5 Facts You Should Know

12/19/2011


The Forecasts never advises readers to buy or sell a stock based solely on its sector. But every sector has its own characteristics, and below we present five facts to consider in the year ahead.

Strength begets strength when it comes to sector performance. The Forecasts' research shows that stocks displaying the strongest total returns in the preceding six months often continue their relative outperformance over the next year. Should this trend hold in 2012, expect decent returns from utilities, technology, and consumer staples, the three best-performing sectors in the second half of 2011.

Within these three groups, Forecasts favorites include Top 15 Utilities portfolio components PPL ($29; PPL) and Sempra Energy ($53; SRE) in utilities, Google ($626; GOOG) and Apple ($389; AAPL) in technology, and Wal-Mart Stores ($58; WMT) in consumer staples.

The technology sector remains a Forecasts favorite for 2012. Tech stocks continue to offer an attractive combination of solid Quadrix Overall scores (the average tech stock in the S&P 1500 Index earns an Overall score of 61) and decent Value scores (53). This mixture of fundamental strength and value should help propel quality tech stocks to market-beating returns in 2012. Forecasts Buy-rated tech stocks include Intel ($24; INTC), IBM ($191; IBM), Microsoft ($26; MSFT), and Oracle ($31; ORCL).

With 2012 an election year, the health care, energy, and financial sectors warrant special focus. While it seems these sectors always receive extra attention during election years, the 2012 tilt promises to shine an even brighter spotlight. The two political parties have distinct philosophical differences regarding the regulation and operation of these industries. A winner-take-all election in which one party wins the White House and both houses of Congress would likely have a meaningful impact on the investment appeal of the three groups.

At the very least, investors holding stocks from these sectors should expect increased volatility leading up to November. In these groups, the Forecasts expects that stocks rated Buy or Long-Term Buy — Apache ($92; APA), Exxon Mobil ($81; XOM), and Chevron ($104; CVX) in energy; Abbott Laboratories ($54; ABT), Agilent Technologies ($33; A), St. Jude Medical ($34; STJ), and UnitedHealth Group ($48; UNH) in health care; and Aflac ($42; AFL) and J.P. Morgan ($31; JPM) in financials — should outperform their peers.

Don't ignore the transportation group, especially if the Dow Theory turns bullish. Because of its extra sensitivity to both the economy and stock-market conditions, transportation represents a potentially attractive area for investment in 2012, provided we get a new bull-market signal under the Dow Theory.

The Forecasts currently recommends one transport stock, CSX ($20; CSX), which is rated Long-Term Buy. For investors seeking diversified investments across the transportation sector, consider the following exchange-traded funds (ETFs): iShares Dow Jones Transportation Average ($80; IYT) and SPDR S&P Transportation ($44; XTN).

Beware of "top-heavy" sector exchange-traded funds. Stocks that posted market-beating returns in recent years may command oversize weightings in certain sector ETFs. For example, Exxon and Chevron account for about one-third of the Energy Select Sector SPDR ($68; XLE) ETF. In the Technology Select Sector SPDR ($25; XLK) ETF, Apple, Google, IBM, Intel, Microsoft, and Oracle account for more than 45% of the fund's weighting. If you already own these stocks, you add to your bets by buying the ETF.

To avoid becoming too concentrated in any one stock — a dangerous prospect even with high-quality names — check the weightings of sector ETF holdings before you purchase one of the funds. ETF providers typically report this data daily on their Web sites.

SECTOR ANALYSIS
S&P 1500 Index stocks in the consumer discretionary, energy, health care, industrials, and technology sectors average Quadrix Overall scores of at least 60. Strong six-month returns for the consumer discretionary, consumer staples, technology, and utility indexes bode well for year-ahead price action.
Index Total Returns
Average Quadrix Scores
For Stocks In Index
S&P 1500 Sectors
6
Months
(%)
12
Months
(%)
24
Months
(%)
Momen-
tum
Value
Overall
Cons. Discretionary
1.7
3.5
32.6
52
54
60
Consumer Staples
2.9
11.5
24.3
48
47
55
Energy
(4.9)
4.0
24.7
62
52
60
Financials
(14.3)
(17.1)
(7.7)
48
53
47
Health Care
(4.4)
8.1
11.8
53
56
63
Industrials
(5.9)
(2.9)
19.7
56
56
61
Materials
(10.5)
(8.5)
9.4
53
56
56
Technology
3.1
1.4
16.8
50
53
61
Telecom Services
(1.5)
4.7
20.7
42
65
50
Utilities
6.6
15.3
20.4
41
48
44
Broad index
(3.0)
0.5
15.7
51
54
57
Note: Quadrix scores are percentile ranks, with 100 the best.

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