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Sherwin-Williams Topped Valspar In 2012 Paint Race

The highly cyclical paint and coatings business does not typically excite thoughts of high-growth stock performance.

Yet in 2012, paint stocks boasted powerful rallies. What can we learn from them

The trade's leaders, including PPG Industries (PPG), Sherwin- Williams (SHW) and Valspar (VAL), pay dividends, enjoy long-term earnings stability, and offer ways to play housing and industrial sector cycles with buffered risk.

Plus, new homes and nearly all remodeling work need at least some paint. And rising industrial activity calls for coatings for everything from soda cans to the hulls of shipping fleets.

In the past year, what started as a stumblebum housing recovering gradually found its feet. The preceding decline was deeper than usual. The subsequent rebound has been more acute.

The cycle is somewhat predictable. Housing-related stocks, led by residential homebuilders, typically rebound abruptly in the early part of the housing cycle.

In 2012, Ryland Group (RYL) soared 132%. Pulte Homes (PHM) leapt 188%. Lennar (LEN) vaulted 97%. Paint makers Sherwin rose 72%, PPG 62% and Valspar 60%.

Sherwin was not the industry's obvious leader until later in the year. It started the year with margins and earnings increases accelerating from low levels, but sales growth contracting.

Peer Valspar was exhibiting powerful earnings gains and higher level sales growth. As a result, Valspar carried high Composite and EPS Ratings.

Sherwin rallied past an 87.40 buy point in a long cup with handle in late December of 2011 (1) (a monthly chart is shown). Volume was initially weak, but the stock gathered institutional support and stronger trading in the first two weeks of January.

Valspar, which had cleared a buy point in heavy trade in November 2011, was the group leader. But Sherwin also showed signs of strength, advancing for seven straight weeks up the cup's right side, closing consistently high in its range and driving its relative strength line to a new high. After clearing the base, it rose for 19 of the next 20 weeks through early May.

A 51% gain in first-quarter earnings and a 15% rise in sales put Sherwin on the leadership radar. A month after that April 19 report, the stock tested its 10-week moving average. Volume on the rebound was healthy, giving investors a chance to step on board.

In June, Sherwin formed a flat base with a 134.07 buy point. The stock's EPS Rating had climbed to a solid 87. Its Relative Strength Rating was a rocking 96, the Composite Rating a 97. The rally above the base's 134.07 buy point also came in light trade. A 4% gain in heavy trade on July 19 could have been considered a rebound from 10-week support.