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Stock Screen: Best & Worst Performing Industries – May 9, 2011
Among the many features found in each week’s Issue of Value Line’s Selection & Opinion is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divvied up among 97 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization). This data also forms the basis for the Relative Strength price charts found on each industry page in the Value Line Investment Survey.
A quick review of the industries on our best/worst performer list can usually provide some insight into the underlying trends driving the broader market. Overall, the Value Line (Arithmetic) Average has performed well of late, rising 4.7% for the period under review (ended May 3, 2011). From an industry perspective, we find Apparel stocks leading the way, with a gain of 15.4%. Otherwise, the majority of the industries on the best performing list operate in the healthcare field, including the Drug companies and medical supply providers.
This week we will be concentrating most of our attention on the worst performing list. Rather than being viewed as afterthought, this roster of out-of-favor industries can at times be a source of worthwhile investment ideas. Indeed, it is not uncommon for industries to make the trek from worst performing to best performing in fairly short order. For instance, back in January, the Apparel industry, along with another of this week’s top performers, Shoes, could be found on the worst performing list.
The composition of the latest list of the down-and-out suggests that investors have a limited appetite for risk at the moment. We find that in each of these seven groups the median beta is well above 1.00, suggesting that a portfolio of equities comprised of stocks from our worst performing list would be much more volatile than the broader market. Although this propensity for wide price swings is working against these industries at the moment, it can result in outsized returns when investor sentiment shifts in a positive direction.
For instance, frequent readers of our best and worst performing lists will be quite familiar with the Oilfield Services/Equipment industry. This collection of nearly 30 stocks clocks in as the sixth worst performing industry in our recent rankings, losing about 2% in value over the preceding six weeks. For most of the month of March, however, the group topped our best performing list, as the shares of oilfield services providers and other energy-related equities were driven higher by the sharp rise in oil prices. Energy prices will likely continue to exert a strong pull on profits in this group, but the long-term outlook, driven by rising demand for oil and natural gas in emerging markets, appears favorable. And although valuations for the group as a whole aren’t especially attractive, a number of equities look poised to generate above-average share-price appreciation over the next three to five years. On this score, the shares of two of the industries largest players, Schlumberger Ltd. (SLB) and Transocean Ltd. (RIG), appear worthy of further investigation.
As is the case in the oil patch, investors looking for opportunities in the Newspaper industry will require a strong stomach. The median Beta for the group is above 1.50, and more than half of these stocks get marks of 10 or below for Price Stability. (Our Price Stability range runs from 5 for the most volatile stocks to 100 for the most stable ones.) However, while the price swings of oilfield services stocks are largely a reflection of the ebb and flow of energy prices, the concerns surrounding newspaper companies appear more existential. Thus, buy-and-hold investors, in particular, should proceed with extra caution around this group.
The newspaper operators continue to struggle to develop sustainable business models for a world in which increasing numbers of people consume news in digital (via computer or related devices) rather than paper-and-ink form. In fact, we find that only one of these companies, The Washington Post (WPO), was able to produce earnings in 2010 that surpassed the sums recorded in 2005. Conditions in the industry, such as demand for advertising and classified ads, should improve some as the recession recedes further into the past, but there is still considerable uncertainty surrounding the long-term profit picture here. In view of this, industry observers will be keeping close tabs on initiatives to implement premium-pricing strategies at The Dallas Morning News, which is owned by A.H. Belo Corp. (AHC), and The New York Times (NYT). Thus far, consumers have shown considerable resistance to paying for information over the Web. We think all but the most venturesome investors should show similar restraint in the sector until the long-term earnings drivers for these companies come into clearer focus.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.