Should You Buy Stocks Operating in Low-Ranked Industries?
There has been much talk about the virtues of investing in industries that have been positively ranked by Zacks. These are the ones in the top 50% of 250+ Zacks-classified industries. Historically, this group has been seen to outperform the bottom 50% by a factor of 2 to 1. So investing in it is a no-brainer. But should you avoid the bottom 50% entirely? Let’s find out.
It’s important to say at the outset that in stock investing, we are generally focused on increasing the odds of success. So if there’s any system, or formula if you like, that increases these odds, we should pay attention to it. Choosing an attractive industry is for this reason. It’s based on the understanding that there are positive factors working in favor of an industry that will likely have an impact on all players.
Take for example, traditional retailers that are seeing increased footfall, as America gets increasingly vaccinated and people turn to more occasions, outings and work. This phenomenon is positive for all traditional retailers, whether they’re selling apparel, footwear, beauty products, or other goods. So it’s a single factor influencing a large number of companies. And by choosing stocks from the retail industry, we can leverage the resurgent demand that the whole industry is enjoying.
But not all industries are as homogenous, if we can call it that. The component companies within some industries cater to materially different end markets, which make them subject to materially different conditions. So in such cases, the broad factors, whether positive of negative, may not affect all players in the same way.
Let’s take the example of the Internet - Content industry, which is in the bottom 21% of Zacks-ranked industries. The industry’s price performance shows significant deterioration through July followed by recovery in the second half of August. So while it is down 2.05% year to date, it is up 4.5% in the last three months.
Obviously, all stocks within the industry are not equal because INLX, SSTK, TTGT and PCOM appreciated 51.8%, 29.8%, 29.6% and 6.4%, respectively, within the same three months. At the same time, LOV declined -44.7%, ANGI -21.1%, BCOV -17.1%, IS -4.9%, YELP -1.3%, etc.
A quick look at their target markets paints a clear picture.
And so we see that TechTarget, Inc. TTGT provides IT companies with ROI-focused marketing programs to generate leads, shorten sales cycles and grow revenues. So given its exposure to the hot technology segment and being a leading producer of vendor-sponsored webcasts and podcasts for the IT market, the stock is set up to succeed in the current environment.
Analysts expect the company to grow revenue and earnings at strong double-digit rates both this year and the next. Estimates for both years are surging. The shares carry a Zacks Rank #1 (Strong Buy) and a Growth Score of B.
Intellinetics, Inc. INLX offers document storage and management solutions through a software platform called IntelliCloud(TM) that facilitates document usage across operations. With customers spanning and private and public sector organizations across healthcare, education and law enforcement verticals, one can see why the company would do well today.
The company is expected to see double-digit revenue increases both this year and in the next. But following very strong triple-digit earnings growth this year, a correction is expected in 2022. The estimate revisions trend is positive, likely the reason behind the Zacks #2 (Buy) Rank. The Growth Score is A.
Shutterstock, Inc. SSTK, a global marketplace for digital imagery including licensed photographs, vectors, illustrations and videos to businesses, marketing agencies and media organizations around the world, may also be expected to see a roaring business as COVID disrupted the world.
Consequently, revenue and earnings are expected to grow strongly both this year and the next with estimate revisions trending substantially higher in both years. The shares carry a Zacks Rank #2 and Growth Score A.
Points International, Ltd. PCOM is the owner and operator of Points.com, the world's leading reward program management web site. Points.com is an online loyalty program management portal, where consumers can earn, buy, gift, share, swap and redeem miles and points with some of the loyalty programs and retail partners.
Participating programs include American Airlines AAdvantage program, Aeroplan, AsiaMiles, British Airways Executive Club, Wyndham Rewards, Delta SkyMiles and InterContinental Hotels Group's Priority Club Rewards. Redemption partners include Amazon.com and Starbucks.
Since PCOM is exposed to the travel market, it is significantly exposed to the recovery in airline travel. At the same time, the risks are bigger for this player than the other three, since any resurgence in the virus or any new variants can hurt demand.
Coming off the COVID-ravaged 2020, analysts currently expect the company to grow revenues at a double-digit rate both this year and in the next with earnings growing triple digits in both years. The shares carry a Zacks Rank #1 and Growth Score A.
And lest we forget that this is not an attractive industry overall, here are details of a few of the underdogs-
#3 (Hold) ranked Spark Networks, Inc. LOV is a dating website. So it’s easy to see why people could be staying off those for now. Both revenue and earnings are expected to decline significantly this year and there aren’t reliable estimates for the following year. While the Value Score for this stock is A its Growth Score is C.
#5 (Strong Sell) rated Angi Inc. ANGI offers home service professionals for home repair, maintenance, and improvement projects, as well as related tools and services in the United States and internationally. The company also owns and operates Angie's List, which connects consumers with service professionals for local services through an online directory of service professionals in various service categories and includes related tools and services.
In July, it acquired Total Home Roofing to accelerate its offerings in roofing services. The integration of this acquisition, ongoing investment in the platform and $9.6 million in one-time costs related to rationalizing its real estate footprint is leading to bottom line pressure. As a result and despite double-digit revenue growth both this year and the next, the company’s losses are expected to increase significantly this year with further losses expected next year.
#4 (Sell) rated Brightcove Inc. BCOV provides cloud-based services for video. Its flagship product includes Video Cloud, an online video platform that enables its customers to publish and distribute video to Internet-connected devices. Given the nature of its offerings, its understandable that it reported strong results in the last quarter.
But since guidance for the rest of the year disappointed, analysts have significantly lowered their estimates for both the current and following years. Revenue is still expected to grow in both years, with earnings declining slightly this year and jumping back in the next.
It’s fairly easy to choose the best stocks with the best ranks in the most attractive industries. But these may not always be cheap. At times, when we are bargain-hunting, it might be profitable to research stocks in some of the less attractive industries.
3-Month Price Performance
Image Source: Zacks Investment Research
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