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Stock Screen: Best & Worst Performing Industries - March 15, 2013
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).
After a strong start to 2013, the equity markets took some knocks in late February, but appear to have regained their momentum in recent weeks. For the period covered in our latest Industry Price Performance rankings (January 29th to March 12th), the Value Line Arithmetic Average rose 3.3% and, to qualify for a spot in our top seven, an industry needed to advance at least 8%. The Entertainment group was the top performer over the past six weeks, climbing 10.9%. Others able to secure a spot at the top of our rankings were Public / Private Equity (+10.2%), Funeral Services (+9.6%), Newspaper (+9.5%), Packaging & Container (+9.1%), Healthcare Information Systems (+8.6%), and Reinsurance (+8.4%).
In looking for investment ideas among the best-performing industries, we are focusing our attention on stocks in the Healthcare Information Systems space. Overall, this industry looks well positioned to benefit from the implementation of past healthcare legislation, especially the HITECH Act of 2009. This legislation figures to spur increasing investment in healthcare information technology and clinical information systems. Nonetheless, investment returns for the group as a whole have been unexceptional in recent years. Notably, the group is rather small in number—only seven companies are included in our coverage—meaning that a wide share-price swing in any one equity will have a big influence on the industry’s standing in our rankings.
In this instance, the group’s current lofty status can be largely attributable to WebMD Health Corp. (WBMD) stock, which soared after the provider of consumer health information released its December-quarter results. In our view, the recent enthusiasm seems a bit excessive, and we suggest that most investors remain on the sidelines for now. Notably, the company continued to operate in the red, losing $0.12 for the period and $0.45 for the full year. Too, revenues remained under pressure, as its largest customers (makers of pharmaceuticals and consumer packaged goods) keep a tight grip on advertising spending amid changes in those industries. Investors, though, were apparently heartened that the erosion in the top line has moderated some (from roughly 20% year over year in the first half of 2012 to 12% in the December period). Over time, the company’s well-established and valuable online presence, including the webmd.com and medscape.com Websites, should help to get revenues and earnings back on track. Nonetheless, competitive pressures will likely limit a recovery in margins and keep profits below previous highs for at least the next 3 to 5 years.
Meanwhile, support for the other Healthcare Information Systems stocks has been unremarkable of late, resulting in a gain of roughly 4% (excluding WebMD stock) during the latest six-week measurement period, just modestly ahead of the broader market. Looking further back, the group has a decidedly mixed track record. Allscripts Healthcare Solutions (MDRX), MedAssets (MDAS), Quality Systems (QSII), and WebMD have all experienced setbacks that have resulted in fairly sizable losses for shareholders over the past three years. On the other hand, athenahealth (ATHN) and Cerner Corp. (CERN) have been investor favorites for sometime, producing total returns that have handily beat the broader market so far this decade.
CERN stock’s impressive track record dates back even longer stretch and has garnered it our top score (100) for Price Growth Persistence. The equity stands a good chance to build on this performance in the year ahead. The HITECH Act has helped to boost demand for the company’s clinical information systems in recent years and further implementation should support good sales and earnings growth in 2013 and the years that follow. Still, this equity won’t necessarily appeal to all investors. For starters, it doesn’t pay a dividend, and we do not foresee this changing in the next 3 to 5 years. And, like many of the stocks in this group, it trades at a lofty valuation, with a price-to-earnings multiple that is more than twice that of the broader market. As such, even with the company’s solid earnings growth prospects, the potential for a narrowing in the P/E multiple leads us to believe that investors focusing on appreciation potential to 2016-2018 should look elsewhere.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.