Despite numerous stomach-churning days marked by sharp price swings, the last six weeks were a generally good stretch for stocks. The Value Line (Arithmetic) Index, for instance, advanced by 4.3% during the six-week period ended October 18th. To secure a spot in our top seven, an industry needed to advance by at least 11%. The Retail Store group led the way with a gain of roughly 13%. Still, many industries failed to participate in the broader market upswing, including three that suffered double-digit losses: Power (down 18%), Trucking (down 12%), and Metals & Mining (down 11%).
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. For instance, the composition of the best-performing list has undergone a noticeable shift since late summer. At that time, noncyclical industries, such as Natural Gas Utility, Water Utility, Household Products, and Food Processing, dominated the list, as investors wrestled with an influx of disquieting economic data. The composition of this week’s list, on the other hand, is consistent with a market that has taken a more positive view of the economy. Granted, there is still a healthy level of concern regarding the prospect of the United States slipping back into another recession, but the sense of inevitability that prevailed in some quarters in late summer seems to have lifted. Against this backdrop, industries where profits tend to fluctuate widely with changes in the macroeconomic environment, such as Auto Parts, Semiconductor Capital Equipment, and Bank (Midwest), have become investor favorites, at least as far as the past six weeks are concerned.
The presence of the latter three industries among the best performers also provides a reminder of how fickle investors can be. Each of these groups made an appearance on our worst performing list during the month of the September. Human Resources and Homebuilding, two other industries that were also especially hard hit during the market’s late summer sell-off, also made strong bids for this week’s top seven, but fell just short.
Meanwhile, in search of investment ideas among the best and worst performing industries, we are taking a closer look at the Computer and Peripherals group, which came in third in this week’s rankings with a gain of nearly 12%. Incidentally, two of the industry’s biggest names, Apple Inc. (AAPL) and International Business Machines (IBM - Free IBM Stock Report), released their September-quarter results just after the latest Industry Price Performance rankings were compiled. In both cases, the market was underwhelmed, responses that figure to make it difficult for the Computers/Peripherals Industry to retain its lofty standing on our best performing list. Still, investors shouldn’t be too quick to dismiss this group.
Our analyst Justin Hellman, in fact, thinks the recent weakness in AAPL shares presents an opportunity for interested investors to establish positions. Earnings at the Silicon Valley giant rose 52% year over year in the September quarter, but still didn’t measure up to Wall Street’s expectations, largely due to lower-than-expected sales of the iPhone. The shortfall, though, may well have been largely a timing issue related to the transition to Apple’s next-generation smartphone. iPhone sales continued to ramp up strongly, but the looming release of the 4S model, which went on sale in mid-October, apparently prompted some customers to delay purchases in the latter stages of the September quarter. Beyond this, the company continued to perform at a very impressive level, with healthy growth in the Mac computer line-up and explosive gains for the iPad.
Meanwhile, back on the east coast, Armonk NY-based International Business Machines also provided details on its for the September quarter. The bottom-line tally was solid, with share net reaching $3.19, up 13% from the prior-year period and $0.14 ahead of our estimate. Revenue growth, though, slowed from 12% year over year in the June quarter, to 8% in the most recent interim. With a top rank (1) for Safety, the stock remains suitable for most investors, though better 3- to 5-year total return potential can be found elsewhere, particularly for those with a greater tolerance for risk.
One such example in the Computer and Peripherals space is Tech Data Corp. (TECD), a distributor of microcomputer-related hardware and software products. The stock is just an Average selection (3) for Safety, but offers generous price-appreciation potential to mid-decade. The company looks to be executing well at present, with earnings on track to rise 15%-20% in 2011. New product offerings, geographic expansion, and expanding relationships with leading vendors should help Tech Data to maintain its positive momentum over the next several years.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.