Some Good “News”
By Dirk Van Dijk
January 12, 2010
Industry Rank Analysis 1-12-10
In evaluating the Zacks Industry Ranks, you want to see two things: both a good overall score (low, meaning more Zacks Rank #1 and #2 stocks than #4 or #5-ranked stocks) and some improvement in the relative position from the prior week.
Good “News”
Often the best investments are the ones that if you mention them at a cocktail party, everyone there will look at you as if you have two heads. There is some very good “news” on that front.
If there was ever an industry that everyone knows is a dinosaur, it would be the Newspapers. The past year has seen a number of well-known and established papers go bankrupt, and several of them have stopped publishing. Even if they do have long-term challenges, it doesn’t mean that pessimism can’t get overdone on a short-term or even medium-term basis.
When expectations are very low, you only have to avoid a disaster — not hit it out of the park — to do much better than expected. Put another way, people in Detroit were probably happier with the Lions this year than the people in Pittsburgh were with the Steelers, even though the Steelers had a much better record. The reason is that people in Detroit expected the Lions to stink, while people in Pittsburgh were expecting to at least make it to the playoffs, if not a return trip to the Super Bowl. If NFL teams were stocks, the Lions would have soared while the Steelers would have been a dog in 2009.
The Newspaper industry is now in 7th place among the 206 industries we track — an improvement of seven spots from last week. The average Zacks Rank is 2.11 versus 2.11 last week. Three of the seven firms in the group have coveted #1 ranks, including Gannett (GCI), the largest newspaper chain and owner of USA Today, and the New York Times (NYT), which is to my (somewhat biased) mind, the best newspaper in the English-speaking world. McClatchy (MNI) also holds a Zacks #1 Rank. News Corp. (NWS), which is more of a media conglomerate — but one with a lot of newspaper exposure (both highbrow in the form of the Wall Street Journal, and lowbrow in the form of the New York Post, as well as papers around the world) — has a Zack #2 Rank.
Yes, papers face declining circulations, particularly among the young, and things like Craig’s List have decimated their once highly lucrative classified franchises. They are, however, often local monopolies, and advertisers still find them useful. As for the readers, I know I feel more confident about the accuracy of information I get if it comes from the New York Times or the Wall Street Journal than if it comes from some semi-anonymous blogger.
While they may never return to their glory days, that doesn’t mean that they are all going to go extinct in the near future, either. Most have greatly reduced their costs over the last year, so just a small pick up in revenue should lead to large gains on the bottom line. The Newspapers are part of the reason the Consumer Staples sector is tied for second among all sectors.
Not All Oil Companies the Same
Often I like to look at related industries that are headed in the same direction, but sometimes the differences can be interesting. Something along those lines is happening right now in the oil industry. The Canadian Integrated Oil industry improved 56 spots this week to land in 10th place, with an average rank of 2.29; it was 2.57 last week. Two names in particular stand out: Ecopetrol (EC) and Imperial Oil (IMO), both with Zacks #1 Ranks.
While the Canadian integrated names jumped up in the rankings, the rest of the world’s integrated firms fell, but are still not that bad. The International Intergraded Oil group dropped 18 spots, but is still in 49th place with a average score of 2.68.
Integrated oil companies are, however, in effect two businesses that are joined together: the upstream, which is involved in finding the oil and natural gas, and the downstream which is involved in refining it and selling it at the gas station.
The downstream seems to be where the problems are in the industry. The stand-alone oil refining group is near the bottom of the list, in 173rd place, and moved 5 spots closer to the bottom this week with an average score of 3.27. In particular, you might want to avoid Zacks #5 Ranked stocks like Tesoro (TSO) and CVR Energy (CVI).
The oil royalty trusts, on the other hand, which are pretty much a pure-play on the price of oil and gas (they just pump it out and send investors a check, and don’t even bother looking for more) are doing extremely well, in the 15th spot — an improvement of 19 places over the last week, with an average score of 2.29. They are a very nice income play, but they are a depleting asset, so some of that dividend should be considered a return of your capital, not a return on your capital. In particular, take a look at Zacks #1 Ranked firms BP Prudhoe Bay Trust (BPT) and Permian Basin Royalty Trust (PBT).
About the Author
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market-beating Zacks Strategic Investor service. For more information, visit http://www.zacks.com.
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