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 up 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). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey.
The names at the top of our latest industry price performance ranking provide something old and something new for regular followers of our list of best-performing industries. Five of this week’s top seven have made multiple appearances on our best performing list over the past few months. This includes the Newspaper group, which separated itself from the rest of the field, advancing nearly 21% in the six-week period ending January 17, 2012. The next six industries were tightly bunched, posting gains between 11% and 13%. Of these, Homebuilding, Retail Building Supply, Building Materials, and Bank (Midwest) were all making a return trip to the top seven. The two relative newcomers to the list were Biotechnology and Chemicals (Basic), and we will concentrate our attention on these two in looking for investment ideas this week.
The biggest name in our coverage of the biotechnology space is Amgen, Inc. (AMGN). The company develops, manufactures and markets medicines aimed at aiding patients undergoing chemotherapy treatment, suffering from chronic renal failure, or fighting autoimmune diseases. Its diverse product portfolio generates annual revenues in excess of $15 billion, dwarfing the rest of the industry, where most companies bring in less than $500 million in revenues each year.
The year just ended was a relatively lackluster one for the company, with earnings likely inching a head just a percent or two. Amgen, though, has a strong track record for increasing profits—just a single down year in the past decade—and the pace of growth should pick up some in 2012, when we expect share net to climb 5% or so. Given the stock’s fairly modest P/E multiple, an acceleration in earnings growth ought to be sufficient to underpin support for this high-quality issue. AMGN shares carry our top rank (1) for Safety. In addition, the company initiated a quarterly dividend payout during 2011, providing shareholders with a respectable measure of current income (yield: 1.6%).
From an investment standpoint, AMGN shares can hardly be considerable typical of the biotechnology space. Most of these companies are either unprofitable or generate negligible earnings (relative to their market capitalizations). In these cases, valuations are often based largely on the prospects for success of research and development efforts that are still some years away from producing meaningful profits. Not surprising, many of these stocks are quite volatile, meaning investors in the biotechnology area usually require a high tolerance for risk.
One stock that falls into this category is Human Genome Sciences, which trades on the NASDAQ under the ticker symbol HGSI. The company possesses one of the world’s largest proprietary databases of human and microbial genes, which it is seeking to leverage in the development of pharmaceutical products. Despite a nearly 20-year track record as a public company, HGSI is still some ways from turning a profit. We expect it to report a loss of about $2.00 a share for 2011. Its only commercial product right now is BENLYSTA, which is used in the treatment of lupus, though other drugs are also in the pipeline. Not surprisingly, given the uncertainties associated with such a business model, HGSI shares carry our lowest rank for Safety (5) and tend to exhibit a good deal of volatility. The stock was pummeled in the second half of last year by near-term challenges related to BENLYSTA. At the current valuation, though, HGSI shares look to have good recovery potential to mid-decade, as BENLYSTA gains more acceptance in the market.
Meanwhile, looking at the Chemical (Basic) industry, we find the shares of Dow Chemical (DOW) helping to lead that group’s charge up our industry rankings. Dow is one of the leaders in its field, generating revenues of about $60 billion from the manufacture of a wide variety of basic chemicals and plastics, including ethylene, propylene, benzene, and vinyl chloride. Its stock —which has risen about 15% in the past six weeks— will likely appeal to a number of investors. It offers good appreciation potential to 2014-2016, based on our expectations for annual earnings growth in the low teens over the next three to five years. The company also pays out about one-third of earnings each year in dividends, providing shareholders with a healthy stream of current income (yield: 3.5%). Meanwhile, the stock is an Average selection (3) for Safety, though investors should note that demand for the company’s products is cyclical. In fact, earnings would likely come under considerable strain if our current expectations for continued economic growth in the U.S. and a mild recession in Europe prove overly optimistic.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.