April 26th, 2008

Advancing IBD Industry Groups and Their Stocks

Having written (see April 24) that industry groups represent about 30% of a stocks performance, the next logical question is, “How can I track industry groups?” I confess, it’s challenging because

  • Classification: readily available sources often slot companies into different classifications. For example, Netflix (NFLX) is classified as part of: 1) Specialty Retail-Music & Video Stores (Hemscott/Yahoo/Telechart), 2) Internet-E Commerce (IBD) and 3) Services-Recreational Activities (Google Finance).
  • Indexes: the performance of an industry can be tracked over time by an index. However,each of these sources probably use different methologies to combine group members into their Industry Indexes (indexes can be capital weighted, trade weighted, numerical average or, as IBD claims, a proprietary method).
  • Comparisons: there are no readily available easy method for comparing industry groups to determine, for example, which are performing best, improving the most or out of favor.
  • Accuracy: some groupings are so narrow that there are less than a handful of members and reflect mostly the performance an individual stock (in Hemscott’s Specialty Retail-Toy & Hobby Stores Industry Group contains only one stock: BBW, Build-a-Bear Workshop)

Hemscott has 208 Industry Groups within 32 sectors; IBD has 197 Industry groups. Standard & Poors, for that matter, has 104 Industry Groups summarized in 9 sectors.

I prefer the consistent and reliable IBD’s Industry Group Ranking approach. I’ve been tracking those rankings for nearly 4 years and have been able to see, over time, which groups have lead the market and which have lagged.

It’s usually easy to see which groups are the leaders since they appear conspicuously throughout the IBD newspaper. For example, among the top-ranked IBD 100 stocks, 29 are Energy and Oil & Gas, 10 are Machinery manufacturers and 9 are various Chemical stocks; that makes up 48% of the top stocks today.

Many of these stocks have already had huge moves so new commitments to them today might be risky. What you actually want are the groups that are “emerging” leaders, those stocks that haven’t yet made it to the top 100 but are advancing in their rankings (and even though they may never make it to the top 100 they may still generate nice profits at low risk if bought early enough.

I have two criteria when I look at IBD’s Industry Group rankings: 1) that the group has advanced by more than 50 places in the rankings for several weeks and 2) more than a single stock has participated in the Groups improvement in ranking. Two Industry Groups, and member stocks with potential for new investment today with upside left in them, are (click on symbols to see charts):

  • Transportation-Rail:
    • NSC (Norfolk Southern)
    • BNI (Burlington Northern Santa Fe)
    • GWR (Genesse & Wyoming)
  • Finance-REIT, and specifically healthcare and retail:
    • HCN (Health Care Reit)
    • NHP (Nationwide Health Prop)
    • VTR (Ventas)
    • SPG (Simon Property Group)
    • SKT (Tanger Factory Outlet)
    • TCO (Taubman Centers)
Subscribe below or click here to learn more about help for navigating turbulent markets.