The Dead Money List
By Ian Davis
June 26, 2008
Once you're sitting on a losing position, you might wait longer than you think before the economic tides turn for the better.
Take homebuilders, for example. In November 2006, I recommended homebuilder Toll Brothers in my newsletter, Quant Trader. Housing stocks were cheap, houses were becoming more affordable, and the sentiment among the homebuilders themselves was rising.
I didn't foresee the upcoming subprime mortgage debacle.
When the stock started to fall, we stuck with our pre-assigned stop, and exited the position with a minor loss of 3%.
Toll Brothers fell by another 41% over the following six months.
And that's only a mild example. The following table shows just how long some sectors take to recover. These sectors have all failed to achieve new highs for more than nine years. I've sorted the list by each sector's performance over the last six months to see if any seems ready to rally.
Sector |
Six-month performance |
Years since all-time high |
% off all-time high |
Waste Services |
10.1% |
9.91 |
-8.0% |
Toys |
2.2% |
10.25 |
-34.5% |
Business Supply |
1.2% |
9.91 |
-40.4% |
Drug Retail |
1.2% |
9.43 |
-13.2% |
Apparel Retail |
-3.1% |
9.18 |
-29.4% |
Auto Parts |
-6.0% |
10.16 |
-30.9% |
Soft Drinks |
-15.4% |
9.95 |
-17.5% |
Cars |
-19.7% |
9.12 |
-74.7% |
Travel |
-21.2% |
10.20 |
-56.0% |
Airlines |
-36.9% |
9.95 |
-70.9% |
|
So, are any of these left-for-dead sectors worth investing in now?
Let's take a look...
Airlines and automobiles are the farthest from reaching new highs. Both of these sectors are in shambles, down by double digits in just the last six months.
The automobile industry is suffering from high oil and raw-material prices, a recession in the U.S., and huge pension responsibilities.
Airlines are also suffering from high oil prices. According to CEO Douglas Steenland, Northwest Airlines has to pay $420 million in additional annual costs for each $10 increase in the price of oil.
So right now, I'd rather take a midnight stroll through a Detroit alleyway than invest in these sectors.
As for top of the list...
The toy sector rose 2.2% over the last six months. The weak U.S. dollar is helping... The largest U.S. toy maker, Mattel, achieves 46.8% of its revenue internationally.
However, toys are discretionary items and sales may be impacted by a U.S. recession. And the sector is still 34.2% off its all-time high. For that reason, I'd avoid it for now.
The waste-services sector is up 10.1% in the last six months. This sector is also the only member of the list that's approaching new all-time highs... It's only 8% away.
So why is the sector rallying?
Well, the world has obviously become more concerned with "green" energy and environmental clean up. The commodity boom is also partly responsible for the turnaround.
Although the waste-disposal sector is subject to some oil-related costs (garbage and recycling trucks need fuel), rising commodity prices tend to help the sector, allowing waste companies to sell their recycled products, like aluminum, for more money. And the roaring energy market is increasing their revenue from selling gas that's been recovered from landfills.
I'll take a closer look at the waste-disposal sector in an upcoming issue of Growth Stock Wire.
Until then... good investing,
Ian Davis
