In back-testing industry data from 1970-2001, I found that using a 12-month measure was superior for three reasons. The industries that made the list displayed a higher compounded annual growth rate. They also more frequently outperformed the benchmark index on an annual basis. And finally, the turnover of industries wasn't as great.
DEFENSIVE. Even with the change, many of the industries on the list are familiar. But there is one new name this week: Distillers & Vintners. S&P analyst Rick Joy has a positive near-term investment outlook for the industry. He cites favorable demographic and consumption trends for wine products, continued consolidation among spirits and wine producers, and strong cash-flow generation. He also points to increased investor interest in defensive issues, and this group is a hardy perennial in that category.
Joy expects that U.S. distilled-spirits shipments will post only modest gains in 2002, reflecting the weakness in the travel and entertainment segments of the economy, competition from new malt-flavored alcoholic beverages, and a continued movement toward moderation. Wine products, however, may again buck this trend. Joy says that favorable publicity touting the health benefits of moderate wine consumption continues to give a modest lift to U.S. wine shipments. Also, lower grape prices should allow for lower wine prices for the popular-priced segment of the market, giving vintners an additional volume boost in 2002.
Profit growth for industry players should remain strong, thanks to favorable raw-material costs, modest price increases, and lower interest rates. In addition, Joys believes earnings should benefit from synergies and cost savings resulting from the recent acceleration in merger activity in the industry.
CONSOLIDATION. Given the trend toward moderation of wine and spirits consumption in the highly developed markets of the U.S. and Western Europe, many of the leading U.S. alcoholic beverage companies have diversified their operations in recent years -- both geographically and by product line. Longer term, the U.S. alcoholic beverage segment is likely to plod along with only slow growth. Most future growth will be generated by new products and penetration into developing regions abroad, according to Joy. The likely outcome will be contined consolidation, as companies aim to build economies of scale and global capabilities -- and improve their pricing flexibility.
Joy's top pick in the group is Constellation Brands (STZ
), the name behind well-known labels like Almaden, Vendange, Black Velvet, and Schenley. The stock carries S&P's highest investment ranking, 5 STARS (buy).
S&P Relative Strength RankingsThese industries carry 12-month relative strength rankings of "5" as of May 10, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Computer & Electronics Retail/Consumer Discretionary
Best Buy (BBY)
Consumer Electronics/Consumer Discretionary
Harman International (HAR)
Distillers & Vintners/Consumer Staples
Constellation Brands (STZ)
Health Care Facilities/Health Care
Tenet Healthcare (THC)
Home Furnishings/Consumer Discretionary
Leggett & Platt (LEG)
Clayton Homes (CMH)
Housewares & Specialties/Consumer Discretionary
Fortune Brands (FO)
Managed Health Care/Health Care
Metal & Glass Containers/Materials
American Water Works (AWK)
Specialty Stores/Consumer Discretionary
Barnes & Noble (BKS)
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS
(accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's