Industry Rank Analysis 07-21-10
Normally we think that the relationship between the stock market and earnings is one where earnings lead the stock market. In other words, if earnings are good for a given stock or industry, then the stock prices will follow. However there is one area of the market where the relationship is reversed: a bad stock market actually causes bad earnings.
While the market does seem to be on the mend over the last two weeks or so, there is not question that the market in the second quarter was, in a word, lousy. The industry that is most affected by the direction of the market is, of course, Wall Street itself. More specifically the Investment Managers, Investment Funds and Investment Brokers, which in out classification system are three separate, but obviously related and overlapping industries.
The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well — a single firm with good news can propel a one- or two-firm industry to the top of the charts. It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.
However, in this case, the industries are not particularly small in terms of the number of companies involved. The Investment Management industry has 27 firms in it, yet it ranks 253rd out of the 256 industries we track. Of those 27 firms, an increasable 13 hold the dreaded Zacks #5 Rank, or Strong Sell. An additional 6 hold a Zacks #4 Rank, or Sell.
Only the worst 5% of all socks are stuck with a Zacks #5 Rank, and the next 15% get Zacks #4 Ranks. Thus, if it were totally random, one would only expect 20% of the firms in an industry to have ranks of #4 or #5 (this mirrors the #1 and #2 ranks, by the way). For the Asset Management firms, over 70% have ranks that say “run away.” The average Zacks rank of the industry as a whole is 4.19, “up” from 4.04 last week.
The Investment Fund (mutual fund) industry is a bit smaller, with only 5 firms, but it has two with Zacks #5 Ranks, and one more with a #4, so 60% of the firms in the industry have very undesirable Zacks ranks. That industry is in 245th place, although that is four spots better than last week, as the industry’s average score improved to 3.60 from 3.80.
The Investment Broker industry is the largest of the three with 30 firms. It is in 227th place (a 1-spot improvement on the list from last week). Its average score is 3.40, a slight deterioration from the 3.37 average it held last week. It has four Zacks #5 Ranked stocks and seven #4s, so 36.7% of the firms have unfavorable ranks.
The table below shows the stocks from these three related industries that hold the dreaded Zacks #5 Rank. Historically, #5-ranked stocks have far underperformed the overall market, so if you hold any of them you might want to get out while the getting is good — or if you are the more adventuresome sort, these might be good short candidates.
The firms range in size from large caps to micro caps. Given the overall valuation in the market, with the S&P as a whole trading for just 13.6x 2010 earnings expectations, these stocks do not look particularly cheap, either. Especially since they generally are much more volatile than the overall market and have less reliable earnings than most firms. Keep in mind that if the consensus estimates are falling, they are far more likely to continue falling than to turn around and start to rise. Thus these P/Es may well prove to be to low relative to the earnings that these firms will actually post this year.
Number 5 Ranked Stocks
| Company | Ticker | Market Cap ($ mil) | P/E Using Curr FY Est | P/E Using Next FY Est | % Change Curr FY Est – 4 wk | % Change Next FY Est – 4 wk | Current Price |
| Franklin Resour | BEN | $20,958 | 14.82 | 13.05 | -0.83% | -1.27% | $92.19 |
| Blackrock Inc | BLK | $19,887 | 15.21 | 13.38 | -2.01% | -1.77% | $149.36 |
| T Rowe Price | TROW | $12,368 | 19.52 | 16.87 | -2.81% | -3.74% | $47.65 |
| Sei Investments | SEIC | $4,097 | 19.58 | 16.68 | -3.67% | -3.72% | $21.58 |
| Eaton Vance | EV | $3,449 | 19.96 | 15.9 | -1.96% | -3.38% | $29.19 |
| Lazard Ltd | LAZ | $2,864 | 14.81 | 11.53 | -8.41% | -5.70% | $28.25 |
| Alliancebernstn | AB | $2,759 | 14.56 | 13.17 | -6.70% | -7.98% | $27.01 |
| Waddell&Reed -A | WDR | $1,988 | 13.44 | 11.42 | -4.15% | -6.72% | $23.00 |
| Fortress Invest | FIG | $1,859 | 8.75 | 6.59 | -6.36% | -6.32% | $4.05 |
| Stifel Finl | SF | $1,406 | 15.27 | 11.79 | -5.16% | -3.10% | $45.32 |
| Och-Ziff Captl | OZM | $1,032 | 10.98 | 7.89 | -12.88% | -3.20% | $12.46 |
| Gamco Investors | GBL | $1,015 | 16.99 | 14.86 | -6.68% | -5.53% | $36.79 |
| Cohen&Strs Inc | CNS | $850 | 21.54 | 16.99 | -4.34% | -3.77% | $19.95 |
| Artio Globl Inv | ART | $650 | 9.09 | 8.95 | -4.68% | -6.44% | $15.43 |
| Piper Jaffray | PJC | $627 | 15.25 | 10.46 | -7.12% | -8.08% | $30.22 |
| Compass Diversf | CODI | $606 | 10.46 | 9 | 0.00% | 0.00% | $14.47 |
| Sws Group Inc | SWS | $287 | 13.13 | 9.76 | -12.09% | -8.59% | $8.83 |
| Fbr Capital Mkt | FBCM | $212 | N/A | 8.5 | -533.33% | 0.00% | $3.40 |
| Calamos Asset-A | CLMS | $189 | 12.02 | 10.77 | -10.73% | -11.31% | $9.50 |
| Sector | “This Week’s Zacks Rank ” |
“Week ago Zacks Rank ” |
“FY10 Revisions Ratio ” |
“FY10 Estimates Revised Up ” |
“FY10 Estimates Revised Down ” |
“FY11 Revisions Ratio ” |
| Transportation | 2.72 | 2.73 | 1.68 | 210 | 125 | 2.28 |
| Auto-Tires-Trucks | 2.73 | 2.83 | 1.65 | 43 | 26 | 1.72 |
| Computer and Technology | 2.89 | 2.89 | 1.61 | 514 | 320 | 1.58 |
| Basic Materials | 2.93 | 2.96 | 0.85 | 159 | 186 | 1.2 |
| Industrial Products | 2.94 | 2.96 | 1.27 | 121 | 95 | 1.3 |
| Aerospace | 2.95 | 3.03 | 0.76 | 26 | 34 | 0.59 |
| Consumer Discretionary | 2.98 | 2.95 | 0.79 | 151 | 192 | 0.78 |
| Retail-Wholesale | 3 | 2.87 | 0.7 | 229 | 327 | 0.6 |
| Business Services | 3 | 2.99 | 0.51 | 70 | 138 | 0.47 |
| Construction | 3.01 | 2.91 | 0.51 | 43 | 85 | 0.33 |
| Medical | 3.03 | 3.05 | 0.58 | 190 | 326 | 0.53 |
| Conglomerates | 3.04 | 2.79 | 0.85 | 17 | 20 | 0.3 |
| Consumer Staples | 3.06 | 3.15 | 1.1 | 114 | 104 | 1.27 |
| Utilities | 3.07 | 3.12 | 0.81 | 81 | 100 | 0.8 |
| Finance | 3.07 | 3.07 | 0.63 | 543 | 856 | 0.55 |
| Oils-Energy | 3.08 | 3.08 | 0.69 | 371 | 540 | 0.6 |
In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.
The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry — they have the same influence on the industry rank.
Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.
The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.
Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
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.
