The five worst-performing industries in U.S. equities are averaging a 27% decline so far in 2014. With less than three months to go in the calendar year, these five industries are truly the poster children for a diversified portfolio. A large bet on any of these industries at the end of 2013 would be financially crippling — only if you sold and many would — all but the wealthiest investors.
Hidden amongst the ruins, however, are some exceptions to the rule. Every industry, no matter how poorly it’s performing as a group, usually has an outlier or two, those exceptionally consistent stocks which perform despite the headwinds faced by the industry as a whole.
Who are those outliers?
I’ll give you five picks — one from each of the five worst-performing industries year-to-date.
Worst Industries — Marketing Services (Down 28% YTD)
As industries go, marketing services is one of the worst when it comes to long-term performance. Over the past five years, it’s achieved an annualized total return of -0.5% compared to 14.4% for the S&P 500. One of the rare exceptions is National CineMedia (NCMI), up 3.3% annually over the same period and 221% since hitting its all-time low of $4.79 in November 2008.
Going public in February 2007, NCMI is a product of some of the country’s biggest cinema owners, providing movie theaters with the largest digital in-theater media network in North America. Connecting 710 million movie patrons with national and local advertisers, NCMI is able to truly engage the audience unlike TV and other forms of media.
In the past four years its adjusted operating income before depreciation and amortization has grown 24% to $235 million at the end of 2013. In the meantime its annual dividend has grown 38% from 64 cents in 2009 to 88 cents today. At current prices, NCMI stock is yielding almost 6% despite revenues declining in the first two quarters of the year.
If you’re an income investor, NCMI stock is a good way to generate consistent yield.
Worst Industries — Computer Peripherals (Down 28% YTD)
Up 5% year-to-date through October 15, Electronics for Imaging (EFII) hasn’t had a down year since 2008 and over the past five years has outperformed the S&P 500 on an annualized basis by more than 10%.
EFII provides its customers with digital color imaging technology in the form of digital print servers, digital inkjet printers and professional printing software. Companies like Staples (SPLS), Alphagraphics and anyone else in need of quality printing technology use EFII to improve their bottom line.
In the first six months of the year, EFII has grown top-line revenue by 9% year-over-year to $382 million with non-GAAP net income up 21% to $41 million. With the exception of its Asia/Pacific segment, EFII is firing all cylinders with its EMEA product segment generating double-digit revenue gains on a trailing-twelve-months basis.
Despite participating in one of the worst-performing industries in the U.S., EFII is anything but an also-ran. If you needed any more proof, just look at EFII stock’s 4% jump after Wednesday’s earnings report.
Worst Industries — Building Materials Wholesale (Down 27%)
Louisiana-Pacific (LPX) has actually done quite well in recent times, up 17% on an annualized basis over the past five years compared to 6% for its peers. Off 20% year-to-date it has managed to claw some of that back over the past week.
As far as industries go, building materials is about as cyclical as they come. Louisina-Pacific’s largest segment — Oriented Strand Board (OSB) — saw OSB prices decline by 37% in the second quarter compared to the same period a year earlier. As a result, OSB revenues in Q2 2014 declined by 27% erasing all operating profits the segment hoped to generate. Last year its OSB segment made $95 million in the second quarter; this year it lost $6 million, $101 million worse year-over-year.
This time last year LPX stock was trading 20% higher; before the recent recovery, LPX stock was lower than it has been in the past two years. With a slowdown in new home construction in the U.S. it’s unlikely that OSB prices will keep rising for much longer.
That said, if markets in general continue to falter, and LPX falls below $10, you’re looking at quite the value play.
Worst Industries — Mortgage Investment (Down 27%)
The mortgage investment industry has been hit hard by regulatory probes over the improper handling of mortgages by non-bank specialty servicers such as Ocwen Financial (OCN), Walter Investment Management (WAC) and NationStar Mortgage Holdings (NSM).
As the bigger banks have gotten out of mortgage servicing, companies like Ocwen and Walter have stepped into the breach growing rapidly as a result. In addition, with the number of loans serviced being of finite capacity, non-bank servicers are looking to non-prime customers to originate new mortgage loans.
David Lykken of Mortgage Banking Solutions estimates the market for these non-prime loans to be as much as $200 billion annually. With almost no market in existence presently for non-prime mortgages, this trio could be in for another huge growth spurt.
Of the three, I’d have to pick NSM stock whose adjusted EBITDA has grown from $46 million in 2009 to $617 million in 2013. Its plan is simple: to increase the profitability of its servicing segment while growing its mortgage origination business, which drives its servicing business.
Worst Industries — Electronics Stores (Down 21%)
Every time I look at RadioShack’s (RSH) market cap of $88 million I have to glance a second or third time to make sure I’m not hallucinating. It seems surreal that something that was once so ubiquitous in America is now relegated to micro-cap status. I guess time really doesn’t stand still for anyone.
Anyway, with the easy money on Best Buy (BBY) already gotten — up 242% in 2013 — it seems to me that GameStop (GME) is the stock to go to in this particular “loser” industry. InvestorPlace contributor Kenneth Fick points out in his October 15 article that GME stock makes sense for growth and income investors willing to keep a close eye on its volatility. I couldn’t agree more.
There’s enough good stuff happening at GameStop to entice investors with a little risk tolerance to get in on the action.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.