Here's how the 10 major industry groups in the S&P 500 grade out, according to John Dorfman
For much of this year, consumer discretionary stocks were the best performing group in the Standard & Poor's 500 Index. With the economy reviving, consumers started to came out of their shells, and investors figured that trend would continue. It didn't. After rising 17 percent in the first four months of the year, consumer discretionary stocks turned tail and dropped about 12 percent, falling a bit more than the stock market as a whole.
These sorts of trends bear watching because getting the right industry mix is a key element in investing success. The truth is, choosing the right industries is often more important than identifying superior individual companies.
Which industry groups should investors emphasize now? Which sectors pass, which fail, and which get an incomplete. Here's how the 10 major industry groups in the S&P 500 grade out.
Consumer discretionary: FAIL
These stocks cooled as jobless claims stayed stubbornly high and the rebound in home prices stalled. The bad performance since April is a warning shot across the bow: Lighten up if you are heavy in this group.
Consumer staples: PASS
I'm normally skeptical of this group, because I think people overpay for the presumed steadiness of businesses that manufacture diapers, soap, shampoo, cereal and the like. Yet with the economy looking shaky lately, steadiness becomes more appealing.
One attractive stock in this group is CVS Caremark Corp., the drugstore chain based in Woonsocket, Rhode Island. In recent years it has been gaining market share from rival Walgreen Co.
Financials: FAIL
These stocks have been feeble this year after a strong 2009 and a disastrous 2008. Even though banks benefit from the current low interest rates, delinquency rates remain high on credit cards and real-estate loans. I don't think the rest of this year looks inspiring for this group.
Health Care: PASS
During the agony of 2008, my clients' accounts were heavy in health care, because it holds up better than most groups in bad times. This year I was expecting a robust economic recovery, so I cut back on health-care stocks. Now I may expand my allocation to this group.
Several pharmaceutical companies look attractive, including Merck & Co. and Pfizer Inc., which I've discussed in previous columns. I also like Mednax Inc., a provider of physician management service located in Sunrise, Florida, that trades at 12 times earnings.
Energy. PASS
I like energy stocks. They have been hurt by the global economic slowdown and the Gulf of Mexico oil spill. Still, I think there are many good values in the group.
Energy stocks look good for the next three to five years though I don't expect them do much in the next month or two. Among the many energy companies I like are Rowan Cos., a driller, and National Oilwell Varco Inc., an oilfield equipment company. Both are based in Houston.
Industrials: INCOMPLETE
The industrial group, up slightly this year, has fallen about 6 percent in the past month. Signs of a weakening economy make investors understandably cautious about these companies. But nobody seems to know for sure if the recovery is still on, or if the U.S. is headed for a double-dip recession. Bad economic data one day is offset by better news a few days later. The upshot? It's good to have some industrial stocks in your account, but don't go overboard.
Information Technology: PASS
Tech stocks are the largest group in the S&P 500, making up 18 percent of the index's market value. The typical information technology stock is trading at almost 15 times earnings, far less than in tech's heyday.
One inexpensive stock in the group is Entegris Inc. of Billerica, Massachusetts, which protects and transports materials used in technology manufacturing. It sells for 10 times recent earnings and only six times estimated 2010 earnings.
Materials: PASS
There are two reasons to like materials stocks. First, China, now the world's second-largest economy, is demanding a lot of materials such as metals, chemicals and fertilizer. Second, materials stocks often hold their own in an inflationary environment. Inflation appears toothless now. Yet with the U.S. government running oversized deficits, the Federal Reserve may boost the money supply in the next several years, which might lead to a cycle of rising prices.
Telecommunications: FAIL
This is a small group, only 3 percent of the S&P 500. In the past month, it is the best performing group, up about 2 percent. Because of intense competition, I don't like the group as a whole, but I am considering purchase of Research in Motion Ltd., the Canadian maker of BlackBerry phones.
Research in Motion has fallen to about $48 from a 2008 high of about $148 because investors think Apple Inc.'s iPhone may swallow the market. At today's reduced price, Research in Motion sells for 10 times earnings even though it earned a 36 percent return on equity last fiscal year
Utilities: INCOMPLETE
A traditional haven of defensive investors and dividend fans, utility stocks are little changed in the past month as investor nervousness increased. If a double dip recession seems likely, I would add to utility holdings. But again, economists and analysts disagree on whether the U.S. economy is headed up, down, or just muddling through. Personally, I foresee slow growth but not another recession.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
