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 divided 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.
The six-week stretch covered in this week’s rankings for best and worst performing industries was a turbulent period for the equity markets. The opening weeks were particularly challenging, as investors wrestled with a variety of sobering issues, including the tepid pace of recovery in the U.S. economy, the lack of progress resolving the euro zone’s sovereign-debt problems, and signs of slowing growth in key emerging markets, such as China. Stock prices did rebound in the opening weeks of June, but not enough to fully offset the earlier weakness. Overall, the Value Line Arithmetic Average declined 1.9% for the period ended on June 19th. (Notably, this does not include the market’s stomach-churning drop on June 21st, which trimmed about 2% from many of the leading benchmarks.)
At the top of our best-performing list, the Precious Metals group was able to separate itself from the pack, rising nearly 11%. Electric Utility-West was next up, advancing just under 5%, but it had a lot of competition for the number-two spot, as five other industries registered gains of at least 3%.
As has been the case over the past month or so, what stands out about the best-performing industries is how little some of them would seem to have in common. Geography is one area where there does appear to be some overlap. Aside from Precious Metals, the other industries among the best performers generate the vast majority of their sales and profits in the U.S., suggesting that investors are looking to limit their exposure overseas. Otherwise, from an investment perspective, the four utility groups on this week’s list (Electric Utility-West, Electric Utility-East, Electric Utility-Central, and Natural Gas Utility) would appear to be at the opposite end of the spectrum from the Newspaper and Homebuilding groups.
Investors drawn to utilities stocks are likely of the conservative variety. Most of these equities carry Above Average (2) or better (1) ranks for Safety. Income-oriented investors will also find much to like among these groups. The typical yield for a natural-gas stock is just under 4%, while most of the electric utility stocks come in above the 4% mark. (On the other hand, the median yield for dividend-paying stocks in the Value Line universe is 2.4%.) Still, even utility investors will likely have to make some trade off between risk and income. Among the industries on this week’s best performing list, we found only two stocks, AGL Resources (GAS) and Southern Company (SO), that offer both a Top rank for Safety (1) and a yield in excess of 4%.
Meanwhile, the homebuilding and newspaper industries generally have little to offer those seeking Safety and yield. Many of the stocks in these two groups trade at just a fraction of the prices they fetched before the collapse of the housing bubble and the encroachment of the Internet, respectively, wreaked havoc with their business models. You can get some sense of how hard these two groups have been hit by looking at their Price Growth Persistence scores. These scores, which incorporate 10 years of stock-price data, run from 5 (worse) to 100 (best). Most of the newspaper group is at or near the bottom (five of the eight get our lowest score), and the homebuilders fare only modestly better, with scores ranging from 10 to 65. By comparison, the typical utility scores in the 50s, essentially a middle-of-the-pack performance.
Still, venturesome Investors who aren’t spooked by these dismal performances may find the newspaper and homebuilder industries worthy of further inspection as potential turnaround plays, as a number of stocks from both groups offer substantial, though fairly speculative recovery potential. Among the newspaper operators, for instance, the shares of A.H. Belo (AHC), Gannett Co. (GCI), and New York Times (NYT) all possess price-appreciation potential to 2015-2017 that is at least twice that of the typical stock in the Value Line universe (about 75%). Homebuilder equities Hovnanian Enterprises (HOV) and KB Home (KBH) also offer the prospect of sizable capital gains to mid-decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.