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 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 bulls and bears essentially fought to a draw in the six-week period under review in our latest rankings for the best and worst performing industries. A handful of groups, though, were still able to rack up big gains against this backdrop. Coal and Trucking were able to pull away from the pack, with gains of 17.1% and 11.4%, respectively. The remainder of the top seven consisted of Air Transport (up 8.3%), Building Materials (8.0%), Retail Automotive (7.3%), Homebuilding (7.0%), and Semiconductor Capital Equipment (6.9%).
Notably, the coal group will likely take a big step back to the pack in next week’s rankings. The industry spent much of 2011 and 2012-to-date in the market’s doghouse, reflecting a number of factors, including a sluggish economic recovery and the emergence of natural gas as a more formidable threat to coal in the power market. These stocks, though, have recouped some of these losses over the past couple of months. Alpha Natural Resources (ANR), the industry’s best performer in the six weeks between September 25th and November 6th, rose nearly 50% over this stretch, and three of the other nine stocks in our coverage advanced at least 20%.
The period under review, however, ended on Election Day, and coal stocks were among the hardest hit in the post-election selloff. On November 7th, virtually every one of these equities fell at least 6% in price. The weakness was partly coincidental, as poor results that day from industry participant James River Coal (JRCC) likely would have put investors in a poor frame of mind under any circumstances. Still, in the wake of a ruling earlier this year by the Environment Protection Agency regarding CO2 emissions that stands to take a toll on the industry in the years ahead, some in the market were undoubtedly hoping that a new administration with a less-hostile view toward coal power would be coming to Washington in January.
As recent returns would suggest, conservative investors may feel a bit ill at ease in this sector. Granted, all of the coal stocks we follow carry Average (3) ranks for Safety, but most exhibit greater share-price volatility than the typical stock in the Value Line universe. And, as we’ve seen, developments in Washington can have as big an influence on share prices as those in coal country.
Overall, we think coal stocks are best suited for venturesome investors with a long-term outlook. Certainly, the near-term earnings prospects for much of the group are unexciting. For instance, share net at Arch Coal (ACI), the nation’s second largest coal producer, has dipped into the red lately, and will likely finish the year at a deficit of $0.45, down from a profit of $0.74 in 2011. Its larger rival Peabody Energy (BTU) has remained solidly in the black, but earnings there have fallen off sharply as well, reflecting the challenging conditions in the industry. On the positive side, the industry does have some speculative flavor. For instance, Arch and Alpha Natural, both trade at steep discounts to book value, raising the possibility that suitors might emerge (particularly from overseas), looking to pick up these assets at bargain prices.
Those seeking income may also wish to take a closer look at the coal producers. Alliance Resource (ARLP), Natural Resource Partners (NRP), PVR Partners (PVR), and Rhino Resource (RNO) are all structured as limited partnerships and offer yields far above the Value Line median.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.