Marvelous Mines - Zacks Industry Rank Analysis

Industry Rank Analysis 1-26-11

China continues to grow, and as it does its demand for basic raw materials continues to increase. At its current stage of development, economic growth in China is much “heavier” than it is here in the U.S. More of the economic output is in things measured in tons, rather than in bits.

To a lesser extent, the same is true for India. Commodities prices have been strong, and that can only mean good things for the companies that produce the commodities. As a result, several mining “industries” have started to head to the top of the Zacks industry list.

The Zacks industry classifications are very fine, with 255 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well, a single firm with good news can propel a one or two firm industry to the top (or bottom) of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list. This is particularly true of the semiconductor and semi-equipment area, where two of those industries have just a single firm, and two more have just two members. If there were not a big cluster of such “industries” at the top of the list, I would probably not be highlighting them.

Leading the way are the silver miners. It is a medium-sized industry by number of firms at 8, and is currently in a tie for 6th place, and improvement of 11 spots from last week with an unchanged average score of 2.00. While most of the demand for silver is for jewelry and for speculation (the poor man's gold), there is an industrial component to it as well.

In India and China, there is a much higher propensity to hold ones wealth in the form of precious metals than is true in the West. More rich and upper middle class Chinese and Indians means more demand for precious metals. This is a much neglected factor in the strength of gold and silver prices over the last few years.

As those societies get wealthier, one of the things that people demand more of is protein, specifically animal protein. That means growing more grains to feed to the animals, rather than eating the grain directly. Since the number of acres available for cultivation has not changed, that means producing more per acre.

That means using more fertilizer. The fertilizer industry is in a tie for 18th place, an improvement of 6 spots from last week, as its average score fell to 2.29 from 2.43. It is also a medium-sized industry at 7 participants. Two smaller mining “industries" also show up in the top 40: iron mines in 27th place with and average score of 2.50 (unchanged from last week) and the non-ferrous mines, in 38th place with an unchanged average score of 2.57.

Strong demand for mined materials also means strong demand for the machines to get it out of the ground. The mine machinery industry is in a tie for 27th place with an average score of 2.50, up from 2.25 last week. It is also an averaged sized industry with 8 participants.

The first table below shows the mining and related stocks that hold the vaunted Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. There are a large variety of market caps available on the list, from micro-caps to mega-caps. Valuations by and large are not too extreme one way or the other.

Number 1 Ranked Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Southern Copper	SCCO	$37,562	13.15	10.91	4.46%	11.74%	$44.19
Soc Quimica Min	SQM	$14,065	26.63	22.55	0.78%	2.71%	$53.44
Silver Wheaton	SLW	$10,637	20.37	20.92	6.15%	6.15%	$30.57
Buenaventur-Adr	BVN	$10,389	10.64	11.36	4.64%	10.16%	$40.83
Joy Global Inc	JOYG	$8,887	16.25	14.04	0.15%	0.29%	$85.77
Coeur Dalene Mi	CDE	$2,014	10.49	8.4	11.40%	15.45%	$22.55
China Green Agr	CGA	$207	6.03	4.59	0.00%	0.14%	$7.98

Number 2 Rank Firms

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Caterpillar Inc	CAT	$58,869	15.92	12.27	1.74%	2.27%	$92.75
Cf Indus Hldgs	CF	$9,481	10.74	11.71	7.26%	0.27%	$133.30
Lundin Mining	LUNMF	$4,324	9.68	10.49	0.00%	0.00%	$7.45
Pan Amer Silver	PAAS	$3,534	15.95	14.99	6.60%	19.52%	$32.93
Hecla Mining	HL	$2,215	16.8	15.92	9.72%	8.93%	$8.64
Astec Inds Inc	ASTE	$714	20.22	15.85	0.86%	1.43%	$31.54
Mesabi Trust	MSB	$471	13.1	11.96	-2.14%	0.00%	$35.89
Paramount Gold	PZG	$414	N/A	N/A	0.00%	25.00%	$3.13
H&E Equip Svcs	HEES	$405	136.12	17.2	9.68%	3.07%	$11.57

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php
 
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