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Stock Screen: Best & Worst Performing Industries - March 29, 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).
The equity markets continue to forge ahead in 2013, with most market benchmarks approaching or already showing double-digit gains year to date. The Value Line Arithmetic Average, for instance, has risen 11.7% so far this year, including a 2.8% increase for the period covered in our latest Industry Price Performance rankings (February 12th to March 26th). In this environment, an industry needed to advance nearly 8% over the past six weeks to qualify for a spot in our top seven. The Newspaper group was the top performer over this stretch, climbing 11.7%. Funeral Services (+11.4%) and Air Transport (10.7%) also enjoyed double-digit gains, while Entertainment Public (+9.7%), Packaging & Container (+9.3%), Furniture/Home Furnishings (+8.7%), and Restaurant (+7.5%) did well for investors, too.
In looking for investment ideas among the best-performing industries, we are focusing our attention on stocks in the Furniture / Home Furnishings space. Our coverage of the industry includes 16 stocks, almost entirely small and mid-cap names, with a median market value of about $1.1 billion. From an investment perspective, the stocks found here will likely have the most appeal with momentum-oriented investors. As indicated by its presence on our best-performing list, the equities in the group have enjoyed generally strong support from investors of late, and our Timeliness Ranking System pegs many of them to continue to outperform the market in the six to 12 months ahead.
This includes the shares of Mohawk Industries (MHK). Mohawk is the largest company in our coverage of the industry, with annual sales of $5.8 billion and a market capitalization of $7.8 billion. We expect 2013 to be a big year for the Georgia-based designer and manufacturer of carpet, rugs, and hard-surface flooring. Its top line should climb 20%, to nearly $7.0 billion, while earnings ought to power ahead 27%, to $4.80 a share. A recent buying spree figures to play a key role in the growth we envision. Since last October, the company has announced three sizable acquisitions. (Note that the first two are factored in our estimates, though the most recent—a deal to acquire panel board supplier Spano for $170 million—is not.) The largest of these would be the $1.5 billion purchase of Marazzi Group. This addition will add about $1.2 billion to annual revenues, while making Mohawk the worldwide leader in ceramic tile. The transaction, which was funded with the help of $600 million in recently issued debt, should be accretive to earnings this year.
One of the downsides to investing in Furniture / Home Furnishings space at the moment is that valuations appear to have become a bit stretched. In the case of MHK shares, for instance, the stock price has nearly doubled in the past year, pushing the price-to-earnings multiple (about 24-times our 2013 estimate) to the top end of the historical range. As such, investors with a 3- to 5-year investment horizon may wish to look elsewhere, owing to the possibility that a contraction in the multiple over time will erode shareholder returns.
Meanwhile, income-oriented investors will probably find their options to be fairly limited. Just over half of these companies pay a dividend, but only three, HNI Corp. (HNI), Leggatt & Platt (LEG), and Steelcase (SCS) offer yields in excess of the current median (2.2%) for dividend-paying equities. Of these, LEG stock provides the most generous stream of current income. The current quarterly payout of $0.29 represents an annual yield of 3.5%. Moreover, the manufacturer of bedding components, furniture, and other engineered products has increased its annual payout for 42 consecutive years, and we think this streak will continue over the next 3 to 5 years. Granted, the company’s 2013 operating results figure to be fairly forgettable—sales advancing at a low-single-digit clip, while earnings retreat slightly, from $1.70 a share last year to $1.65 in the current one. Still, cash flow should be more than sufficient to cover Leggett’s needs for shareholder distributions and capital spending. The market certainly has shown few concerns of late about the unexciting near-term profit outlook, bidding up LEG’s stock price by nearly 25% since the start of 2013.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.