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Stock Screen: Best & Worst Performing Industries – April 11, 2011
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 divvied up among 97 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.
A quick review of the industries on our best/worst performer list can usually provide some insight into the underlying trends driving the broader market. Overall, the Value Line (Arithmetic) Average has risen 3.4% for the period under review (ended April 5, 2011), as the bulls appear to be regaining their confidence after a difficult late-winter stretch that saw a variety of unsettling developments, including political upheaval in the Middle East and North Africa, natural and nuclear disasters in Japan, and continuing signs of weakness in the long-depressed U.S. housing market.
Looking at the components of the best-performing list, we find that the Metal Fabricating Industry not only leads the way, it has separated itself from the pack. The group has advanced 17.0% in the six-week period under review, while its nearest challenger, Coal, is nearly 700 basis points behind, with a gain of 10.1%. (This lead figures to narrow some in the next week or two, as the gains racked up by shares of Charter Industries (GTLS) and Dynamic Materials (BOOM) in late February, around the time the two reported year-end results, are dropped from the calculation.) This impressive showing seems to merit a closer look at some of stocks in this group.
The Metal Fabricating Industry is fairly small in number, comprising only nine companies. The biggest name in this space is Illinois Tool Works (ITW), with sales, profits, and market capitalization that exceed the combined totals of the eight other metal fabricators we follow. The company has a diverse business portfolio, providing components and machinery for a wide range of industries, including automotive, construction, and electronics. Its near-term profit picture looks promising, as well, with the continued recovery in the global economy (over 50% of revenues come from outside the U.S.) likely helping to lift 2011 earnings by 20%, or more, year over year.
Notably, though, ITW stock hasn’t played as much of a role in the industry’s surge to the top of our best-performing list. Its share price, in fact, hasn’t budged more than a few percentage points from where it started 2011. Despite this, this issue still has a number of attributes that will appeal to some segments of the investment community. With a Price Stability index of 90 (on a scale of 5 to 100), ITW shares are better suited for more conservative investors, rather than aggressive ones looking to capitalize on rapid price movements. And, on a risk adjusted basis, the stock figures to provide solid total returns to 2014-2016, with an active acquisition program helping to lift earnings and support a higher dividend payout in the years ahead.
Aside from ITW, the metal fabricating group is populated by relatively modest sized companies, with annual revenues ranging from under $200 million for Dynamic Materials, to just north of $4 billion at Timken Co. (TKR). Investors looking for ideas among these equities will generally require a taste for volatility, as many of these stocks get low marks for Price Stability. This is certainly the case for shareholders of Chart Industries and Dynamic Industries, two stocks that have played key roles in securing the industry a spot on the best-performing list.
For instance, at Charter, a manufacturer of engineered equipment used in the production, storage, and end use of hydrocarbon and industrial gases, the stock price plunged 90% during the market selloff that began in late 2008, but it has rallied strongly since then, and now trades nearly at par with its pre-recession high. Sales and earnings, on the other hand, have yet to recover from the economic downturn, but the company appears poised for a big bounce back year, with a firming in the steel sector and increases in industrial demand likely contributing to a doubling of profits in 2011. A similar story seems to be unfolding at Dynamic Materials, an industrial manufacturer serving the process and energy industries. The company is starting to see increased demand for its oil and gas processing equipment, and we expect an uptick in chemical sales to get under way this year, as well.
That said, from a price-to-earnings perspective, these stocks are trading at elevated valuations, leaving them more susceptible to selling pressures, in our view. As such, investors here should be prepared to move out of these positions quickly if there are indications that that the rapid profit growth we envision over the next two years is beginning to falter.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.