Industries Take Big Gains In A Rough And Tumble 2012

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2013: A Look Back And Ahead At the end of 2011, energy stocks were rallying. Iran faced rising economic sanctions and had threatened to blockade the Straight of Hormuz — a vital oil shipping route. U.S. oil prices had climbed past $100 a barrel, up from a $75 low in October and heading toward a high above $110 in March.

The blockade never materialized. And, although rebounding U.S. oil and natural gas production would remain one of the biggest economic stories through 2012, global energy demand continued to lag. Oil and gas stocks, aside from refiners and a few domestic producers like Bonanza Creek Energy (BCEI), would end 2012 with some of the worst losses among industry groups for the year.

Energy was only one standout in an unusually complex year. Eurozone worries, the promise of a record corn crop broken by a record-breaking drought, an awkward housing recovery, a midyear Supreme Court decision upholding ObamaCare, health care consolidation, restructuring among banks, the presidential election and, finally, the fiscal cliff — these were some of the overarching factors driving institutional investors in and out of an evolving pack of industry groups across 2012.

It was a far better year than 2011 when the S&P 500 ended flat and the Nasdaq slipped 1.7%. That year ended with rising industries led by railcar equipment makers and auto retailers pointing to a broadening rally.

The rally panned out. With one session left in 2012, the S&P 500 is up 13%. The Nasdaq has muscled 14.7% higher. A full 87% of IBD's 197 industry groups have advanced vs. the 38% that rose in 2011. The big wins for the full year went to mortgage services, makers of three-dimensional printers and paint makers. Homebuilders, recreational vehicle makers and plastics producers were next in line.

But it wasn't a steady advance for the market or industry groups. The step-up, step-back action meant that different sectors led and lagged on a quarter-by-quarter basis.

Here is a quick yearbook for industry group action, with some of the factors that drove the ups and downs.

First Quarter Some 96% of industry groups rose in 2012's optimistic first quarter, led by a healthy mix of technology, industrials, finance and others. The biggest industry advance went to the media software makers group.

Linked to the rapid changes in communications, entertainment and related fields, four out of 10 media software stocks vaulted 26% or more in January. In the same group, Brightcove (BCOV) and Synacor (SYNC) went public in February. Each leapt more than 50% in March in an enthusiastic IPO market. But the group peaked in February, then fell into a sharp correction.

Q1's second-best industry gain went to medical software makers, led by Athenahealth (ATHN) and Cerner (CERN). They rode optimism about ObamaCare to gain in 11 of 12 weeks through March 9.

Oil prices peaked in March, then corrected. That dragged down many of the energy groups analysts had expected to lead the year's gains. Homebuilders rose through January, then backtracked in February and March as housing data wobbled ending the quarter in the bottom 40% of group performances.

Second Quarter Prospects darkened in Q2, with eurozone travails dragging the S&P 500 down 3.3%. Less than a third of industries gained, with defensive plays like dairy products and candy makers seeing some of the quarter's strongest gains.

Despite the weakness, homebuilders began to assert themselves, rising 18% to take the quarter's second-tallest gain. The year's strongest industry, mortgage services, advanced 16% after rattling off a 48% gain in the first quarter.

Less a housing market play, more the beneficiary of banks exiting the mortgage services trade as they restructured operations, the group had a growth story independent of the housing recovery's ups and downs.

Riding Ocwen Financial (OCN) and NationStar Mortgage (NSM), the group went on to climb more than 140% for the year, nearly double the No. 2 industry group.

Third Quarter The mortgage services group extended its lead, rising 28% in the third quarter. Auto retailers and gold and silver miners were close behind, up 25% apiece. Auto sales tracked toward a third year of steady gains and Portland, Ore.-based Lithia Motors (LAD) was leading the auto retail group. Gold miners were just finishing off their run for the year, and started correcting when gold prices peaked in October.

Homebuilders, hurt by a July 19 sell-off after NVR (NVR) missed Q2 revenue estimates, managed only a 3% gain for Q3. That put the group in the lower half of industry performances for the quarter.

Fourth Quarter In the fourth quarter, the Machinery—Material Handling/Automation group kicked into its home-stretch sprint. The group posted one of the biggest gains in Q4 2011 — up 32% — but ended the year with a weak ranking. In 2012, it didn't show up in the top 10 advances among industries for any quarter before Q4. Still, it has jetted ahead a full 80% for the year, the year's second-largest gain among industry groups.

Key to that growth was novel and cost-effective technology allowing plastic models and components to be manufactured by compact units called three-dimensional printers. The group's two leaders, 3D Systems (DDD) and Stratasys (SSYS), hold only a small portion of the market — estimated by analysts to reach $1.5 billion this year.

In addition to that new technology, an optimistic mix of industries took the best gains in 2012's final quarter. Among the leaders, airlines, steel makers, automakers and movie distributors, echoing the broad optimism at the start of the year.

The most obvious trait among top industries during the last three quarters of 2012 was a link to technology. Medical software, computer makers, enterprise software and network solutions providers all ranked among the 10 fastest-moving industries in the first quarter.

By the second quarter, not one technology group made the top 10 list. The Internet-Content and Telecom Services-Cable/Satellite groups were the only technology plays to chalk up a top 10 gain in Q3.

Apple (AAPL) shares topped in September and corrected 29% through the fourth quarter. The stock still is on pace to end the year with a 27% gain, but its drag helped block technology groups — other than 3D printers — from any top 10 gains during the fourth quarter.

The Year Ahead Looking toward 2013, Sam Stovall, Standard & Poor's chief investment strategist, says analysts' 12-month price targets suggest a solid recovery among technology sector plays. Energy tops the list of forecast industry winners, with stock price targets pointing to a 16% gain for the year. Technology is next in line, up 15%, followed by the housing and industrial sectors.

In the mortgage services field, analysts forecast Ocwen to more than double revenue in 2013 after an expected 69% gain for 2012. NationStar's revenue should climb 47% in the new year after spiking an expected 150% in 2012.

For 3D printer makers, 3D Systems' revenue growth is expected to slow from 53% this year to a still-healthy 25% for 2013. Analyst consensus sees Stratasys ramping up to 104% growth for 2013, from a 36% gain in revenue this year. Analysts also say Stratasys and 3D Systems may become acquisition targets for larger players.

Paint makers, led by Sherwin Williams (SHW) and Valspar (VAL), took the third-largest gain for the year among industries. Recovering housing markets and low prices for natural gas fueled paint makers' profits. Both trends are forecast to continue.

In the telecom space, this year's busy merger and acquisition action was capped by Sprint Nextel's (NYSE:S)$20 billion deal with Japan's Softbank and Sprint's $2.2 billion buyout of Clearwire (CLWR). Researcher IBIS World projects telecom M&As will continue at a brisk pace over the next five years. But IBIS industry analyst Lauren Setar says there is likely to be a lull in 2013.

"I think things will slow down just because there has been a lot of activity, and the deals have already been made," she said.

And while the housing recovery appears set to continue into 2013, the psychological wealth effect upon consumers from rising home values may not last. That effect has helped boost high-end consumer spending, including in power sports and recreational vehicles, and top-shelf fashions such as Michael Kors (KORS) and Lululemon Athletica (LULU).

"Housing is going to recover, but it is not clear that consumption can sustain itself," said Alan Zafran, partner with Luminous Capital.

As to the bigger picture, both Stovall and Zafran say they are guardedly optimistic. Zafran sees central banks and regulators set to continue policies designed "to inflate asset prices including stocks.

Stovall projects the economic recovery to continue on a vulnerable, low-level trajectory. If nothing comes along to knock that ascent off track, he says, the market appears poised for extended gains.

"We're headed in the direction that most people don't expect," Stovall said, "and that's a multiyear bull market."

--

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