Home  BASIC TRAINING

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

Questions or comments about this site:

Winning Investing   199 Quail Run Road Aptos, CA 95003

(Aptos is 'the beach' for Silicon Valley)

(800) 276-7721 • (831) 685-1932