Some Improvements in Energy

Industry Rank Analysis 11-17-09

Normally, the focus of this article has been on the industries that have the best overall Zacks ranks, with an occasional mention of the industries that rank particularly badly and thus should be avoided. This week, however, I wan to look at some of the industries that are showing sharp improvements in rank, even if they are still far from the top of the list.

Ideally, you would want to focus on the industries that are both near the top of the list and rising fast, but that rarely happens, especially for industries with a large number of participants. The Zacks Industry Rank is an un-weighted average of the Zacks ranks of the firms in the industry, so it is much easier for a small industry with only tow or three firms in it to rise quickly and have a very good-looking rank than it is for a large industry with 25 or 30 firms in it. 

A good example of an industry that is showing both a very good overall rank and substantial improvement is Oil Royalty Trusts, which with a industry rank of 2.00 is tied for 4th place with several other industries. What sets it apart is that it improved 21 spots in its ranking as the average ranking of its components, up from 2.43 last week. Every one of the seven firms in the industry has a Zacks Rank of 2.

These are great vehicles for income-oriented investors, as they simply represent big pools of oil or natural gas in the ground. As the oil is produced, the proceeds are paid out in the form of dividends. It also means that the dividends are very variable with the price of oil.

The problem with them is that eventually the oil in the ground will run out, so some of that dividend is really a return of capital, not a return on capital. Thus if you are thinking about investing in them, look at how long those reserves will last, as well as the current income you are getting from them.

On the plus side, the tax code recognizes this, so a portion of the dividend is sheltered from the IRS. Unlike a regular exploration and production oil firm, there is no risk of a dry hole, nor are they exposed to changes in the price of drilling. If you think that the price of oil is headed higher, they are very attractive investments, especially if you want current income. Two of the larger names in the area that are worth considering are B.P. Prudhoe Bay Trust (<a href=http://www.zacks.com/stock/quote/bpt>BPT</a>) and San Juan Basin (<a href=http://www.zacks.com/stock/quote/Sjt>SJT</a>).

A good example of a big important industry that is still distinctly mediocre in terms of its absolute standing is the Integrated Oil Industry, the home of some of the world’s largest firms like Exxon Mobil (<a href=http://www.zacks.com/stock/quote/xom>XOM</a>) and Petrobras (<a href=http://www.zacks.com/stock/quote/pbr>PBR</a>). It currently has an average rank of 2.95, which puts it in 102nd place out of 206 industries ranked. That, however, is a substantial improvement from the 3.16 average last week, and was enough to lift it by 49 spots.

A good example of an industry that scores poorly on both fronts, and thus should be avoided is the SBIC and Commercial lenders group. It is no secret that credit for small businesses has been under pressure for awhile now, but this suggests that things are still getting worse. The industry rank for the group is a very weak 3.43, which currently puts it in 192nd place, a deterioration of 31 spots from last week when its overall score was 3.21.

Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down
Auto-Tires-Trucks	2.73	2.72	2.65	135	51
Consumer Staples	2.75	2.76	3.40	476	140
Retail-Wholesale	2.77	2.78	2.90	940	324
Computer and Technology	2.85	2.78	2.48	2082	838
Construction	2.85	2.85	1.43	185	129
Conglomerates	2.88	2.88	3.72	93	25
Basic Materials	2.92	2.88	1.65	446	271
Business Services	2.95	2.95	2.15	279	130
Medical	2.98	3.00	1.81	1466	812
Industrial Products	2.98	3.01	1.75	466	266
Oils-Energy	2.99	3.01	1.34	913	681
Utilities	3.05	3.02	1.12	239	214
Consumer Discretionary	3.07	3.03	1.54	548	357
Finance	3.16	3.15	1.29	1646	1277
Transportation	3.22	3.23	0.89	286	323
Aerospace	3.28	3.28	1.99	143	72

Dirk Van Dijk, our Chief Equity Strategist, also manages the Zacks ETF Trader. This service uses Exchange Traded Funds to help investors ride a 4-to-1 performance advantage of stocks in the top half of the Zacks Industry Rank. It commands trends without the extra risk and fees of buying many different stocks.

Read the full analyst report on XOM

Read the full analyst report on BPT

Read the full analyst report on SJT

Read the full analyst report on PBR