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

This week’s best-performing list looks quite a bit different than what we have become accustomed to in 2012. Housing-related groups, for instance, have been featured prominently for most of this year. Most notably, the Homebuilding industry has made frequent appearances among our top seven, taking the top spot as recently as last week. However, for this week, at least, the housing sector is nowhere to be found. The homebuilders, as a group, remained in positive territory for the six weeks ended July 31st, but their advance of just under 2% was only good for a 25th place finish among the 100 industries that we follow. (By comparison, the Value Line Arithmetic Average was essentially flat, rising just 0.1% during this same stretch.)

In their place, investors have flocked to energy-related names. The Natural Gas (Diversified) industry was the top performer in our latest rankings, advancing 7.2%. This just edged out the 7.1% gain posted by the Pipeline MLP group. Following close behind were two other energy-oriented industries, Petroleum (Producing) and Oilfield Services & Equipment, which clocked in with gains of 6.9% and 6.4%, respectively.

Many of the biggest names in the energy game, such as Exxon Mobil (XOM - Free Exxon Mobil Stock Report) and Chevron (CVX - Free Chevron Stock Report), are included as part of our coverage of the Petroleum (Integrated) industry. This group, though falling just shy of our top seven, has also been among the best performing industries since late June. 

Notably, unlike the homebuilders, energy-related stocks have spent most of 2012 in the market’s doghouse. As is frequently the case in the energy sector, recent changes in commodity prices look to be among the driving forces behind the shift in investor sentiment. Natural gas, for instance, has been in protracted slump, due partly to the success of exploration and production companies in tapping new domestic supplies, such as the Marcellus Shale in Pennsylvania and surrounding states. Ultra Petroleum (UPL) is one of the leading players in that region. At the Houston-based company, production from the Marcellus has risen about 85% over the past year and now accounts for more than one-quarter of its total output. However, its stock price, even with its recent rebound, is down about 50% since last summer, reflecting the fact that both the spot and futures markets for natural gas still show sharp declines on a year-over-year basis.

Recent developments, though, appear to be lighting a fire under this commodity. These include warm summer weather, which drives up use of air conditioners and electricity, the increased popularity of natural gas (versus coal) among power producers (partly reflecting the low price of the former), and cutbacks in production by some players in the natural-gas industry. In all, the price of natural gas has climbed nearly 30% since mid-June, though it remains at just a fraction of where it stood in mid-2008.

Meanwhile, the recent rebound in oil prices lagged about a week or two behind the one in natural gas markets and has been comparatively modest. Still, the double-digit gains in crude (off of the 2012 lows hit in late June) are a welcome development in the industry. The issues at play here, such as some easing in concerns regarding the crisis in the eurozone and the prospects of slowing growth in emerging markets, look to be much more global in nature, relative to the natural-gas market.

Before joining the rush into energy-related stocks, investors should remember that market sentiment in this sector can change quickly. The volatile nature of commodity prices is obviously a big factor here. The market, though, also tends to respond strongly to company-specific developments, such as drilling results in promising, though perhaps relatively untested, areas. In addition, for many companies, the capital necessary to tap attractive growth opportunities frequently exceeds cash flow, leaving them reliant on external funding (debt, equity, or joint ventures) or asset sales to reach their full potential. For instance, investors will undoubtedly be keeping close watch on the progress of Pioneer Natural Resources (PXD) in the Wolfcamp Shale. Early results from horizontal drilling in this west-Texas play have been encouraging, but management is now looking to bring on a joint-venture partner to allow it to fully exploit the opportunities there.   

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.