Stock Ratings Define Sector Ratings

TheStreet.com

NEW YORK (TheStreet) -- In March I noticed a dramatic shift in the distribution of buy rated stocks and sell rated stocks among the 16 sectors covered by ValuEngine. My analysis resulted in how I rated key sectors and what story each told about the U.S. economy. This last time I covered this concept was on April 5 when I wrote, Stock Ratings Key Market Top. Today I provide the current status of this unique analysis.

The basic materials sector is undervalued by 6.4% but only nine stocks out of 411 in the sector have buy ratings. There are 143 sell rated stocks and 57 strong sell rated stocks and thus 48.7% of all stocks in this sector are rated sell. This gives the sector an underweight rating.

Among the sell rated names in this sector is Dow component DuPont which peaked at $57.25 on May 31. The stock closed Friday at $52.68 with this month's value level at $48.23.

The construction sector is 13.2% overvalued but only 17 stocks out of 160 in the sector have buy ratings. There are 40 sell rated stocks and 27 strong sell rated stocks and thus 41.9% of all stocks in this sector are rated sell. This gives the sector an underweight rating.

There are five home builders in the sector that have been upgraded to buy recently and I will cover them on Thursday following this week's data on home builder sentiment and housing starts.

A notable buy rated stock in this sector is cement company Cemex which peaked at $12.57 on May 15. The stock closed Friday at $10.46 with its 200-week simple moving average at $9.90.

The oils-energy sector is 8.2% overvalued and only 14 stocks out of 558 stocks in the sector have buy ratings. There are 141 sell rated stocks and 47 strong sell rated stocks and thus 33.7% of all stocks in this sector are rated sell. This gives the sector an underweight rating.

A notable buy rated stock in this sector is the extremely volatile First Solar which peaked this year at $59.00 on May 21. The stock closed Friday at $44.71 with a semiannual value level at $36.34 and this month's pivot at $48.63, which was a value level as June began.

The retail-wholesale sector is the most overvalued sector by 22.5%, but the sector has 267 buy rated stocks out of 358. With 74.6% of all stocks in this sector rated buy the sector gets an overweight rating.

Among the buy rated names are many of the discount retailers including two I mentioned when recording a segment on Yahoo Finance Breakout.

Dollar Tree peaked this year at $51.20 on May 23. The stock closed Friday at $49.12 with a semiannual value level at $47.35, and a semiannual pivot at $50.27.

Ross Stores peaked this year at $66.60 on May 9. The stock closed Friday at $64.86 with a monthly value level at $56.55, and a semiannual risky level at $69.32.

The transportation sector is overvalued by 20.8% but only 7 stocks out of 183 in the sector have buy ratings. There are 94 sell rated stocks and 44 strong sell rated stocks and thus 74.5% of all stocks in this sector are rated sell. This gives the sector an avoid-source of funds rating. I spoke to an industry insider last week who told me that commercial shipping is weakening and that margins slipped to 15% due to fierce competition. Before the recession margins were around 30%. I will cover this sector on Wednesday.

The utilities sector is overvalued by 9.6% but 73 stocks are rated strong buy and 121 are rated buy. With 215 stocks in the sector 90.2% have buy ratings. This sector is thus rated overweight. This anomaly suggests that investors should be rotating into this dividend friendly sector.

Rather than pick names I suggest investing in the Utilities Select Sector SPDR which peaked this year at $41.44 on April 30 then dropped like a popped bubble to its 200-day simple moving average at $37.21 last week. The EFT closed Friday at $38.00 with a semiannual value level at $36.48, a monthly pivot at $38.51, and a quarterly pivot at $40.27.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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