Like animals in nature, stocks tend to move in groups. The importance of identifying leading sectors and industry groups has been well-documented. Quantitative research studies suggest that approximately half of a stock’s future price appreciation is due to its industry grouping.

Beginning with this top-down approach not only allows us to narrow the investable universe but also guides us to stocks with the best profit potential. Once we begin to regularly view stocks in leading industry groups, we’ll start to notice that these stocks will continually make new highs as they have the strong backing of their leading industry.

Focusing on the top-performing industry groups provides us with a constant ‘tailwind’ to our investing success. A great starting point is to identify the leading industries and buy one or two top individual performers from each industry group. The length of time an industry group remains a leader can vary from several months to a year or longer.

So how do we go about identifying the leading industries?

The Nasdaq officially entered a bear market in early March, but has swiftly reversed course after a record intramonth surge that made the history books. The tech-heavy index remains in correction territory but appears to be on the way back up to test its previous highs.

The formation of a bear market bottom normally begins with signs of accumulation in select industry groups and sectors. Using a combination of fundamental and technical analysis helps guide us to the leading groups. For example, we can determine that a specific industry has been outperforming the market over the past year while also containing stocks that are experiencing positive earnings estimate revisions – the most powerful force in stock investing.

The industry groups with a healthy number of stocks hitting new highs coming off the market bottom will often be the leaders. Many times, these stocks will bottom before the general market and will start breaking out well in advance of the major indices.

Let’s take a look at a current example. The Zacks Funeral Services industry group is currently ranked in the top 2% out of approximately 250 industry groups. This group has outperformed the S&P 500 over the last year and its constituents are all witnessing positive earnings estimate revisions.

Investing in funeral companies is nothing new as these companies have been around for a long time. Funeral companies are businesses and provide a service to those in need, just like companies in different industries provide a product or service to customers who require assistance.

And while investing in funeral companies may be controversial and lack excitement, there’s a reason they are outperforming the market. The industry group is displaying above-average historical sales growth, dividend increases, and earnings growth. Also note the favorable valuation characteristics for the Funeral Services industry:

Image Source: Zacks Investment Research

It’s not too difficult to understand why these companies likely still have room to run. Let’s take a look at a top individual stock contained within this leading group.

Service Corporation International (SCI)

Service Corp. International is North America’s leading provider of deathcare products and services. Based in Houston, TX, SCI operates through their Funeral and Cemetery segments. SCI provides professional services related to funerals including the use of facilities and motor vehicles, cremation, memorialization, as well as catering services. The company markets its Dignity Memorial® brand which offers assurance of quality, value and exceptional customer service.

A Zacks Rank #2 (Buy) stock, SCI has been on a tear recently in terms of earnings beats – averaging a +43.8% surprise over the past four quarters. The company has exceeded earnings estimates in each of th last seven quarters. The funeral services provider most recently posted Q4 EPS of $1.17, a +17% surprise over consensus estimates. SCI stock has followed suit, advancing nearly 32% over the past year.

Image Source: Zacks Investment Research

Analysts covering the firm have boosted their current-quarter estimates by +4% in the past 60 days. The Zacks Consensus Estimate now stands at $1.04. SCI is slated to report the Q1 results on May 2^nd.

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