Among the features found in each week’s issue of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. The time frame encompassed by the latest rankings (November 22nd to January 3rd) corresponds roughly to the final six weeks of 2011.
After a rough-and-tumble year, the markets closed out 2011 on a high note. The Value Line (Arithmetic) Average, for instance, advanced by 7.3%, and most of the leading market benchmarks also racked up strong gains. The upswing was largely propelled by a release of favorable data regarding the performance of the domestic economy.
In this environment, industries had to clear a very high hurdle to qualify as a top performer in this week’s rankings. With a sizzling gain of 23%, the newspaper industry ran away from the field. Building Materials, its nearest adversary, benefited from strong investor support for, among others, the ADRs of Cemex (CX), the Mexican cement maker, and the shares of USG Corp. (USG), the Chicago-based supplier of gypsum wall board, ceiling tiles, and other products. Even with this, however, the industry’s overall advance of 15% still left it a distant second. Meanwhile, a number of industries, including Hotel & Gaming and Thrift, generated gains of 10%, but still fell short of our top seven.
This week we will take a closer look at some of the stocks that have powered the best-performing industries to their lofty standings in our latest rankings. As is frequently the case, particularly when equity prices are on the rise, investors using this approach to identify potential investment ideas in the current market environment will need a healthy appetite for risk.
For starters, the star performer of late in the newspaper industry has been McClatchy Co. (MNI) stock. McClatchy is the third-largest newspaper company in the United States, with a portfolio that includes Sacramento Bee, Kansas City Star, Charlotte (NC) Observer, and Fort Worth Star-Telegram. Its share price has more than doubled since early December when the California-based newspaper publisher provided its long-beleaguered shareholders with some comparatively encouraging news. Advertising revenues dropped 10.0% in the first nine months of 2011, but the erosion slowed to just 2.4% in the month of November. The company also indicated that Sunday circulation in the preceding five months edged ahead 1.9% on a year-over-year basis.
Still, investors shouldn’t diminish the challenges facing McClatchy and the broader newspaper industry, which are reflected in this stock’s rank for Safety (5: Lowest). In the middle of last decade, the company’s annual earnings frequently surpassed $3.00 a share. Share net has slipped under a dollar in recent years, and likely only reached $0.40-$0.50 in 2011. The last recession and the migration of readership (and advertising dollars) to other news sources (e.g., the Internet), have taken a heavy toll, and the latter challenge, obviously, isn’t likely to go away. On the positive side, even a modest uptick in profits, likely helped along by better economic conditions in key markets, such as California and Florida, should help this equity garner a much stronger valuation. As such, we think there is still ample upside for the stock over the next 3 to 5 years for venturesome investors.
One of the few industries to have had a tougher time than the newspaper group in recent years is Homebuilding. Generally speaking, 2011 was another grueling stretch for the companies in this market and their investors. As suggested by the industry’s presence among our recent best performers list, the year finished on something of a hopeful note.
One of the stocks leading the late year charge was Beazer Homes USA (BZH). Beazer, which designs, builds, and sells single-family homes for entry-level and first move-up buyers, has struggled badly since the collapse of the housing boom. In fiscal 2011, which ended on September 30th, the company generated $740 million in revenues, down from $1.0 billion in the previous 12 months, and $5.5 billion in fiscal 2006, which was also the last year in which the company turned a profit.
The favorable flow of domestic economic data that helped spark the broader market’s late-year rally included several encouraging bits about the housing market, including solid gains in housing starts and building permits. BZH stock, as one of the most beaten-down and volatile holdings in the sector, has gotten a big boost from the news. As was the case with MNI shares, however, investors need to proceed cautiously before jumping on the bandwagon. This equity’s past performance, along with its Safety Rank (5: Lowest), Beta (2.50), and Price Stability score (5: Lowest), all indicate that BZH’s share price is likely to react just as dramatically to any negative developments regarding the industry’s long-awaited, and often-delayed, recovery.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.