The summer of 2011 has not been one of the nicer summers in recent memories. Crushing heat across much of the country is bad enough in its own right, but it is paired up with ongoing financial trouble in Europe, an unprecedented sovereign downgrade for the United States, economic worries all around and a weak stock market. Yet, even against this dour backdrop, there are still areas of the strength in corporate America.

For purposes of this article, strength refers to the momentum in corporate sales and earnings, as well as the trajectory of analyst expectations. Curiously, there are numerous divergences between those industries showing fundamental strength and stock market strength, and these may well prove to be trading opportunities for investors.

TUTORIAL: Economic Basics

Auto Parts
The auto parts industry best highlights that dichotomy between financial and stock market strength. With strong results from companies ranging from American Axle (NYSE:AXL) to Dana (NYSE:DAN) to Tenneco (NYSE:TEN), the auto parts industry has shown very healthy revenue and profit momentum as car sales have risen more than 10% year-to-date. Curiously, this is also one of the weakest sectors year-to-date, as stocks in this group have fallen almost 20%. Perhaps investors have been spooked by the recent slowdown in passenger vehicle sales and have decided to take profits in names that, in many cases, have appreciated several times over since the worst of the recession. (For related reading, see 2011 Cars With The Highest Resale Value.)

Chemical companies have had to deal with higher petroleum, hydrocarbon and energy costs, but the sector as a whole pushed through higher prices and reaped excellent demand growth from emerging markets. Even still, demand for basic chemicals is closely tied to overall global economic growth and the sagging outlook for growth may be responsible for the underwhelming recent performance of these stocks. While major chemical companies like DuPont (NYSE:DD) and BASF have worked hard to diversify their businesses and become less cyclical, the fact remains that as the economy goes, so too goes the chemical sector. (Now known as one of the world's largest chemical companies, DuPont got its start in gunpowder. For more, see 5 Of The Most Adaptive Companies.)

Railroads have been on a tear for a while now, benefiting from the higher traffic coming from the economic recovery. More traffic has allowed these companies to wring more operating profits out of their networks. Moreover, persistently high fuel costs have led customers to rely more on intermodal shipping. As intermodal carries higher margins, this has been a win-win for the industry - capturing more tonnage from the trucking industry and delivering better profits for shareholders.

Rails have been the strongest stocks of these out-performing industries (about 3% year to date) as investors weigh out the pluses and minuses of slowing rail traffic growth and intermodal expansion. Rail traffic is still well off its peaks, though, so investors looking for a long-term play on improving U.S. economic fundamentals can still find opportunity in the rail sector.

Oil prices are volatile as investors try to digest the ongoing troubles in Europe and the weakening economy in the U.S. and interpret their impact on global growth and global energy demand. Nevertheless, energy companies large and small continue to see very profitable price realizations and are pushing ahead with aggressive production expansion plans.

As investors try to forecast the near-term trends in energy prices, as well as the possibility of regulatory changes to drilling practices, stock performance has been all over the map. The sector as a whole has been fairly weak (down almost 10%), but stocks like Petrohawk (NYSE:HK), Cabot (NYSE:COG) and Chesapeake Energy (NYSE:CHK) have done quite well on news (or expectation) of buyouts and responsible production growth strategies.

Energy Services
As oil and gas companies have looked to hold leases with production and expand their revenue base, energy service companies have seen a jump in demand for their services. This has fueled a jump not only in revenue and profits, but in the companies' order books as well. While companies like National Oilwell (NYSE:NOV) and Cameron (NYSE:CAM) look for major orders from large offshore energy projects, more traditional service providers like Schlumberger (NYSE:SLB) and Haliburton (NYSE:HAL) are looking to couple a recovery in international markets with very strong North American demand.

Looking at the Flip Side
In contrast to the five industries above, where strong underlying revenue and profit performance has not necessarily translated into hot stocks, the packaged food and agricultural input industries have done much better from a stock market perspective. The packaged food sector has risen more than 6% this year, while ag input stocks are up better than 3%.

To a large extent, this looks like a reaction to the troubled and uncertain economic times. Packaged food companies are one of those groups that investors believe can weather any sustained economic downturn, as people always need to eat and cannot really postpone grocery shopping. Ag inputs, on the other hand, play into several trends that appeal to investors - commodity prices have been strong and agriculture input companies like Potash (NYSE:POT) and Syngenta (NYSE:SYT) give investors a way to play increasing food prices and agriculture land values.

TUTORIAL: 20 Investments You Should Know

The Bottom Line
Looking at the dichotomy between fundamentals and stock market performance, it is easy to remember the adage that Wall Street is a forward-looking discounting mechanism. In other words, while the performance of stocks in sectors like auto parts and chemicals have been strong, the action in the stocks indicates that investors expect that performance to start tapering off. On the flip side, investors seem to think that packaged food stocks offer some safety and security in an uncertain world and that agricultural will remain an attractive sector for some time to come.

Related Articles
  1. Economics

    The Trajectory of Europe's Quantitative Easing Program

    The European Central Bank's quantitative easing program aims to save a heterogeneous Eurozone with liquidity for widespread investment.
  2. Investing Basics

    How to Think About Seasonality Trends

    Investors benefit when company research incorporates seasonality trends that predict relative strength and weakness throughout the calendar year.
  3. Chart Advisor

    These 3 Charts Say Now Is Not The Time To Buy Commodities

    Traders are turning their attention to the charts of commodity stocks to get a better idea of the future trend. We'll take a look at three stocks from different segments of the basic materials ...
  4. Investing

    Major Companies That Lose Money On Shipping

    We look at some of the big companies in the home delivery business that have high shipping costs and how they mitigate this.
  5. Investing News

    Farmers Markets—Gaining Ground in Grocery Sector

    Farmers markets have gained a solid foothold in the grocery sector, but it seems that large retailers will retain the lion's share of the industry.
  6. Investing

    Top Investment Banks In The Energy Industry

    Many global Investment banks are highly involved in the energy industry, but there are also some smaller banks and boutiques that are strong players.
  7. Mutual Funds & ETFs

    Top 4 Transportation Mutual Funds

    Discover the top-rated mutual funds in the transportation industry, and understand how investors can position these funds in their asset allocation.
  8. Chart Advisor

    Bumpy Roads Ahead In Transportation

    Investors are keeping an eye on the transportation industry. We'll take a look at the trend direction and how to trade it.
  9. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  10. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  1. What are the major laws (acts) regulating financial institutions that were created ...

    Presidents George W. Bush and Barack Obama, in conjunction with Congress, signed into law several major legislative responses ... Read Full Answer >>
  2. What countries are driving most of the growth of the food and beverage sector?

    The countries driving most of the growth of the food and beverage sector are the primary emerging market economies of China ... Read Full Answer >>
  3. What are the primary factors that drive prices in the gold industry?

    Gold has been one of the most sought-after commodities for centuries. It has been used to prop up currencies for countries ... Read Full Answer >>
  4. What are examples of popular companies in the metals and mining sector?

    Some of the most highly traded companies in the metals and mining sector are gold and silver mining stocks, which include ... Read Full Answer >>
  5. What seasonal trends exist in the metals and mining sector?

    There are strong seasonal tendencies in the metals and mining sector. The seasonality of the mining sector is primarily driven ... Read Full Answer >>
  6. What countries represent the largest portion of the global metals and mining sector ...

    Concerning future mining potential, many large untapped precious metal reserves exist. The countries with the greatest mining ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Ex Works (EXW)

    An international trade term requiring the seller to make goods ready for pickup at his or her own place of business. All ...
  2. Letter of Intent - LOI

    A document outlining the terms of an agreement before it is finalized. LOIs are usually not legally binding in their entirety. ...
  3. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  4. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  5. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  6. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!