction growth spreads into commercial.  In October, construction spending came in 5.3% higher than a year ago, bringing year-to-date construction spending 5% above 2012.  Non-residential construction spending growth has been led by lodging, commercial, transportation and manufacturing over the past year.  Europe remains a wildcard for potential growth in 2014 as analysts' under-model potential recovery.
 

Healthcare

The following healthcare stocks offer the best seasonality for the 3-months ending February.   Healthcare strength shifts more to medical appliances and instruments than biotechnology.
 

The following are the highest scoring healthcare companies this week.  Specialty drug manufacturers (UTHR, QCOR, ALXN) are well represented and benefit as specialty drug pricing and label expansion provide revenue upside.  IMS projects global drug spending will climb from tepid <3% growth to a compounded 3-6% annual rate over the next five years, led by specialty drug spending which is forecast climbing 38% to $230-$240 billion in 2017.
 

Services

The following services stocks offer the best seasonality through the end of February.  Discount brand retail is strong (ROST, TJX).  Auto dealers (KMX) offer upside, with manufacturers recording their best monthly sales in over six years.  Autodata estimates sales reached a 16.4 million annualized run rate in November, increasing 8.9% year-over-year.   U.S. light vehicle sales are 8.3% higher year-to-date than in 2012, according to Ward's.

The strongest services industries include railroads (TRN, CSX, ARII) and truckers (HTLD).  In November, U.S. intermodal rail carloads were up 7.8% from a year ago, helping total carloads increase 1.3% from last year.  The biggest year-over-year growth came from grain and petroleum shipments.  Motor vehicle carloads were also up 10.8%.  Excluding coal, U.S. rail carloads were up 5.3% from 2012 in November.    

 
 
Consumer Goods

The following consumer stocks have the best seasonality through February.
 

Across consumer, focus on auto parts and textiles.  Inventory turns support retail restocking while cotton prices remain margin friendly.  In November, cotton "A" index prices fell to 84.65 cents per pound from 89.35 cents per pound in October, marking the third consecutive month of declines.
 

Financials

These three financials provide the best seasonal tailwinds through February.

In financials, buy asset managers (AMP, PJC) and regional banks (FFIN, OZRK, TBBK).  Asset managers benefit from equity driven AUM growth and rotation into higher fee products and out of lower fee fixed income.  Regional banks loan growth focus is migrating from C&I loans to consumer loans.  Profits at banks are set to climb further as excess deposits are converted into loans.

FOCUS PICKS

Associated Banc-Corp (ASBC)
 
In the 3-month period ending January, ASBC has posted gains in 7 of the past 10 years, generating a 4.26% average return and a 6.12% median return. ASBC's standard deviation is 16.02% in the period and its correlation to the SPY is 0.90.
 

• Improving manufacturing activity in the Midwest supports C&I and CRE loan growth, which is being leveraged against lower fixed costs tied to fewer branches and employees. 

Associated, with 239 branches, is one of the fifty largest publicly traded banks, with $24 billion in assets.  The company is most heavily tied to Wisconsin, where its 170 branches account for $11.9 billion of the banks $18 billion in deposits.   It also operates 44 branches in Illinois and another 25 in Minnesota.   Midwest manufacturing has grown a CAGR of 6.7% since 2011, more than 2x the national average, and the Chicago Fed Midwest Manufacturing Index is 97.4, up from 92.1 a year ago.   21% of the company's CB&L loans are manufacturing, while another 11% are wholesales/trade.    Of its CRE portfolio, 24% is multifamily, 21% is office and 23% is construction.  Average loans have grown 5% from a year ago to $15.7 billion.  39% of the company's assets are retail, 37% are C&I (up from 33% in 2009) and 24% are Comm'l real estate.  The biggest jump in loans this year has come from residential, where ASBC's loan portfolio has grown 11.9%.   Midwest housing starts were 149k in August, up from 128k a year ago and the median home price for existing home sales has increased to $154.7k from $141.5k last year.  CRE is up 9.6% and general comm'l is up 7.2%.  The bank is also focusing more attention on power markets, where loans are up 148% and oil & gas, where loans are up 30.9%.  As expected, net interest income is climbing thanks to rising loan activity, which is offsetting NIM compression.  NIM's have fallen from 326 bps to 313 bps YoY, while net income has climbed from $156 million to $161 million.   Net interest income in the first 9 months has climbed to $470 million from $410 million in the same period of 2011.  Meanwhile, the banks cost of funds has fallen 24 bps thanks to expiring CD's moving into low and no interest savings.  Net charge offs have fallen to 0.14% of average loans, from 0.47% last year and non performing assets to total assets stand at 0.98%, down from 1.38% last year.  That's thanks in part to the unemployment rate in the Midwest falling to 7.1% from  8.2% in the fall of 2011.  Through October, the company has bought back $120 million in stock, up from $60 million in the comparable period of 2012.  The company's efficiency ratio has dropped 90 bps in the past year as full time employees have fallen by 5%.  However, there's more room for improvement given its 68.5% ratio remains above the 64.5% peer average.  That should improve as the bank consolidates operations and increases IT investment.  The bank has shrunk from 315 branches to 239 since 2007, and ASBC expects to operate less than 230 branches by the middle of 2014.  In the first 9 months of this year, ASBC's EPS is $0.82, up 11% from 2012.   In October, the bank bumped up its dividend to $0.09 per quarter from $0.08 last year.  Book value is $17.10, up from $16.82 a year ago. 

November BancAnalysts  Presentation
FYQ3 Earnings Transcript

Lennox Int'l (LII)
 
In the 3-month period ending February, LII has posted gains in 9 of the past 10 years, generating a 12.12% average return and a 12.19% median return. LII's standard deviation is 7.37% in the period and its correlation to the SPY is 0.62.
 

Lennox gets 53% of its business from commercial customers, 68% of which is demand for replacement units, and 83% of which occurs in the Americas.  27% of its sales are for refrigeration products, like those used in C-stores and Supermarkets.   LII is guiding for sales of ~$3.2 billion, up from $2.9 billion last year and $2.4 billion in 2009.   The company expects high single digit residential unit volume growth, up from 2% YoY growth last year as new construction continues higher --supporting margin.  LII continues to open PartsPlus stores to better serve emergency repair markets.  Currently, LII operates 136 of those stores and expects to operate 215 or more by the end of 2016.   Comm'l HVAC sales grew 12.7% in 2012 on 4% unit volume growth in No. America for unitary systems.  Comm'l construction spending should improve in 2014, supporting unit and sales upside (new construction accounts for 20% of unitary demand/emergency replacement is 45% and planned replacement is 35%).  Comm'l segment margin was a record 16.4% in Q3.  The company also provides ongoing service for major retailers including McDonald's, Lowe's and Ross Stores.  Sales from those accounts are expected to grow to $150 million in 2015, up from $85 million last year.  Additional comm'l tailwinds could come from a pickup in Europe, where comm'l demand grew for the first time in a year last quarter.   In refrigeration, more than half of sales come from No. America, however, rapid growth in Asia and Latin America has lifted that region to more than a quarter of all revenue.  The company expects relatively lackluster demand for refrigeration to turn higher next year.  The company continues to restructure sourcing to lower cost suppliers and is transitioning to lower cost aluminum from copper; moves LII expects will save $30 million annually.  Last quarter, total margin expanded 190 bps thanks to rising volume and pricing.  The company expects another price increase for 2014 to offset higher steel prices -- protecting margin.  For the full year 2013, LII is guiding $3.50-$3.75 per share on 6-8% top line growth.   Exiting Q3, LII increased its full year planned buybacks to $125 million from $100 million -- reflecting improving free cash flow, which grew to $136 million in Q3 from $63 million last year.  In 2015, sales are expected to grow to $3.5 billion.
 

Corporate Barclay's Presentation
Company's Q3 EPS transcript

Economic Data to Watch this Week: 
 

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