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Stock Screen: Best & Worst Performing Industries - January 4, 2013
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).
Despite ever-present concerns about the “fiscal cliff,” the final six weeks of 2012 were rewarding ones for investors. For the period November 20th through December 31st, the Value Line Arithmetic Average rose 6.4%. During this stretch, roughly 20 of the industries we follow rang up double-digit gains. Human Resources was the top performer, clocking with a 15.7% increase. Steel and Metal Fabricating were not too far behind, rising 13.5% and 12.9%, respectively. Rounding out the top seven was perhaps the most surprising name on the list, the Power industry, which advanced 12.3%. This group has been out of favor with investors for a number of years, making numerous appearances on our worst-performing list, most recently in early December.
The industry’s poor performance has been broad-based. Not a single one of the power-related stocks we cover has been to able to keep pace with the Value Line Arithmetic Index over the past three years, with many losing more than 50% of their value during that stretch. Moreover, we continue to have reservations about the near- and long-term prospects of many of these companies and think that investors should proceed cautiously before making commitments in this space.
Solar-energy stocks, for instance, enjoyed a hot streak in the closing weeks of 2012, and the resulting share-price gains were a big factor behind the Power industry’s presence on this week’s best-performing list. News out of China no doubt provided some of the spark for the market’s recent burst of enthusiasm. Most notably, reports in mid-December indicated that the country would be sharply increasing subsidies for its solar power sector.
Developments closer to home have helped to sustain the share-price momentum into the opening days of the new year. Indeed, the first week of 2013 was marked by the news that a subsidiary of Warren Buffet’s Berkshire Hathaway (BRK/B) had made a deal to purchase two solar projects from SunPower Corp. (SPWR), an announcement that caused its stock, and a number of others in the space, to be bid up.
Nonetheless, we suspect this sector of the power industry will continue to face hard times ahead, and the downside risks mean that most investors will want to remain on the sidelines. Notably, we recently dropped coverage of one of the companies, Suntech Power, due to its poor operating performance and unreliable financial information. Suntech rang up heavy losses in 2011, and concerns of fraud at a company in which it had invested has prevented it from reporting detailed financial results since the March 2012 quarter. (Incidentally, shares of this China-based company were among the biggest beneficiaries of the recent news that the Chinese government would be boosting its support for the industry.)
Meanwhile, we continue to follow a number of other solar-energy companies, such as First Solar (FSLR), GT Advanced Technologies (GTAT), and SunPower Corp. (SPWR). When the final results for last year are tallied, though, we expect all three of the aforementioned to report a significant deterioration in their operating performances from 2011 to 2012.
Business for the industry has actually been fairly brisk in the U.S., where solar installations have been setting new records in 2012. For the solar companies, though, the benefits from this activity have been more than offset by excess supply and weak prices. According to the Solar Energy Industries Association, the average cost of a completed Photovoltaic system fell by 33% year over year in the September quarter. In this environment, SunPower has resorted to selling its products at a loss in order to gain market share.
These are trying times for GTAT Advanced Tech., as well. Earnings there likely dipped into the red in the December quarter, and management’s recent guidance suggests 2013 will be a fairly dismal year, too, as its customers, mostly solar companies in China, struggle with declining prices and steep declines in demand from Europe. For the year, we expect sales to decline about 18%, while share net is likely to be cut in half, to $0.35.
Elsewhere, First Solar, which designs and manufactures solar modules using a proprietary thin-film semiconductor technology, also faces its share of challenges. The company is making a transition from a module manufacturer to a project-based business, which results in more unpredictable revenues streams. Overall, its revenues likely exceeded $3 billion in 2012, and its backlog, though down modestly since the end of 2011, looks comparatively healthy, exceeding $9 billion. Earnings, though, have slumped noticeably over the past two years, and we expect share net will remain under pressure in the 3 to 5 years ahead.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.