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 (out of the roughly 100 in the Value Line universe) over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. 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).

In reviewing this week’s best- and worst-performing lists, we see indications of how quickly investor sentiment towards a particular industry can change. The turnover at the top was fairly extensive from last week to the current one, with only two groups, Human Resources and Auto Parts, managing to secure a spot on both lists. Granted, two of the newcomers, Retail (Automotive) and Computers & Peripherals, have been in and out of the top seven within the past month. The Newspaper, Railroad, and Reinsurance industries, however, are making their first appearances in quite some time.
Stepping back a little further, we revisited our best and worst performing lists from September 20th. This corresponds to the start of the six-week measurement period for this week’s rankings, meaning there is no overlap in the pricing data between the rankings for that week and for the most recent one. Not a single industry among the top seven performers in the September 20th rankings was able to duplicate this feat in our current list. In fact, of the seven best-performing industries from September 20th, only two groups, Retail Store and Retail Building Supply, surpassed the 3% gain posted by The Value Line Arithmetic Index in the subsequent six weeks. One of the groups, Healthcare Information Systems, can even be found among our current worst performers.  

On the other hand, the worst-performing industries from September 20th have, for the most part, been market favorites of late. Five of the seven have outperformed the Value Line Arithmetic Index since September 20th. Two of these formerly out-of-favor groups, Human Resources (up 15%) and Newspaper (up 11%), made it all the way to the top of this week’s rankings. One very notable exception to this reversal of fortune was the Power Industry. That group’s fall from grace has been pretty much uninterrupted since the latter stages of last decade. Not only can it be found among our worst performers for the periods ending November 1st and September 20th, it has consistently and often dramatically underperformed the market for several years running. 

As the information above suggests, increasing your exposure to “hot” industries is no guarantee of investment success. Still, we think investors can find a number of worthwhile investment ideas among the groups on our latest best-performing list. This week we are focusing our attention on two car-related segments: Retail (Automotive) and Auto Parts.

In the former, subscribers may wish to take a closer look at Advance Auto Parts (AAP), the nation’s second largest retailer of auto parts and accessories. The replacement auto-parts industry is relatively noncyclical in nature. Economic hardship tends to increase the need to keep older cars on the road. At Advance Auto, earnings rose relatively unimpeded through the last recession. Too, the positive comparisons show no sign of letting up, with share net likely climbing about 20% in 2011 and another 15% to 20% next year.  

Shares of AutoZone (AZO), Advance Auto’s larger rival, also have some appealing attributes. That company has produced impressive returns for its shareholders, not only in recent years, but dating back more than a decade. Solid growth prospects and an ongoing share repurchase program should keep earnings climbing at a steady clip over the next year and out to 2014-2016. However, the stock’s P/E multiple does look to be a bit elevated compared to historic levels, suggesting long-term investors may wish to wait for a pullback before establishing positions here.

Meanwhile, most of the companies in the Auto Parts industry were hard hit by the recession. These companies do most of their business directly with the vehicle manufacturers, who suffered a steep decline in new vehicle sales during the economic downturn. Since then, profits at the auto parts makers have come roaring back. Along with a strong, though still incomplete, recovery in industry sales, many of these companies are also benefiting from the savings realized from aggressive downsizing, undertaken in recent years, particularly of high-cost domestic operations.

The stocks in this group, with a few exceptions, are quite volatile, meaning more-conservative investors need to proceed with extra caution. These equities can be particularly sensitive to economic developments. As a result, the second half of 2008, aside from the last month or so, has been a rough time for the group, reflecting increased concerns about the pace of economic growth in the U.S. and the limited progress addressing sovereign-debt problems in Europe. Risk-tolerant investors, though, can find a number of equities, such as American Axle (AXL), Dana Holding (DCN), and Lear Corp. (LEA) that figure to provide generous long-term returns in the event that vehicle sales are able to continue their march back closer to prerecession levels.

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