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When picking stocks, it is often said that risk can be reduced if you are targeting companies in an industry group that is already doing well. This prevents you, as an investor, from having to swim against the tide.

With more than three fourths of the 2010 first quarter earnings season complete, this post takes a look at those industry groups that appear to be registering the best results.

The screen I have done has counted those stocks that have seen both year-over-year and sequential earnings per share increases. I refer to these stocks as the EPS Gainers. The numbers reflect a total universe of approximately 5800 stocks.

Overall, roughly 13% of stocks fall into this category of being EPS Gainers. Some sector and industry classifications, however, are doing better than others.

Getting right into the results, I’ll profile a couple of industries that are looking good.

First, we have these retail industries that seem to be on fire:

Industry Number of EPS Gainers Total Companies in Industry Percent EPS Gainers
Department/Specialty Retail Stores 11 24 46%
Consumer Electronics/Video Chains 4 9 44%
Clothing/Shoe/Accessory Stores 17 43 40%
Specialty Foods 4 11 36%
Retail: Computer Software & Peripheral Equipment 3 9 33%
Consumer Specialties 5 16 31%
Home Furnishings 8 27 30%

Tech is not doing too badly but not as good as I thought:

Industry Number of EPS Gainers Total Companies in Industry Percent EPS Gainers
Computer peripheral equipment 6 19 32%
Computer Communications Equipment 7 23 30%
Computer Software: Programming, Data Processing 6 21 29%
Computer Manufacturing 4 15 27%
Electronic Components 10 44 23%
Computer Software: Prepackaged Software 25 129 19%
Semiconductors 21 146 14%

So how about the financial sector? Here it is in all its glory:

Industry Number of EPS Gainers Total Companies in Industry Percent EPS Gainers
Finance Companies 3 11 27%
Savings Institutions 21 113 19%
Finance/Investors Services 1 7 14%
Major Banks 54 398 14%
Investment Bankers/Brokers/Service 8 69 12%
Finance: Consumer Services 13 200 7%

Here are some interesting observations:

  • REITS have been on a tear recently yet only 14 out 164 (9%) can be considered EPS gainers.
  • Semiconductors stocks have been doing better than REITS but not as well as I thought. Nevertheless, many investors, including me, have registered some nice gains over the last year from buying chip stocks. Does this mean the semiconductor rally is overdone? I hope not...

Conclusions--

The consumer is back. The rebound in retail is real. The results across seven different industries involved with consumer retail consistently range from decent to good. This would not be the case unless the consumer was truly out there spending money.

Good results from a small number of bellwether stocks can move a whole sector, as exhibited by the REITs and semiconductors. For an investor in sector ETFs, though, that may be good enough.

For industries or sectors that are showing price gains while industry-wide earnings lag, there is one word I want to say to you: caution. These are the kinds of investments that can suddenly plunge. There's nothing wrong with riding a financial ETF higher and higher; just be sure to keep reasonably conservative stops in place in case a rally based on weak fundamentals runs out of steam.