This week’s roster of best performing industries indicates that the market has been digging deep for returns of late, driving share prices for many basic-materials and energy companies up nicely. (Our rankings of the seven best- and worst-performing industries over the past six weeks can be found on the inside back cover of Selection & Opinion.) Concerns about the tenuous health of the global economy appear to have eased since late summer, prompting investors to revisit some beaten down, economically sensitive groups. For instance, the Coal Industry tops this week’s industry rankings, checking in with a heady gain of 19.6% between September 4th and October 16th. Strong advances by Precious Metals (+9.9%), Metals & Mining (+9.4%), and Steel (+9.2%) industries also won them spots in our top seven. All four of these groups, though, were out of favor early in 2012. Coal, in fact, ranked as the worst performing industry for the six months ending June 19th, with a composite price change of –26.7%, while heavy losses among Precious Metals and Steel stocks also put these two group in the bottom five out of roughly 100 industries under our review.
In looking for investment ideas this week among the best performing industries, we are taking a closer look at the Metals & Mining group. From an investment perspective, a high Beta is one of the most notable features of the typical Manufacturing & Mining stock. The median for the industry is a lofty 1.55, versus 1.00 for the market as a whole. A diversified portfolio of high Beta equities will tend to outperform the broader market when prices are on the rise, but lag behind when the market falters.
These equities are especially sensitive to macroeconomic developments. In particular, any news that moves commodity prices for aluminum, copper, and other metals will exert a heavy influence on valuations. Within the latest six-week period, for instance, share prices in this group shot up in mid-September when the U.S. Federal Reserve revealed its latest round of bond-buying. The measures announced were even more aggressive than most had expected, fueling hopes of stronger economic growth and increased demand for various commodities. This was a welcome development for Metals & Mining equities, as metal prices have been under pressure for most of 2011 and 2012, largely, we suspect, due to concerns about a recession in Europe, slowing growth in key emerging markets, especially China, and the sluggish pace of economic recovery at home. This weakness will be evident on the bottom line across the industry, with most of these companies on pace to report lower earnings for calendar 2012. The improvement in pricing seen in recent months, however, gives us increased confidence that the New Year will bring better times for the group.
Overall, investors confident that the global economic outlook will continue to brighten should probably consider increasing their exposure to Metals & Mining issues. Granted, this would likely increase the volatility of one’s portfolio, meaning more-aggressive accounts will probably feel the most comfortable pursuing such a strategy. Still, those on the conservative side who are contemplating ratcheting up the Beta of their holdings may also want to take a closer look at that this industry, particularly its biggest names, such as BHP Billiton (BHP), Freeport-McMoRan Gold & Copper (FCX), Rio Tinto (RIO), and Southern Copper (SCCO). For starters, all four of these companies are financially fit, with each carrying a Financial Strength rating of A or A+. Their stocks also provide a good source of current income. Every Metal & Mining equity, in fact, pays an annual cash dividend, and the yields on the big four are comfortably above the current median of 2.3% for dividend-paying stocks in the Value Line universe. BHP, for example, offers a yield of 3.3%, and it was the only one of the four not to cut its annual distribution during the last recession.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.