Question: Could you explain why industries are important when selecting stocks? Or maybe they're not. But they're always mentioning the word "industry" on the "Nightly Business News."

A BuyandHolder

Answer:

Dear BuyandHolder,

Considering various industries is important when managing one's portfolio. It is a means to diversification -- a key way to spread out risk. Selecting the right industry and the right time also provide protection against changes in the economy. And, finally, industries offer an interesting way to identify winners and losers among individual stocks.

Definition

The word "industry" in the investment world refers to a category of business activity. Among the most common industries are:

Airlines
Appliances
Automobiles
Banking
Cosmetics
Drugs & Pharmaceuticals
Electronics
Food & Beverage
Home Furnishings
Hotel, Gaming & Leisure
Insurance
Internet
Mining
Petroleum & Natural Gas
Publishing
Transportation
Utilities

There are a great many more.

Note: If a company participates in multiple business activities, it is usually considered to be in the industry in which most of its revenues are derived.

Finding The Right Industries

• Value Line. The best study of stocks by industry is prepared by independent analysts for Value Line Investment Survey. This printed research service, updated weekly, reviews and evaluates thousands of stocks, organized by industry. Check your library for a copy or go to: www.ValueLine.com.
  
  
• MSN.money. Every evening, the 10 best performing industries and the 10 worst performing industries are posted at:
  
  http://moneycentral.msn.com/investor/market/top10industries.asp.
  
  The list also gives the percentage change, up or down, for the month for each industry listed.
  
  You can then click on the industry name, say "Utilities," if that's listed, and it will take you to the 10 best performing stocks and the 10 worst performing stocks in the utilities industry, with the symbol for each.
  
  Then, click on an individual stock's symbol to get its closing price, volume, day's high and low, percentage of industry ownership, the 52-week high and low, the P/E ratio, earnings per share, dividend, dividend yield, total number of outstanding shares...and, equally important, the links to recent news articles about the company.

What It Means For You

Not all industries perform well at the same time. For instance, large manufacturing companies tend to flourish when the economy is strong and when both businesses and individuals are spending money. The same is true for stocks in the automobile, jewelry and hotel/leisure time industries.

On the other hand, some industries are pretty much recession proof. When the economy is in a slump, people still need to buy groceries, over-the-counter and prescription drugs plus paper products such as tissues, paper towels and toilet paper.

When times are difficult and people are being laid off, consumers cut out luxury items and put off buying boats, expensive cars, second homes and new appliances. And they stop taking vacations -- at least expensive ones.

Bottom Line

Studying industry trends is a sound strategy for picking stocks.

Good luck!