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Picking
Hot Industries
With the
major averages down for the year, the market has been nothing to shout
about recently.
But investors
holding Health Care Plan stocks may not have noticed. When I checked
last week, stocks in that industry were up 27 percent on average, over
the past six months. What’s more, I counted at 13 other industries
showing at least 20 percent returns over the same period.
Those returns
show that investors in the right industry can make money, even if the
market is going nowhere. That’s why many money managers advise that
your chances of making money depend more on selecting the right industry
than it does on picking the right stock.
An industry
is a group of companies in the same or related business such as grocery
stores, disk drive makers or hospitals. Stocks in the same industry tend
to move together for a couple of reasons. For starters, all companies in
an industry are affected in similar ways by market conditions. Secondly,
mutual fund and other institutional managers track performance to
determine which industries are cooling down and which are coming into
favor. Once they identify a trend, the industry “rotates into favor”
as the big players accumulate shares in the industry’s best prospects.
Here’s a
rundown on my favorite resources for finding hot and cold industries.
Prophet.Net
Prophet.net (www.prophet.net) is a
useful resource for tracking recent industry performance. Click on
Explore and then
Industry
Rankings to see a list of the top performing industries over the
past six months. In addition to showing the current rank, Prophet also
shows the change in rank over the timeframe displayed. For instance, the
top ranked industry, Beverages-Winery/Distillers, had moved up 12
notches, from number 13, over the last six-months. By contrast, Medical
Practitioners soared from a lowly 124 rank to number three in the same
period, so it may have stronger momentum.
Usually an
industry stays in favor for, at most, six months to a year. You have to
spot a hot industry early, and hop on it before it loses steam.
Consequently,
it’s best to pay most attention to shorter timeframes, such as one- or
two-months. Looking at the past month, the Biotechnology, Retail Real
Estate Investment Trusts (REITs), and Specialty Eateries industries were
the best performers.
You can see
the charts of the stocks making up each industry by clicking on the
Charts icon. If you do, use the Chart Controls to change the default
chart timeframe from the one-day default to one-year to get a better
perspective on each stock’s long-term performance.
Equity
Trader
Equity Trader, founded by technical analysis guru John Bollinger, is
another resource for spotting strong industries. Bollinger employs
technical and fundamental factors to spot economic sectors (e.g.
technology), industries within those sectors (e.g. software), and stocks
within those industries likely to move up in price in the coming weeks.
Equity trader
displays a set of six signals; two red, two yellow, and two green, for
each sector, industry and stock. They look like traffic signals and
interpretation is intuitive. Two green lights forecast the strongest
expected performance, and two red lights the weakest.
On Equity
Trader’s homepage (www.equitytrader.com),
click where it says, “Click
here to bypass registration” and select Structure
(top menu) to see the indicators for the 13 major economic sectors. Then
click on a sector name to see the
industries
within that sector. Finally, click on an
industry
to see stocks making up that industry.
Briefing.com
Briefing.com (www.briefing.com)
takes a different approach to industry analysis. Instead of using
computers to crunch the numbers, Briefing.com employs real people to
analyze the future prospects of each industry.
Briefing.com
is mostly a pay site, but its industry analysis is in the free (Silver)
section. Get to the sector analysis by selecting
Silver
Index from Briefing’s homepage and then
Sector
View.
Briefing
starts by rating each of 10 major economic sectors: healthcare, telecom,
industrials, financial, basic materials, technology, utilities, consumer
staples, energy, and consumer discretionary. Each sector is rated as
“overweight,” “market weight,” or “underweight.” The ratings
reflect Briefing’s view of each sector’s outlook of the next three
months.
Then,
Briefing gives you a detailed sector analysis, including its view of the
prospects for the major industries within each sector.
Stovall’s
Sector Watch
Sam Stovall literally wrote the book on sector investing. His
“Standard & Poor’s Guide to Sector Investing” was the first
in-depth guide on the subject. You can read his weekly commentary,
“Stovall’s Sector Watch, on the Business Week site.
Each week he
reviews an industry sector in depth, or gives his take on sectors coming
into-, or going out-of-favor. He also frequently lists S&P’s
top-rated stocks in sectors of interest. Stovall’s column is
frequently featured on Business Week’s homepage (www.businessweek.com).
If not, find it by selecting
Investing
and then
Investing
Columns.
Sticking with
strong sectors is a good start. Usually the best performing stocks
within each sector are your best bet. But you still have to research
each stock before you buy.
published 5/15/05 |
