10 Dying Industries, 3 Vital Stocks

Research firm IBISWorld recently published an analysis of 10 "dying industries" -- industries that are in structural decline. Do you own stocks in any of those industries? That needn't be cause for concern. Yes, the industries are contracting, putting pressure on company earnings; however, other factors can still create opportunity for value-conscious investors. I'll explain why and identify three stocks that look attractive relative to the overall market.

10 terminal patients
In case you're curious, the following table contains the 10 dying industries, along with annualized industry revenue growth over the past 10 years:

Industry

10-Year Revenue Growth, 2000-2010 (annual)

Apparel manufacturing (14%)
Record stores (13%)
Manufactured home dealers (12%)
Photofinishing (11%)
Wired telecommunication carrier (8%)
Mills (7%)
Newspaper publishing (4%)
DVD, game, and video rental (4%)
Formal wear and costume rental (4%)
Video postproduction services (3%)

Source: IBISWorld.

I'm assuming there aren't too many surprises on that list: When was the last time you set foot in a record store? Fundamentals aren't good in these industries, but does that translate to their stock market performance? I looked at the 10-year performance of the 29 stocks traded in six of the 10 industries in the table above (U.S. companies with stocks traded on major U.S. exchanges and a minimum market capitalization of $500 million). The results might surprise you:

Total Return, Annual (to April 7, 2011)

  3-year 5-year 7-year 10-year
Dying Industry Basket 8.4% 3.3% 4.7% 4.0%
S&P 500 2.4% 2.6% 4.4% 3.6%

Source: Capital IQ, a division of Standard & Poor's. I looked at just 6 of 10 industries identified by IBISWorld because the other four were too specific for the industry classification in my screen setup.

Where the dying beat the average
In every period I looked at, our dying industry basket outperformed the S&P 500! It's worth noting, however, that the results don't account for survivorship bias. Last week, DISH Network bought Blockbuster's assets out of bankruptcy. The video rental chain was not included in the basket (no shares traded on major exchanges). Needless to say, if it had been, it would not have contributed positively to returns.

That said, let's look more deeply at three of the industries.

Wired telecommunications: AT&T (NYSE: T  ) , Verizon (NYSE: VZ  )
When an industry undergoes a tectonic shift like the one that continues to sweep through the fixed-line telecommunications business, companies can adopt multiple strategies. The incumbent major telecoms had a bit more breathing room in terms of developing a response, because their franchises were still generating massive profits, giving them time and resources.

Still, both AT&T and Verizon have trailed the S&P 500, with annualized 10-year returns of 1.4% and 3.1%, respectively, against 5.2%. Does that mean that they will start to outperform over the next several years? Both sport rich dividends in excess of 5% that will contribute handsomely toward that goal, and they look like acceptable investments in an overheated market.

Apparel: Hanesbrands (NYSE: HBI  )
Hanesbrands is an example of a business that operates in a bad industry, but which possesses some advantages that ensure it will resist the headwinds better than many of its peers. Scale, for example, enables it to extract a cost advantage over its competitors.

Since Hanesbrands' shares began trading after its 2006 spinoff from Sara Lee, they have soundly beaten the index, with an annualized total return of 5.8%, beating the S&P 500 by almost 8 percentage points. Going forward, I think Hanesbrands will continue to provide acceptable returns.

Newspaper publishing: The New York Times Co. (NYSE: NYT  ) , Washington Post (NYSE: WPO  ) , Gannett (NYSE: GCI  )
Once a stock is tarred with the "terminal industry" label, investors will often dismiss it out-of-hand; thus, they are slow to pick up on changes and improvements in the business. For example, is the Washington Post a newspaper company or is it an education company? It might surprise you to learn that the company derived 60% of its 2010 profits from its education segment.

At the 2006 Berkshire Hathaway (NYSE: BRK-B  ) annual meeting, Warren Buffett said newspaper stock prices didn't reflect the probable rate of earnings decline. He was right: The stocks have performed abysmally over the past five years. Today, the stocks are roughly a third to one-half cheaper on the basis of their earnings multiples. Gannett looks most attractive to me, but none of the three get me in a lather.

Ugly industries can produce beautiful stocks
Businesses in bad industries don't necessarily make bad stocks. Finance academics have identified a "value" premium (i.e., value stocks with low P/E, low price-to-book-value multiples outperform high P/E, high price-to-book-value "growth" stocks because investors tend to overpay for growth). I think the same bias toward growing industries versus industries that are in decline may create opportunities in the latter to collect a similar premium. The next time you catch yourself thinking, "I'd never invest in this stock: The whole industry is going down the tubes," think twice. The key question is not "What does this business do?" but rather "How much residual value am I getting relative to the price I'm paying?"

I believe AT&T, Verizon, and Hanesbrands provide enough of this residual value from here. If you'd like to track these three vital stocks using My Watchlist, click here. You'll get valuable updates as well as immediate access to a new special report, "6 Stocks to Watch from David and Tom Gardner." Click here to get started.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. Berkshire Hathaway is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor choice. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2011, at 5:50 PM, appealnow wrote:

    I don't see why Verizon and ATT have been included in the list. Both have transformed themselves into wireless companies. Both are making better use of their wirelines by offering Internet and HD television services over the wire lines (FIOS and U-verse). Their wirelines still provide the backbone for the wireless networks and the Internet.

  • Report this Comment On April 11, 2011, at 6:29 PM, buddylady wrote:

    AT&T has been a solid recommendation by the Fools for quite awhile now. Are we to assume that it is no longer a strong investment? I hold AT&T not only due to the wonderful divident but also due to the Fools suggestion to Buy.

    Please explain.

  • Report this Comment On April 11, 2011, at 9:33 PM, mythshakr wrote:

    One has to remember that wireless is a last mile technology. The infrastructure that supports all that is still "wired" albeit more and more fiber optic. Whichever of these 2 [or...] is the first to rollout large scale last mile fiber optics to replace old copper will be the winner as they will be able to compete mano-a-mano with the cable companies.

  • Report this Comment On April 11, 2011, at 9:55 PM, Happymspage wrote:

    We have had a land line in our house hold now all

    My life of 76 years ,from childhood to present time.

    I,m seriously thinking of canceling out my land line.

    Both my spouse and myself have cell phones and use them most of the time.

    I consider myself more up to date in my thinking than many in my age bracket.

    I'm very sorry I have been seriously disabled

    Now over 25 years with progressive multiple

    Sclerosis.I really miss working.But I have a uncooperative body.

    Richard

  • Report this Comment On April 12, 2011, at 12:33 AM, Ladybird22 wrote:

    Re: AT&T. I have 2 landlines (one for fax) + a cell with this company.

    I (still) depend greatly on a phonebook for cost-free information. Cell phones alone don't provide this.

    B-u-t today I learned that a local business has been officially listed with my (unlisted) home landline #! It's going to be a l-o-n-g year answering calls & providing the correct number for innocent callers trying to reach that business. Plus, when I'm away, it clutters my answering machine to the point that my callers receive only a "beep" in their ear! Ag-h-h.

    P.S. Richard, keep your landline & stay "in the book." You never know who might need to find you! Take care; I'll be thinking of you.

  • Report this Comment On April 12, 2011, at 1:58 PM, Tygered wrote:

    I would also advise Richard to stay wired. My understanding is that in many instances you won't be able to dial 911 on your cell phone. I just think it might be safer. And I don't see AT&T or Verizon going away anytime soon.

  • Report this Comment On April 12, 2011, at 2:23 PM, RCNC500 wrote:

    Dear all,

    A quick note from an experienced Telecommunications professional to anyone considering the discontinuing of a POTS (Plain Old Telephone Service), conventional 'Wired' or 'Landline' telephone service...

    Please consider and confirm with your telecom service Carrier... the quality, availability, and reliability of your 911 emergency response services, if and when needed.

    With a conventional 'Wired' service through your local telephone company, especially those serving rural communities...your name, phone # and address is displayed to the locally assigned Emergency 911 Services reponse center when 911 is called.

    Preferrably, this allows your local police, fire and medical repsonse professionals to locate you quickly in times of an emergency.

    Of course, for those having higher quality telecom services with your local telecom service carrier, such as fiber optic connectivity directly to your residence (available in larger metro or growing population city areas), your same personal information is registered by your telecom provider for your (should be) closest Emergency 911 Services response center.

    Please carefully consider and confirm with your 'Cell phone' service provider, if you were to call 911, how you would be located (especially if you're at your residence). Know and understand which 911 services center would be contacted (should be the closest to you) and specifically, which emergency responder location (again, should be the closest), would be contacted, be it Sheriff/Police, Fire Station, or Medical responder.

    The largest concern here is for people residing in rural and remote locations where contacting 911 by 'Cell Phone' needs to be reliable to receive emergency response services reliably and timely.

    Today's 'Wired', 'Wireless' or 'Optically delivered' telecommunications services have been greatly advanced, however, keeping your 'Wired' connection may prove to be a reliable resource in times of emergency when your 'Cell Phone' may have poor signal connectivity or when the battery is not charged or fails.

  • Report this Comment On April 12, 2011, at 2:37 PM, RCNC500 wrote:

    Special thanks to 'Tygered' for his initial opening the subject of recommending to possibly maintain a 'Wired' connection, even if you have a 'Wireless' Telecom service via 'Cell Phone'.

  • Report this Comment On April 12, 2011, at 3:05 PM, tshk1221 wrote:

    One of the reasons Buffett does not like companies like ATT and VZ is that they need to reinvest a ton of earnings made to replace their aging infrastructure over and over again to keep it up to date to compete with newer and newer carriers. Sometimes, these carriers must carry mountains of bank debt to accommodate these must infrastructure updates, increasing debt/net worth to unreasonable and unbearable levels and bleeding for hefty interest payments to banks and sweating for sky-high dividend payments to shareholders.

    It is always up to us small investors to choose the companies we want to invest in, but following Buffett's time-tested acumen will help you out more than you think when you're selecting your companies to keep for your life.

  • Report this Comment On April 12, 2011, at 3:06 PM, dkinseycfp wrote:

    Regarding WPO, the fact that it derives so much of its revenue from the "education" segment is even more cause for concern at this time, due to increased regulatory burdens and the fact that the leadership at WPO feels that they are facing headwinds this year and possibly longer. It's going to cost them more to self-police their admissions practices at the Kaplan Division. It's unfortunate, but money can possibly be deployed better elsewhere for the foreseeable future.

  • Report this Comment On April 12, 2011, at 4:09 PM, tshk1221 wrote:

    BuddyLady

    I see your 401k savings you accumulated for your life time. As a small investor like you, I really do hope that you don't make blunders with your savings and make your savings grow over time that will reward you with superior purchasing power over inflation. Here are some tips.

    1. Do not blindly follow stock advisors' advices including those from Motley Fools. Motley Fools did not force you to buy ATT. It was their innocent opinions to attract more internet readers' traffic to its website.

    2. Do not trust any words from stock brokers and personal financial advisors. They are salespersons who feed on trading and advising fees.

    3. Study for yourself first before getting into this extremely rewarding but extremely dangerous stock market. Buffett's Buffetology is one of the best guides out there. Read the book over and over again to understand his acumen, knowledge and experience. Study for yourself the companies BRK holds. If you cannot understand the financial jargons including number calculation and crunching such as PV, FV, NPV, cash flow, meaning of E/P (reversal of P/E ratio) and so on, you'd better stop there and think for yourself whether direct investment is right for you or not.

    4. Choose a few of the blue chip companies BRK-B holds such as KO, WMT or PG that are easier to understand than ATT or VZ. Study their history and financials. Invest very little first (it can be only a few shares) and feel the market and keep them long.

    5. When the good or terrific buying opportunities such as the recent recession comes, invest more into the companies you already have. You will definitely have a better acquisition timing and chance since you know how much you LOST from the shares you already have.

    6. Expand your investment horizon little by little into other companies. By then, you will realize whether you must concentrate or diversify.

    Good study and good luck!

  • Report this Comment On April 13, 2011, at 9:36 PM, ivanczar wrote:

    The telcom wire line business is not dying it's evolving; though traditional dial tone is declining broadband , uverse (tv&video) and voip (voice over internet) is replacing the dial tone using the same existing wires,while providing more revenue for AT&T and other telcoms. So when we hear about "line loss"don't believe it.

  • Report this Comment On April 15, 2011, at 12:19 PM, Luke721 wrote:

    OK, I don't take issue with your investment views or advice, but I will seize the opportunity offered by your comment "when was the last time you set foot in a record store". Tomorrow is international Record Store Day!! So get out and set your foot in your local Record Store and make your own statement against the insipid dullness of web-delivered, digitized music formats, and support musicians in the process. And keep your eyes open for National Bookstore Day which happens in early November.

    Regardless of what they do for the profits of the telecoms, digital files have no soul!!

  • Report this Comment On April 15, 2011, at 2:08 PM, hungryi wrote:

    I think the concern about wireless taking over and wired being a dying industry isn't particularly applicable for companies like these. Lets just take Verizon for example.

    In my area Verizon has optical fiber and something called FIOS. FIOS delivers high speed internet, cable TV, and phone service. And Verizon has arguably the best cell phone service for me.

    I don't use Verizon for my cell phone--I use T-mobile--better value and good enough service for me. I spend $120 a month--$40 for unlimited internet on a netbook I got for little by signing a 2 year contract and $80 a month for my cell phone, unlimited minutes, unlimited texting, unlimited internet.

    I use Verizon for internet and land line phone.

    I use Comcast Cablevision for television.

    But I could and should use one provider for land line, internet and cable--better package deal--my wife doesn't want to be beholding to only one provider.

    The issue isn't land line dying--frankly, its probably not necessary if you have a good cell phone.

    The issue is how Verizon or ATT competes with the entire line of products including internet, television and land line phone, plus cell phone.

  • Report this Comment On April 15, 2011, at 4:35 PM, johnnyque354 wrote:

    Another alternative to a landmine is Magic Jack. I have a 14GB Cable Modem connection. My son has a 6 GB. We've had the service for almost two years and it works great. $119.00 for five years of service and 911 location with Magic Jack, almost free. Disconnect the POTS, use wireless and utilize magic jack. Save money. Retired Verizon Engineer.

  • Report this Comment On April 15, 2011, at 10:13 PM, derbyrm wrote:

    A couple of years ago I dropped my Verizon land line and relied on my cell, a Blackberry. We had an ice storm, the Blackberry died, and at age 75 I wanted some means of communication.

    I have an Insight phone/modem on my cable connection, but I'd dropped the phone service to save the $25 per month charge. They refused to reconnect it at an e-mail request, I had to phone them. If I could have phoned them I wouldn't have needed the service.

    I drove the 25 miles in the ice storm to the Verizon store, swapped the Blackberry and a bunch of cash for a Droid. It works fine. I also bought an Ooma as a backup to talk via the Insight cable.

    My loyalty to Verizon and to Insight is limited; but

    timing is everything.

    I bought Verizon stock on 9/15/2008. My annualized (compounded) value growth is 6.5% and the 5.2% dividend is added to that, so I'll hold the stock until there's a reason to sell.

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