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Stock Screen: Best & Worst Performing Industries - July 19, 2013
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).
The equity markets have rebounded from a recent stumble and are again testing new highs in the second half of 2013. In all, the Value Line Arithmetic Average has advanced nearly 25% so far this year, including a 4.8% increase for the period covered in our latest Industry Price Performance rankings (June 4th to July 16th). In this environment, an industry needed to climb nearly 10% over the past six weeks to qualify for a spot in our top seven. The Newspaper Industry ran away from the field over this stretch, rising 25.1%. Merger-and-acquisition activity helped to spur the advance, as investors responded enthusiastically to Media General’s (MEG) plans to merge with New Young Broadcasting and Gannett’s (GCI) move to purchase television-station owner Belo Corp. (BLC). Other groups leading the market higher included Healthcare Information Services (+13.6%), Biotechnology (13.1%), Telecom (+11.7%), Thrift (11.3%), Life Insurance (+9.9%), and Internet (9.8%).
In looking for investment ideas among the best performing industries, we are focusing our attention this week on the Thrift group. Generally speaking, these stocks are likely to appeal most to investors seeking good yields and limited share-price volatility. Most of these equities carry only Average (3) ranks for Safety, reflecting rather middling marks for Financial Strength. Many, though, score highly for Price Stability, particularly Capital Federal (CFFN) and People’s United Financial (PBCT), which both get grades of 95 out of 100. Meanwhile, all of the thrift stocks that we follow currently pay a regular quarterly cash dividend, and the yields on more than half are above the current Value Line median of 2.1%. New York Community (NYCB) currently leads the way on this measure, with a yield of more than 6.5%, but we have concerns that the payout nearly exceeds earnings. The yield on shares of Northwest Bancshares (NWBI) is fairly modest by comparison (3.4%), but the payout is better covered by profits, which should leave room for modest increases in the dividend in the years ahead.
That said, the industry has faced a challenging operating environment in recent years, as asset yields have declined more rapidly than funding costs. Most of the thrift stocks have struggled to keep pace with the market over this stretch. Recent indications of a steepening of the yield curve, which would have favorable implications for these businesses, has likely contributed to the market’s recent surge in enthusiasm for the group.
One thrift that has managed nicely in these trying times has been Investors Bancorp. Inc. (ISBC). It is the holding company for Investors Bank, a New Jersey chartered savings bank. Founded in 1926 as a mutual savings and loan association, Investors now operates more than 100 branches in New York, New Jersey, and Massachusetts, while offering retail banking, mortgage, and consumer lending services. Its loan portfolio consists mostly of 1- to 4-family mortgages (46%, as of 12/31/12), multifamily (29%), and commercial and construction (21%).
Acquisitions have been a key ingredient to the company’s business model. Investors recently reached a deal to merge with Gateway Community Financial, which would represent the eighth addition to the fold since 2008. Gateway is the holding company for New Jersey-based GFC Bank, which operates four branches.
The thrift is on track to post earnings of $0.90 a share in 2013. This would represent year-over-year growth of 10% and a 61% jump since 2010. The company got off to a particularly strong start this year, as a higher balance of interest-earning assets (thanks to acquisitions) and low funding costs helped to drive a nearly 40% increase in March-quarter share profits. We have some concerns that a rise in mortgage rates (and a resulting rush to refinance loans) will temper loan growth, resulting in fairly modest earnings comparisons. For 2014, we expect new loan volume to slip to $3.6 billion, down 4% from this year’s expected tally of $3.75 billion. Against this backdrop, share-net growth may well slow.
Helped by a successful acquisition strategy, ISBC’s shares have roughly kept pace with the broader market over the past three years, a noteworthy achievement considering the limited interest investors have shown in thrifts during this period. Looking to 2016-2018, appreciation potential for this stock appears to be modestly below average compared to the rest of the Value Line universe. Earnings should advance at a solid clip over the 3- to 5-years ahead, but we think there is the prospect for some erosion in this equity’s price-to-earnings multiple. These shares currently trade at nearly 25-times estimated 2013 earnings, which is higher than most thrifts and well above the median for the broader market (just under 18). Meanwhile, Investors only began paying a dividend late last year, and the current yield of 0.9% is the lowest in our coverage of the thrift industry.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.