Among the many features found in each week’s issue of Value Line’s Selection & Opinion 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.
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. Stocks have generally continued to march higher of late, furthering the advance that began last fall. The past six weeks, though, has included it share of setbacks, which has limited the gain on the Value Line Arithmetic Average to a comparatively modest 1.8%. Meanwhile, the most notable feature of this week’s best performing list is the prominence of the financial sector. The Retail Building Supply industry took top honors with a gain of 12%, but the next two spots went to financial services: Securities Brokerage (up 11%) and Bank (up 10%). Also, the Bank (Midwest) group advanced 8%, good enough for seventh out of roughly 100 industries.
The banking industry’s biggest names have racked up some of the more impressive price gains of late. Bank of America (BAC – Free Bank of America Stock Report) shares rose more than 20% in the six-week period. Citigroup (C), JPMorgan Chase (JPM – Free JPMorgan Chase Stock Report), and Wells Fargo (WFC), the three other largest banks in the U.S. (by market capitalization), also saw their stock’s advance by at least 10%. For most of the period under review, these equities tracked fairly closely to the broader market. In mid-March, though, they surged higher following the release of results for the latest round of “stress tests” by the Federal Reserve. The tests were aimed at determining whether banks had sufficient equity capital to function in the event of severe economic conditions, and the news was generally positive. JPMorgan seemed particularly enthused about its performance, announcing plans to raise its quarterly dividend (from $0.25 a share to $0.30 a share) and authorizing a new $15 billion share-repurchase program.
Despite the market’s recent enthusiasm for the financial sector, investors, particularly those on the conservative side, still need to proceed cautiously with these equities. In particular, Bank of America and Citigroup, which were especially hard hit in last decade’s financial crisis, appear to have a lot of heavy lifting left in order to resolve the problems that have plagued them in recent years. The shares of both of these financial institutions carry Below-Average (4) Safety Ranks. Incidentally, Citigroup was one of four financial institutions (out of 19 included in the latest “stress tests”) that were told that they would need to submit new capital plans. Meanwhile, the current dividends at each of these two banks translate into yields well below 1%. Granted, the payouts figure to jump substantially over the next 3 to 5 years, assuming both banks continue along the road to recovery. For the moment, though, neither equity appears well suited for income-oriented accounts.
Investors will likely find JPMorgan stock somewhat more appealing. It carries an Average (3) rank for Safety, and based on the recently raised payout, yields 2.7%, about 50 basis points higher than the typical dividend paying equity in the Value Line universe. The stock offers decent 3- to 5-year total return potential, as well. Like many of its peers, though, the bank also faces a number of challenges in the year ahead that investors will need to consider before taking a position here. These include the negative impact of declining real estate credits on loan growth, rock-bottom interest rates, increased regulatory costs, new debit fee restrictions, and the prospect of smaller reductions in its credit costs compared with the previous two years. Accordingly, we are maintaining our 2012 share-net estimate of $4.55 for now (versus $4.48 last year), although earnings per share would likely be enhanced if the company took full advantage of the share repurchase program. We tentatively look for the bank to make better earnings progress in 2013, when we expect share net to reach roughly $5.00 a share.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.