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 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.
For better or worse, industries populated with volatile, high Beta stocks tend to make frequent appearance on our best and worst performing lists. We see ample evidence of this again in this week’s rankings. Overall, the broader market performed quite well in the period under review, which ran from July 10th to August 21st. The Value Line Arithmetic Average, for instance, rose 4.7% over this stretch. To secure a spot in our top seven, an industry had to advance at least 11%. This week’s king of the hill was the Engineering & Construction group, which rose nearly 15%. Following close behind were Petroleum (Integrated), Oilfield Services & Equipment, Semiconductor Capital Equipment, Precious Metals, Heavy Truck & Equipment, and Railroad. All of these industries tend to be quite cyclical and are well stocked with high-Beta equities. Their prominence in this week’s rankings suggest that concerns about the parlous state of the global economy, which likely peaked in the Spring, have eased over the course of the summer.
As for individual stocks that may be worthy of further inquiry, we are focusing our attention this week on the Heavy-Truck & Equipment Industry. The biggest contributors to this group’s prominent place in this week’s standings can be found among its mid-cap names. Shares of Gardner Denver (GDI), Manitowoc (MTW), and Oshkosh (OSK) all advanced at least 20% over the past six weeks. It was Terex Corp. (TEX), though, that led the way; as the stock price of the construction and mining-equipment manufacturer rose more than 30%.
The release of second-quarter earnings helped to provide the spark for the surge in TEX stock. It hit its 2012 low on July 25th, but then soared nearly 30% the next day following the release of earnings. Such sharp reversals in investor sentiment are not out of character for this equity, which gets very low marks for Price Stability and Earnings Predictability. In this case, the market was likely pleased with the progress being made after several trying years. June-period results showed earnings reaching $0.76 a share, easily ahead our $0.10 estimate, and the company’s most profitable quarter since 2008. The return to profitability of the Crane segment (31% of sales) helped to drive the improved performance. Earnings over the balance of the year, though perhaps not up to June-period levels, should remain buoyant, reflecting the promising near-term outlooks for the Crane business and the Aerial Work Platform unit.
Generally speaking, Heavy-Truck & Equipment stocks aren’t for the faint of heart. Investors looking for exposure to the industry, but wishing to limit thee risk of wide price swings may wish to take a closer look at some of the group’s large-cap names.
Caterpillar (CAT) is the largest company in the industry by market capitalization and sales. Earnings are advancing nicely at the manufacturer of earth-moving equipment, with share net likely climbing about 25% this year. Meanwhile, its stock price has risen more than 10% in the past six weeks, and we think there is further room to run. Indeed, this equity is a timely selection for the year ahead and also offers good appreciation potential to mid-decade. A well-covered dividend provides a decent measure of current income; CAT stock yields 2.4%, slightly above the Value Line median for dividend-paying equities (2.3%). With a Safety rank of 3 (Average) and middling score for Price Stability, the risk profile here is roughly consistent with what would find with the typical stock in the Value Line universe.
Those seeking a little more income and stability would likely feel even more comfortable with PACCAR Inc. (PCAR) stock, which have rose nearly 15% in the period under review, has a yield north of 3.5%, and its Price Stability score is one of the best in the industry. One of the trade-offs here, though, is the company’s rather uninspiring outlook for the balance of 2012. June-quarter profits at the maker of medium- and heavy-duty diesel trucks were quite healthy, rising 28%, to $0.83 a share. Still, we had been expecting something a little more ($0.85). Moreover, the company recently lowered its outlook for industry retail sales in the U.S. and Canada, and the earnings recovery that got underway in 2010 now looks likely to take a pause for the next few quarters.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.