By: Robert M. Greene, CFA
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 1,700 stocks in the Value Line universe are currently divided among roughly 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 latest six-week period covered in our Industry Price Performance rankings stretched from July 29th to September 9th and was a relatively favorable run for the equity markets. Things got off to a rough start, as stock prices tumbled badly on July 31, but it was relatively smooth sailing after that. Overall, the Value Line Arithmetic Average rose 1.6% for the period. From an industry perspective, Building Materials took home the top spot, rising 9.0%. Other big gainers included Funeral Services (8.3%), Wireless Networking (7.7%), Office Equipment & Supplies (6.5%), Semiconductor (6.2%), Railroad (6.0%), and Entertainment Technology (6.0%).
Looking at the worst performers, we get a sense of how quickly an industry’s fortunes can change. Precious Metals and Metals & Mining-Diversified stocks were among the market’s favorites early in the summer, but support for these two commodity groups has fallen off noticeably, with the former dropping 10.3% and the latter falling 8.2%. Energy-related groups also took their lumps, with Oilfield Services / Equipment (down 8.6%), Coal (down 8.1%), and Natural Gas-Diversified (down 6.4%) being especially weak.
After considering investment ideas among the seven best-performing industries, we have chosen to review Railroad stocks. The market has been quite enthusiastic about the manufacturers of railcars, and this is where we will focus our attention this week. Rising investor support for the shares of American Railcar (ARII), Greenbrier Companies (GBX), and Trinity Industries (TRN) extends much further back than the six weeks included in our latest Industry Price Performance Rankings. Indeed, the stock price of each has more than doubled over the past year.
Recent operating results quickly provide a sense of what has investors so excited. Rising revenues and surging railcar orders were recurring themes, as each company blew through our estimate in its latest quarter. At American Railcar and Trinity, June period earnings rose by 36% and 87%, respectively. Greenbrier outdid both of them, delivering a 106% increase in share net for its May interim. (The company wrapped up its 2014 fiscal year on August 31, though we don’t expect to hear its final tallies for the year again until late October or early November.) These outsized gains probably won’t be repeatable in upcoming quarters, though the record backlogs cited by Greenbrier and Trinity suggest the near-term operating outlook for these companies remains fairly promising.
Meanwhile, developments surrounding America’s energy renaissance appear to be moving in a direction that will help keep the good times on track for the railcar manufacturers. Oil and gas companies have been leaning heavily on the railroads to help get their product to market, and American Railcar, Greenbrier and Trinity all produce the tank car that make this possible. Notably, train derailments and explosions involving tank cars have brought increased regulatory scrutiny. This should actually work to the benefit of the railcar manufacturers. As it stands, the Department of Transportation has set its sights on phasing out DOT-111 cars that ship crude oil in the next couple of years. In this environment, the railcar manufacturers should be kept busy retrofitting existing equipment and building new tank cars.
Not surprisingly, looking at the investment attributes of these three equities, we find a lot of common ground. Overall, these stocks are likely to appeal most to momentum-oriented investors. We also think TRN shares offer more upside for the 3 to 5 years ahead, due, in part, to a more modest valuation. The stock currently trades at roughly 13 times earnings, versus 16 for ARII and 18 for GBX.
Notably, more conservative investors will want to proceed with caution. These stocks all carry high Betas, reflecting to a large degree their sensitivity to trends in the broader economy. For instance, earnings at each fell sharply during the last recession, with American Railcar and Greenbrier even operating in the red for some of this stretch. Too, none of these stocks is likely to get the typical income-oriented investor’s pulse racing. Granted, all three companies have been using their rising profits to reward investors in the form of higher dividends. (Greenbrier, in fact, paid out its first quarterly distribution earlier this summer.) Nonetheless, at recent prices, the yields are still fairly modest. American Railcar stock leads the way in this regard, but its yield of 2.1% puts it only in the middle of the pack relative to other dividend paying equities in the Value Line universe.
