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Stock Screen: Best & Worst Performing Industries - February 3, 2012
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 divided up among about 100 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. As indicated by the 8.5% advance in the Value Line Arithmetic Average over the six weeks ending January 31st, equities have been a roll of late, likely fueled, in part, by data suggesting that the economy is expanding at a better-than-expected clip. Given this backdrop, we don’t find too many surprises among the names found on both the best and worst performing industries. The best-performing list is dominated by cyclical industries, such as Basic Chemicals (up 23%), Automotive (18%), and Homebuilding (17%) that are heavily populated with high-Beta stocks. At the other end of the spectrum, we find numerous, low-Beta, utility-related groups, including Electric Utility (East), Electric Utility (Central), and Natural Gas, being largely left behind in the recent upturn.
In looking for investment ideas among the best-performing industries, we will be focusing our attention on life-insurance stocks. This group has risen 21% in the past six weeks, the second best return of all the industries we follow. Many of the life insurers experienced sharp profit downturns during the last recession and the related bear market. The industry has regained most of this ground since then, though volatile equity markets, low interest rates, and sluggish global economic growth have contributed to a fairly challenging operating environment over the past year or so. And for most of 2011, investors showed limited enthusiasm for the group, which noticeably underperformed the broader market last year. The tide, though, began to turn last fall, and this momentum continued through January, lifting the life insurers to a spot among the best-performing industries in the latest six-week stretch.
MetLife, Inc. (MET) is a suitable place to start for investors seeking investment opportunities in the life insurance industry. The Park Avenue-based insurer is the largest life insurance company in the United States. It is also a leading group non-medical health insurer and provides financial services to institutions and individuals. In addition, the company has been accelerating its expansion into international markets, a strategy that got a big push in late 2010 with the purchase of American Life Insurance Company (ALICO) from AIG, Inc. (AIG).
MetLife’s December-quarter earnings won’t be available until after the market closes on February 14th. We expect the results will make for relatively pleasant reading, with share net likely coming in at $1.27, up 11% from the prior-year period. The positive momentum should persist through 2012, lifting earnings another 13% or so. In the wake of the ALICO deal, the company’s progress in foreign markets figures to play a key role in keeping profits on the rise. The international business accounted for less than 20% of operating income prior to ALICO joining the fold, but this number likely surged to about 40% last year.
MET shares have been a beneficiary of the market’s recent enthusiasm for life insurers, but are still far below their 52-week high, and trade a modest, single-digit P/E multiple. At this valuation, MET shares appear to offer good appreciation potential to 2014-2016, while also providing a decent measure of current income (yield: 2.3%). Unlike many of its peers, MetLife didn’t cut its dividend following the 2008 profit slump. Neither, though, has it increased it in subsequent years, with the company foregoing both dividend hikes and share repurchases in favor of conserving capital. With the ALICO purchase now more than a year behind it, the company should be more willing to loosen the purse strings in 2012.
Prudential Financial (PRU), one of the largest life insurance companies in the U.S., provides a wide variety of insurance, investment management, and other financial products and services. Its two domestic businesses, U.S. Retirement Solutions & Investment Management and U.S. Individual Life & Group Insurance, accounted for 54% of operating profits. Prudential also has a sizable presence in international markets, where it generated 46% of its operating profits.
Prudential, which is scheduled to release December-quarter results after the market closes on February 8th, likely finished 2011 in lackluster fashion. Weakness in the U.S. Retirement Solutions & Investment Management division contributed to a sharp decline in third-quarter earnings, and we expect profits in the final three months of the year were no better than those in prior-year period. The company should get back on track in 2012, though, with incremental contributions from last February’s purchase of Star Life and Edison Life and a reduced share base helping to lift earnings by 10% or more.
Befitting a high-Beta stock, PRU shares have been on roll since the recent market rally commenced in late November. Even with this run-up, the stock still offers good appreciation potential to mid-decade for patient investors, in our view. The equity should also have some appeal with income-oriented accounts, though its low score for Price Stability means more-conservative investors should proceed cautiously. The company, which pays a dividend once a year, usually in December, did slash its payout in response to the 2008 profit slump. The dividend has rebounded quickly since then, however, and now stands at $1.45 a share, up 26%, from $1.15, which was the payout in both 2007 and 2010. An increase in the neighbor of 10% to 15% seems likely this year.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.