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Monday, May 3, 2010

Earnings by Industry -- which sectors are showing real strength?

When picking stocks, it is often said that risk can be reduced if you are targeting companies in an industry group that is already doing well. This prevents you, as an investor, from having to swim against the tide.

With more than three fourths of the 2010 first quarter earnings season complete, this post takes a look at those industry groups that appear to be registering the best results.

The screen I have done has counted those stocks that have seen both year-over-year and sequential earnings per share increases. I refer to these stocks as the EPS Gainers. The numbers reflect a total universe of approximately 5800 stocks.

Overall, roughly 13% of stocks fall into this category of being EPS Gainers. Some sector and industry classifications, however, are doing better than others.

Getting right into the results, I’ll profile a couple of industries that are looking good.

First, we have these retail industries that seem to be on fire:

IndustryNumber of EPS GainersTotal Companies in IndustryPercent EPS Gainers
Department/Specialty Retail Stores112446%
Consumer Electronics/Video Chains4944%
Clothing/Shoe/Accessory Stores174340%
Specialty Foods41136%
Retail: Computer Software & Peripheral Equipment3933%
Consumer Specialties51631%
Home Furnishings82730%

Tech is not doing too badly but not as good as I thought:

IndustryNumber of EPS GainersTotal Companies in IndustryPercent EPS Gainers
Computer peripheral equipment61932%
Computer Communications Equipment72330%
Computer Software: Programming, Data Processing62129%
Computer Manufacturing41527%
Electronic Components104423%
Computer Software: Prepackaged Software2512919%
Semiconductors2114614%

So how about the financial sector? Here it is in all its glory:

IndustryNumber of EPS GainersTotal Companies in IndustryPercent EPS Gainers
Finance Companies31127%
Savings Institutions2111319%
Finance/Investors Services1714%
Major Banks5439814%
Investment Bankers/Brokers/Service86912%
Finance: Consumer Services132007%

Here are some interesting observations:
  • REITS have been on a tear recently yet only 14 out 164 (9%) can be considered EPS gainers.
  • Semiconductors stocks have been doing better than REITS but not as well as I thought. Nevertheless, many investors, including me, have registered some nice gains over the last year from buying chip stocks. Does this mean the semiconductor rally is overdone? I hope not...

Conclusions--

The consumer is back. The rebound in retail is real. The results across seven different industries involved with consumer retail consistently range from decent to good. This would not be the case unless the consumer was truly out there spending money.

Good results from a small number of bellwether stocks can move a whole sector, as exhibited by the REITs and semiconductors.For an investor in sector ETFs, though, that may be good enough.

For industries or sectors that are showing price gains while industry-wide earnings lag, there is one word I want to say to you: caution. These are the kinds of investments that can suddenly plunge. There's nothing wrong with riding a financial ETF higher and higher; just be sure to keep reasonably conservative stops in place in case a rally based on weak fundamentals runs out of steam.

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