Among the many features found in each week’s edition 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). This data also forms the basis for the Relative Strength price charts found on each industry page in The Value Line Investment Survey.
Investors in the biotechnology space continue to endure a rollercoaster ride in 2012. The group was one of the top performing industries in the opening month of the year, but followed that up with a brief, late-winter appearance among the worst performers, and now has staked a claim on the top spot in our latest rankings, thanks to an 6.0% advance over the past six weeks.
The latest burst of investor enthusiasm has been fueled to some degree by acquisition activity. Most notably, shares of Human Genome Sciences (HGSI), which uses its proprietary database of human and microbial genes to develop pharmaceuticals, have roughly doubled in price since the company received an unsolicited takeover offer from GlaxoSmithKline (GSK) in mid-April. The bid of $13 a share was rejected by HGSI’s board, and its share price has since traded above this mark, as the market seems to be anticipating that GSK or another suitor will ultimately place a higher bid.
GenProbe Inc. (GPRO) stock also stands out among the top performers of late in the biotech space. The maker of nucleic acid tests for the diagnosis of human diseases and the screening of donated blood is coming off a challenging year marked by weak screening sales and added costs related to a 2010 acquisition. These challenges contributed to a roughly 50% drop in earnings in 2011, but did not dissuade Hologic (HOLX), a medical device manufacturer, from putting in a bid for the company in late April. In this case, the all-cash offer of $82.75 a share, representing a premium of roughly 20%, was accepted by the GenProbe board. As is often the case, the market has had less enthusiasm for the bidder, Hologic, whose shares have traded down more than 10% since the deal was announced.
Meanwhile, another of our best performing groups also provides additional evidence of the fickleness of investors, from an industry perspective. Railroad stocks mostly sat out the market’s sizzling advance during the opening month or so of the year. Despite the erratic performance of the broader market over the past six weeks, they have forged ahead nicely, climbing 5.9%, to take the second slot in our industry rankings. (The Value Line Arithmetic Average is down 1.3% over this stretch.)
Also of note, several utility industries, including Electric Utility (Central), Electric Utility (West), and Natural Gas Utility, came up just short of our top seven. These groups were largely shunned in the opening months of 2012, as investors opted for more cyclical stocks in a surging market. The tide, though, seems to have turned for now at least, as the mixed messages being put off by the global economy, especially in Europe, has sparked a greater appreciation for companies with more predictable, less cyclical earnings prospects.
Meanwhile, we are dipping into the Chemical (Diversified) industry to highlight a stock with promising growth prospects. Overall, Chemical (Diversified) equities rose 3.4% during our latest measurement period, edging out various utility-related industries for the final spot in our top seven. Shares of PPG Industries (PPG) contributed nicely to this performance, advancing more than 10% in the past six weeks.
The Pittsburgh-based company generates most of its revenues (about 75% in 2011) manufacturing performance and industrial coatings. Helped along by solid gains in performance (up 9%) and industrial (up 5%), the top line rose 6% in the March quarter, and a similar advance seems likely for 2012, as a whole. At first glance, the profit picture looks less rosy, with earnings likely declining about 12% this year, to $6.05 a share. This drop-off, though, is largely due to sizable hits from restructuring and environmental charges in the March quarter. Absent these items, share net should climb at a more-than-respectable, low double-digit rate for 2012.
One of PPG’s most appealing investment attributes is its impressive cash generation, which management has been using to increase the dividend and reduce the share base. The company has also been active on the acquisition trail, and we expect it to remain in a deal-making mode, as it looks to augment its fast-growing optical business and increase its coatings presence in Asian markets.
The downside here is limited price-appreciation potential to 2015-2017. While earnings have rebounded strongly since the last recession, the company’s long-track growth has been considerably more modest, roughly 3.5% per annum over the past 10 years. Aside from an easy comparison in next year’s March quarter, we expect bottom-line increases will likely revert closer to this rate in 2013 and out to mid-decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.