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Stock Screen: Best & Worst Performing Industries - December 21, 2012
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 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).
The beginning of the six-week period covered in our latest industry price-performance rankings (November 6th through December 18th) coincides with the market’s post-election swoon, when concerns about the oncoming “fiscal cliff” in the U.S. and economic weakness in Europe weighed heavily on valuations. Considerable questions remain about how both of these scenarios will play out, but stock prices have rebounded since mid-November, indicating investors have regained some confidence that favorable resolutions are within reach. In fact, most of the leading market benchmarks finished in the black for the period. The Value Line Arithmetic Average, for instance, rose nearly 3%, while the Dow Jones Industry and S&P 500 Index had more modest gains.
Against this backdrop, an industry had to advance at least 6% to secure a spot in our top seven. At the top of the list was the Telecom Equipment group, which rose 11.2%. Foreign Electronics and Wireless Networking also registered double-digit gains of 10.8% and 10.3%, respectively. Meanwhile, the Chemical (Diversified) group was able to edge out Automotive for the seventh spot, 6.4% to 6.3%.
In looking for investment ideas among the best-performing industries, we are focusing our search at the top of the list and the telecom-equipment stocks. Despite its prominent place in this week’s rankings, this industry was not a hospitable environment for investors in 2012. The group badly underperformed the market over the past 12 months and, based on our Timeliness Ranking System, the year ahead could well be a rocky time for many of those equities, as well.
More conservative investors, in particular, will want to proceed cautiously when seeking out investment opportunities in this space. The majority of the telecom-equipment stocks get below average scores for Price Stability. This is not surprising in that the fortunes of competitors in the hotly contested and rapidly evolving industry can change fairly quickly. In such an environment, even the biggest names can struggle, as illustrated by the dizzying fall from grace suffered by Nokia (NOK). The Finnish company was once the world’s largest and most profitable cellphone maker, hitting its peak only five years ago. Now, though, it is mired in red ink, as it works to reposition its portfolio to better compete with the likes of Apple’s (AAPL) iPhone and other smartphones utilizing Google’s (GOOG) Android operating system. If these efforts prove fruitful, NOK stock would likely provide strong total returns in the 3 to 5 years ahead, but the risks here, including a deteriorating balance sheet and intense competition from formidable rivals, figure to keep most investors on the sidelines.
For those looking to steer clear of such high-risk, high-reward scenarios, the industry does include three stocks that carry Above Average or better ranks for Safety: Cisco Systems (CSCO - Free Cisco Stock Report), Motorola Solutions (MSI), and Qualcomm (QCOM). This week we will focus most of our attention on Cisco.
The California-based company is a leading provider of Internet Protocol-based networking and other products transporting data, voice, and video. Its revenues and profits took a step back during the recession, but the company otherwise put together a strong track record for growth. This should continue in the current fiscal year, which ends in late July, with full-year share net reaching $2.00, up 8% year over year and nearly double its 2009 tally of $1.05. Over the next three to five years, the company aims to increase its revenues and earnings 5%-7% and 7%-9% per annum, respectively. In view of its strong execution and exposure to attractive growth markets, such as cloud computing and smartphones, Cisco appears to have the wherewithal to meet these objectives.
In the meantime, the stock provides a respectable source of current income. Its yield of 2.8% is 50 basis points above the Value Line median, and we expect the payout to climb at a slightly faster pace than profits in the years ahead. Factoring this together with a Safety rank of 1 (Highest), and CSCO stock looks to be a solid selection for investors seeking worthwhile, risk-adjusted total returns to 2015-2017.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.