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Stock Screen: Best & Worst Performing Industries – May 27, 2011
Among the many features found in each week’s Edition of Value Line’s Selection & Opinion service 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 98 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 form 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. The performance of The Value Line (Arithmetic) Index has slipped 0.7% for the period under review (ended May 3rd), reflecting the recent skittishness of the market. From an industry perspective, we find restaurant stocks leading the way, with a gain of 8.3%. The healthcare field has been well represented on the best performing list in recent weeks, though only the Pharmacy Services sector was able to secure a spot in the current lineup.
The most conspicuous name among this week’s top performers is perhaps the Air Transport Industry, which has made frequent appearances on the worst performing list in 2011, including as recently as five weeks ago. The rapid change in investor sentiment, though, is not out of character. This sector includes many stocks with low marks for Price Stability. Changing energy prices are often a contributing factor to the volatility, reflecting the strong influence that fuel costs can have on profit margins. This has worked to the group’s advantage in recent weeks, as oil quotations, though still up sharply from 2010 levels, have retreated somewhat from post-recession highs reached in early spring.
In looking for individual stocks from the ranks of the best performing industries, we put an added emphasis this week on long-term appreciation potential. The Air Transport Industry has the strongest prospects in this regard, though, as just discussed, investors in this space usually have to be comfortable with heightened share-price volatility. Delta Air Lines (DAL) certainly fits this description. Shares of the international airline have a Below Average Safety rank (4), but appreciation potential to 2014-2016 far exceeds the Value Line median, which currently stands at 55%. Higher fuel costs (year over year) are likely to hold back earnings in 2011, but we expect the company’s efforts to improve margins and reduce its sizable debt load (about $15 billion versus a market capitalization of roughly $9 billion) will likely drive strong profit gains in 2012 and beyond.
Meanwhile, conservative investors don’t have to entirely forgo the Air Transport industry. In particular, shares of package delivery giants FedEx Corp. (FDX) and United Parcel Service (UPS) have numerous attributes that would make them at home in many portfolios. UPS stock, for instance, has our top rank for Safety (1), an above-average dividend yield (about 3%), and offers good price appreciation potential to 2014-2016. Investors willing to accept a little more risk (Safety: 2, Above Average) and a lower dividend yield (0.5%) in exchange for bigger long-term upside may find FDX shares more to their liking.
Getting our feet back on the ground, we can find stocks elsewhere in our best performing industries that will appeal to patient investors. One interesting, and potentially rewarding, turnaround play to consider is Avon (AVP). The cosmetics maker is one of the leading names in the Toiletries/Cosmetics Industry, which clocks in as the sixth best performer in our recent rankings. The company has a lot on its plate at the moment, as it seeks to halt a two-year earnings slide. Priorities include improving its performance in Brazil and Russia (its two largest markets) and stabilizing the North American business. The company got off to a solid start in 2011, as March-quarter earnings rebounded strongly from the depressed levels of the prior-year period and beat our estimate by $0.02 a share. We look for further progress in upcoming quarters, with full-year share net climbing nearly 50%, to $2.00. The aggressive steps being taken to boost results include significant changes in the corporate structure which may make the company more vulnerable to operational miscues. Any setbacks, though, could invite the attention of activist investors, which lends an added measure of speculative flavor to AVN shares.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.