Seeking The Best Among The Best
A stockâ€™s environment can have a big effect on its movement. By evaluating a stock relative to its peers, investors can spot potential headwinds and identify stocks with built-in advantages.
Share prices can move on company-specific information, but they also rise and fall based on news they cannot control. Whether itâ€™s DirecTV ($44; DTV) slipping when its cable rivals report declining subscriber growth or Exxon Mobil ($74; XOM) riding along with changes in the price of crude oil, stocks have a tendency to run with their own pack.
Our Quadrix research universe tracks 140 industries that contain at least five stocks. We considered the average Quadrix scores (reflecting fundamentals) and total returns for each of these groups. In sifting through the data, we uncovered some interesting trends.
• Just 27 of the 140 industries have generated positive total returns this year. Those 27 industries average Overall scores of 52, with Quality scores of 56 and Value scores of 48.
• The 23 industries that have lost 20% or more this year average Overall scores of just 43, with Quality of 45. Yet the price weakness has not translated into especially attractive valuations, as evidenced by an average Value score of 52.
The two facts above suggest that investors should not rush to buy companies that have bucked the bear market â€” unless they also boast impressive fundamentals. Nor should investors flock to the biggest losers. When you bottom-fish with a big net, you tend to haul in a pretty nasty-looking catch.
As always, the Forecasts advises investors to focus on high-quality stocks, such as those with strong Overall scores. You may have better luck finding such stocks in industries with high average Overall scores, including the 22 listed in the linked table.
Advance Auto Parts ($60; AAP) and AutoZone ($309; AZN) rank sixth and eighth, respectively, among their 18-stock industry as measured by Overall score. AutoZone managed sales and per-share-profit growth in each of the last 16 quarters, while Advance Auto managed 15 out of 16, reflecting fairly consistent demand for parts from Americans holding onto their cars longer.
At less than 14 times trailing earnings, Advance Auto trades at a 12% discount to its five-year average and a 22% discount to its sector average P/E ratio. Wall Street expects per-share profits to rise 19% this year and 13% next year.
AutoZone should deliver even faster growth, with per-share profits up 28% in fiscal 2011 ended August and 15% in fiscal 2012. The company has exceeded consensus profit estimates in each of the last four quarters, averaging a positive surprise of 7%. AutoZone is a Buy and a Long-Term Buy. Advance Auto is a Long-Term Buy.
For details on all of our industry groups, check out the Industry Group Studies report.