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Stock Screen: Best & Worst Performing Industries - December 27, 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 bull market that has prevailed for most of 2013 was again very much in place during the latest six-week period covered in our Industry Price Performance rankings. For example, the S&P 500 Index increased nearly 4% from November 11th to December 23rd, and is holding onto a year-to-date gain of roughly 25%.
In this environment, an industry needed to climb at least 9% over the past six weeks to qualify for a spot in our top seven. The Homebuilding Industry rose 14.4% to beat out Human Resources (up 12.9%) for the top spot. Other groups helping to lead the market higher included Biotechnology (11.6%), Publishing (9.5%), Securities Brokerage (9.3%), Newspaper (9.2%), and Advertising (9.1%).
In looking for investment ideas among these seven industries, we are taking a closer look at two of the Homebuilding stocks, D.R. Horton (DHI) and NVR, Inc. (NVR). Overall, homebuilding stocks look set to end a challenging year on a bright note. Many of these equities hit multi-year highs during the spring, but support has fallen off considerably in the intervening months. In fact, as recently as November, this group made an appearance among our worst performing industries, and 2013 total returns for most of these issues will fall well short of the impressive gains posted by the broader market indices.
Rapid changes in sentiment, such as those experienced this year, are not out of character for this group. Most of these equities have Betas above 1.00 and Price Stability scores of less than 50, which indicate they have been subject to wider price swings than the typical equity in the Value Line universe. Concerns about the actions of the Federal Reserve and its influence on the direction of interest rates appear to be driving much of the volatility in 2013. Last spring, for instance, support for the group tumbled in the wake of Chairman Ben Bernanke’s statements that the U.S. central bank would look to end its asset buying program in mid-2014. More recently, investors seem to have found comfort in the Fed’s latest pronouncements on these efforts, which indicate that it will be proceeding rather deliberately and remains committed to keeping interest rates at low levels for some time to come.
D.R. Horton, Inc. (DHI)
For investors seeking exposure to the homebuilding industry, the nation’s largest homebuilder, D.R. Horton, Inc. (DHI), looks to be a good place to start. The company builds and sells single-family homes in 78 markets in 27 states and also provides mortgage financing and related services. DHI traces its roots back to companies founded by Donald R. Horton in the 1970s and 1980s. The 63-year old continues to serve as the company’s chairman and remains its largest shareholder, owning 8.7% of the shares outstanding.
Fiscal 2013, which ended on September 30th, was easily Horton’s best since the collapse of the housing bubble last decade. In all, earnings reached $1.33 a share, up 82% from the 2012 tally of $0.73. Overall, the operating environment for the company and other homebuilders, is quite favorable. DHI sold more than 24,000 homes last fiscal year, up 28%. Meanwhile, the overall supply of available houses remains quite thin by historical standards. This is helping to underpin prices on the company’s homes, which have also experienced double-digit increases in the past year. Looking into fiscal 2014, an improving economy and recovering job market should help to offset any impact from higher mortgage rates, allowing sales and profits to continue pushing higher, with the latter climbing another 17%, to $1.55.
Overall, DHI stock is worthy of consideration for those looking to establish a position in the homebuilding industry. Most notably, this equity offers wide price-appreciation potential to 2016-2018. The company also pays a dividend, unlike most of the other homebuilders, though the yield of less than 1% is unlikely to whet the appetite of income-oriented investors. Meanwhile, these shares carry an Average (3) rank for Safety, though shareholders should anticipate some twists and turns along the way, as reflected in a below-average Price Stability score of 30 (on a scale of 5 to 100).
NVR constructs and markets single-family detached homes, townhouses, and condominiums. The Virginia-based company generates about half of its revenues in the D.C. and Baltimore metro areas. Like most others in the industry, profits at NVR have rallied strongly in 2013, and will likely reach $50.00 a share for the year, up more than 40% from 2012. The company has experienced some deceleration in orders in the second half of the year, which raises concerns about the possible drag from higher interest rates. This has prompted us to temper our sales and earnings expectations for 2014, though our current estimates of $4.5 billion (down from $4.7 billion) and $65.00 (down from $70.00), respectively, still represent healthy year-over-year gains of 11% and 30%.
NVR stock is likely to appeal most to more-conservative investors, as reflected in its Safety rank of 2 (Above Average). Notably, it was the only homebuilder we follow that was able to remain profitable each year during the collapse of the housing bubble and, in our view, it has the strongest balance sheet in the industry (Financial Strength: A). That said, long-term price appreciation potential, though still above average relative to the rest of the Value Line universe, is fairly modest compared to that offered by the other, more volatile equities in the homebuilding group.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.