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Stock Screen: Best and Worst Performing Industries - January 17, 2014
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 six-week period covered in our latest Industry Price Performance rankings was a solid stretch for equities. The bull market wobbled a bit in early December, but rallied nicely in the closing weeks of the year, and has generally been able to hold onto to these gains so far in 2014. In all, the leading market benchmarks wound up advancing between 2% and 4% for the period between December 3rd and January 14th. From an industry perspective, the Biotechnology group ran away from the field, rising 19.5% to take home the top spot. The Newspaper industry was next up, climbing 10.9%. Other groups in demand among investors were Publishing (9.5%), Human Resources (9.3%), Homebuilding (9.0%), Building Materials (8.4%), and Drugs (8.3%).
In looking for investment ideas among these seven industries, we are taking a closer look this week at Drug stocks. The group’s strong performance of late is nothing new. Indeed, 2013 as a whole was a very good year for drug stocks, in general, with the median total return for ones we follow approaching 50%.
Among the top-performing stocks in the drug group during 2013 was Celgene Corp. (CELG). The company develops and commercializes therapies to treat cancer and immune-inflammatory related diseases. Most notably, Revlimid, which is used in the treatment of multiple myeloma, accounts for about two-thirds of total revenues. Other significant drugs in the portfolio include Abraxane (10% of revenues) for breast and lung cancer and Pomalyst/Imnovid (5%), which also treats multiple myeloma. As with most drug companies, research and development is a key to success, and Celgene doesn’t skimp here, devoting nearly one-third of its revenues to these efforts.
Strong top-line growth has been the norm for the company over the past decade. Although the final tallies likely won’t be in until February, this trend was likely in evidence again in 2013. In fact, Celgene recently provided preliminary results for the just concluded year that indicated revenues rose about 18%, to roughly $6.5 billion.
Moreover, management set its 2014 sights on $7.5 billion in revenues, which would represent growth of 14%. Revlimid should climb at a similar clip, to approach $5 billion in sales. And, unlike the past few years, when earnings were stuck in neutral, the company also appears poised to make big strides on the bottom line. In all, management is targeting 2014 share net of $5.54-$5.92, a 65%-75% leap from its guidance for 2013.
Despite the healthy near-term operating outlook, investors interested in the Celgene story may be best served by biding their time and perhaps looking to buy on dips in the share price. Aside from the drug maker’s attractive growth prospects for both 2014 and the 3- to 5-years ahead, the stock has a number of positive attributes, including a strong mark for Price Growth Persistence and an Above-Average rank (2) for Safety. Still, the rapid advance in the share price during 2013, up 115%, leaves this equity with minimal appreciation potential to 2016-2018, in our view. Income-oriented investors should also note that the stock doesn’t pay a dividend, as the company currently favors share repurchases as the means for returning its ample free cash flow back to shareholders.
Zoetis (ZTS) is one of the more recent additions to our coverage of the drug industry. The company, which develops and manufactures medicines and vaccines for livestock and companion animals, operated as the animal-health division of Pfizer Inc. (PFE -Free Pfizer Stock Report) for more than 60 years. In February, it completed its initial public offering and became fully independent in June when Pfizer exchanged its remaining ZTS stock for PFE shares.
The company has been turning in solid results during its first year on its own. Sales rose 8% year over year in the September quarter, while adjusted net income climbed 10%. Looking into 2014, we expect top-line growth of 7%, with an improving outlook for the global economy likely helping to support demand from the livestock and companion animal markets. Meanwhile, operational enhancements should help to expand operating margins and provide an extra boost for share net, which figures to advance at a mid- to high-teens clip.
ZTS stock shot up on its first day of trading, but hasn’t made much of a mark otherwise, underperforming both the broader market and the shares of its former parent over the balance of 2013. Still, at the current price, this equity may be of interest to long-term investors. It is, in fact, one of the few drug issues offering above-average appreciation potential to 2016-2018. The company also pays a modest dividend. The yield of just below 1% isn’t especially exciting, but the dividend appears to have room to grow at a steady clip in the years ahead, given the modest payout ratio (about 20%), The stock is unranked for Timeliness, due to the short trading history.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.