Q2's Studs And Duds

By James Brumley | July 05, 2011 AAA

Though the recent marketwide correction gets most of the blame for any second quarter losses, the fact is, that pullback only exacerbated what was going to be a loss anyway. And in some impressive cases, stocks and groups of stocks managed to make impressive gains despite the strong selling. (To help you gain in the long run, read 10 Tips For The Successful Long-Term Investor.)

TUTORIAL: Earnings Quality

Since it's almost always prudent to buy into strength and avoid weakness, here's a rundown of this year's Q2 winning and losing industries, in terms of stock price performance.

Leading the pack for the prior three months is ... footwear? That's right. The S&P 1500 Footwear index performed admirably in Q2, advancing 16.6% thanks to help from Crocs, Inc. (Nasdaq:CROX) and Steven Madden, Ltd. (Nasdaq:SHOO), each of which posted close to 40% and 20% gains (respectively) while the market did well to break even.

This may be a trend worth paying attention to as well, considering this admittedly obscure and kind of boring group has absolutely whipped the rest of the market since the March 2009 bottom with a reliably-steady 136% gain.

The runner-up in the winner category is home entertainment software; the S&P 1500 Home Entertainment Software Index advanced 16.1% last quarter.

This is also a noteworthy and investment-worthy trend, though not for the same reason as footwear. Shoe company stocks have a win streak going, while game developers are just starting to come out of a multi-year (and very deep) lull, which means a 'value' proposition now that Electronic Arts (Nasdaq:ERTS) has posted three straight quarters of not just profits after a fiscal 2009 loss, but of year-over-year profit growth. Most other gaming software developers have seen the same over the past few quarters. (To assist you in find some long term winners, read How To Make A Winning Long-Term Stock Pick.)

On the ugly end of the scale you'll find forestry products like wood and paper; the S&P 1500 Forest Products Index gave up 22.1% in the second quarter of this year, thanks to names like Weyerhaeuser (NYSE:WY), which fell after a late-May downgraded by Deutsche Bank ... and then continued to fall.

The question here isn't one of value for Weyerhaeuser or any of its peers; it's one of fear that new homes sales are never going to recover in a meaningful way. Universal Forest Products (Nasdaq:UFPI) shares, which have pretty much suffered the same fate as Weyerhaeuser shares, weren't helped by last week's announcement that weak sales had forced a decision to cut costs via layoffs. Sales were off by 9.5% for the first five months of the year.

If that's a glimpse of the industry as whole, the second quarter's weakness is nothing just to chalk up to volatility.

The next-to-worst performing group in Q2 was coal, as the S&P 1500 Coal and Consumable Fuel Index slumped 17.9%. Alpha Natural Resources (NYSE:ANR) and Peabody Energy (NYSE:BTU) did most of the damage.

It's an interesting result, as the bulls were pretty much pounding the table throughout the second quarter. In fact, JP Morgan raised its price target on Peabody Energy very late in the first quarter, and Standpoint Research upgraded Arch Coal (NYSE:ACI) to a 'buy' in mid-May, but to no avail ... yet.

While it's dangerous to try and catch a falling knife, this may be one of the exceptions to the rule. Despite the fact that the stocks are falling, coal continues to be recommended as long trades and investments by the bulk of the media and analytical community. Eventually, that work will get traction, and coal stocks will slingshot upward. It's just a matter of timing.

Bottom Line
Whether you're a trend follower or a trend contrarian (which seems to be the way to play coal right now), one thing is for sure ... the major movers are making major moves for a reason. You've got to go where the action is. (For more on trendsetters, see Private Equity A Trendsetter For Stocks.)

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