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Rational investors need to weigh risk and return. We found that the utility sector was the most resilient in the recent market downturn, and that water utilities were the safest utility industry.

But which individual industries dropped the most? Where was there the most risk?

To answer this question, utility stocks were screened and sorted based on their performances over week-long downturn that lasted through August 9th, 2011.* Over the course of this week, the S&P500 index dropped over 13.3% while the mean drop for a broader sample of 4541 equities was 10.1%, providing an opportunity to observe industry differences during extreme market drops. **

Below are the 20 worst performing industries:

Row Labels

Average of Performance (Week)

Count

Mean Beta

Mean Market Cap ($ Millions)

REIT - Hotel/Motel

-19.16%

13

2.53

1,321

Manufactured Housing

-18.50%

2

0.93

168

Confectioners

-17.51%

5

0.70

3,412

Basic Materials Wholesale

-17.30%

7

1.47

303

Oil & Gas Equipment & Services

-17.20%

49

1.59

5,771

Shipping

-16.80%

52

1.44

596

Home Health Care

-16.70%

10

0.77

467

Aluminum

-16.52%

6

2.15

5,084

Oil & Gas Drilling & Exploration

-16.50%

75

1.47

7,902

Residential Construction

-16.37%

17

1.66

1,143

Trucks & Other Vehicles

-16.32%

10

1.79

2,062

Recreational Goods, Other

-16.19%

9

1.87

1,016

Independent Oil & Gas

-15.69%

92

1.38

6,780

Jewelry Stores

-15.40%

5

2.15

2,430

Steel & Iron

-15.18%

33

1.79

5,014

Industrial Metals & Minerals

-15.08%

67

1.75

11,579

Oil & Gas Refining & Marketing

-14.56%

28

1.13

5,872

Heavy Construction

-14.28%

22

1.31

1,111

Machine Tools & Accessories

-14.27%

8

1.74

2,313

Nonmetallic Mineral Mining

-14.20%

10

1.64

970

The ranking of industry performance doesn’t really follow beta. This suggests that beta is not always useful at the industry level as a predictor of risk. Most of the beta discrepancies occur in industries with few firms where extreme changes in particular stocks dominate industry average returns. As an example, consider confectioners, whose performance was dominated by a 65.2% drop in Imperial Sugar’s stock price.

Alternatively, other industries with more member stocks show consistent negative performance. Hotel and motel REITs performed poorly, and their relative performance inside the industry follows beta:

Ticker

Company

Performance (Week)

Beta

(SPPR)

Supertel Hospitality, Inc.

-13.21%

1.61

(CHSP)

Chesapeake Lodging Trust Common Shares of Beneficial Interest

-13.48%

(PEB)

Pebblebrook Hotel Trust

-15.44%

(HST)

Host Hotels & Resorts Inc.

-16.61%

2.27

(CLDT)

Chatham Lodging Trust

-16.67%

(AHT)

Ashford Hospitality Trust Inc.

-16.80%

2.71

(LHO)

LaSalle Hotel Properties

-16.85%

2.76

(RLJ)

RLJ Lodging Trust Common Shares

-17.76%

(DRH)

Diamondrock Hospitality Co.

-20.28%

2.28

(BEE)

Strategic Hotels & Resorts, Inc.

-20.89%

2.8

(SHO)

Sunstone Hotel Investors Inc.

-24.97%

2.82

(MDH)

MHI Hospitality Corp.

-25.83%

1.95

(FCH)

FelCor Lodging Trust Inc.

-30.35%

3.58

This analysis is a starting-point for examining particular underperforming industries and their component stocks. Stocks which dropped less than would be expected from their betas have delivered alpha to investors—yielding excess return for their level of risk. Stocks which dropped more than would be expected from their betas returned negative alpha—having less return for their level of risk.

*Stocks with volumes under 5000 were excluded from the screen, since low liquidity makes them hard to trade. ETFs and other funds were also excluded.

**Mean industry performance, mean market cap, and mean beta were calculated from an equal-weighted average of stocks in that sector.

Source: Hotel/Motel REITs Were the Worst Industry in the Downturn