Among the many 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. 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. Over the six weeks ending April 17th, some of the best investment returns could be found close to home. Specifically, industries closely connected to building, furnishing, or maintaining people’s homes held down three of this week’s top seven spots. The Furniture/Home Furnishing group set the pace, climbing nearly 13% during the period under review. Building Materials was next up with a gain of 12%, while Retail Building Supply (up almost 9%) rounded out our list of seven best-performing industries. In comparison, the Value Line Arithmetic Average rose 3.0% over this same period.

Given these results, Homebuilding was conspicuous by its absence. The group has made frequent appearance on our top-seven list since the equity markets began their ascent last October. Over the past six weeks, however, homebuilder stocks have been relatively pedestrian performers, rising less than 4% as a group, good for only 34th place out of roughly 100 industries. 

One factor behind this group’s lackluster performance of late has been the sell-off in KB Homes (KBH) shares. In all, the stock price has slumped more than 20% since late March when the company released results for its February quarter. The California-based homebuilder hasn’t reported a full-year profit since fiscal 2006 (years end on November 30th), and we expect the losses to continue at least through 2012 and 2013.

The recent February report did contain a number of positive elements, including a 29% revenue advance, which was fueled by a sharp increase in the number of homes sold and a 6% increase in average selling price. Investors, though, put more weight on other developments, such as narrowing margins, which caused losses (though down nicely year over year) to exceed our estimate. Moreover, the company indicated that new orders were down 8% year over year.  

Meanwhile, the market has looked much more favorably of late on Home Depot (HD - Free Home Depot Stock Report) and Lowe’s (LOW), the two biggest names in the Retail Building Supply industry. Both stocks registered double-digit share-price gains during the past six weeks. Notably, the home-improvement giants each comfortably exceeded Wall Street’s expectations when reporting results for their January quarters. (Like many retailers, the two companies wrap up their fiscal years near January 31st.)

At Home Depot, comparable-store sales rose 5.7%, while share net jumped 43%. The profit advance should continue through fiscal 2012, with low single-digit comp growth, modest margin expansion, and a shrinking share base helping to lift earnings 10%-15%. The story looks to be fairly similar at Lowe’s, where earnings rose 38% in the January quarter. Results, though, also got a bit of an artificial boost from the inclusion of an extra week in the period. This will reverse itself in the current fiscal year, likely contributing to a more-restrained 5%-10% advance on the bottom. 

Weather is another issue that may complicate the process of evaluating the performance of the home-improvement chains. January-quarter results were no doubt influenced by the unseasonably mild winter enjoyed across much of the U.S. Sales probably got a boost, as the usual seasonal disruptions to outdoor projects caused by snow and cold temperatures were kept to a minimum. Investors are likely to look more favorably on top- and bottom-line gains that are driven by good company-level execution or an improving economic backdrop, rather than those resulting from favorable weather. It may well take some time, however, for the market to sort this out, as weather will probably be cited again as a positive factor when these retailers report results for their respective April quarters.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.