Some Sectors Stand Out

6/18/2012


When the Forecasts looks for new stocks to recommend, we cast a wide net. But given our investment philosophy, which focuses on high Quadrix scorers that deliver growth at a good price, we pull more fish out of some parts of the lake than others.

On all three of our recommended lists, we overweight consumer-discretionary, health-care, and technology stocks relative to the S&P 1500 Index. Check out the table above, and you'll see why.

Consumer-discretionary and health-care stocks have among the highest average Quadrix Overall scores. And while tech stocks don't average exceptional scores, 35 of the S&P 1500's tech companies score over 80. We find a lot of appealing companies in those three sectors.

Conversely, our Buy List contains no consumer-staples, telecommunications, or utility stocks. These three sectors average lower Overall scores than the other seven sectors, hurt in part by unattractive valuations. In recent weeks, investors have bid up many defensive stocks. Overall, relative to the index, our buy lists also underweight energy, financials, and industrials. We do think about diversification when we select stocks for our lists. However, sector representation is just one of many factors, and the appeal of individual stocks drives the bulk of our decision-making process.

Our allocation of 12% to 15% in a short-term bond fund will accentuate sector underweights versus a fully invested index. But for the most part, when you see a sector underrepresented in our buy lists, you can blame a dearth of attractive stocks. 

RECOMMENDED STOCKS
Company (Ticker)
Industry
Consumer Discretionary
Advance Auto (AAP)
Specialty Stores
Bed Bath (BBBY)
Specialty Stores
Comcast (CMCSa)
Cable TV
DirecTV (DTV)
Cable TV
Macy's (M)
Dept. Stores
Wyndham (WYN)
Hotels & Resorts
Health Care
Abbott Labs (ABT)
Pharmaceuticals
Aetna (AET)
Managed Care
Agilent Tech. (A)
Electronic Equip.
Exp. Scripts (ESRX)
Distributors
St. Jude (STJ)
Medical Equipment
UnitedHealth (UNH)
Managed Care
Technology
Alliance Data (ADS)
Processing Svcs.
Apple (AAPL)
Comp. Hardware
CA Tech. (CA)
Systems Software
Cisco Sys. (CSCO)
Network Equip.
EMC (EMC)
Computer Storage
Google (GOOG)
Internet Software
IBM (IBM)
Comp. Hardware
Intel (INTC)
Semiconductors
KLA-Tencor (KLAC)
Semicond. Equip.
MasterCard (MA)
Data Processing
Microsoft (MSFT)
Systems Software
Oracle (ORCL)
Systems Software
Qualcomm (QCOM)
Telecom Equip.
Visa (V)
Data Processing

Within the top sectors, we prefer to select companies from different industry groups, as shown in the table at right. The six consumer-discretionary stocks we recommend hail from four different industries, while among our six health stocks, only two, Aetna ($43; AET) and UnitedHealth Group ($58; UNH), are in the same industry. Our buy lists contain technology stocks from 10 different industries, providing diversification within the sector.

We don't design our buy lists to track index sector exposures. Our stock-driven approach should allow investors to profit from high-potential market niches. Yet we also try to play enough defense to stay ahead of the market during rough patches.

SECTOR BREAKDOWN
Sector Weighting On
Recommended Lists †
Average Est.
-- EPS Growth --
Average
Total Return
Quadrix Overall
------ Score † ------
Sector
(No. Of Companies)
Stock-Market
Value, ($Billions)
(% Of Index)
Focus
List
(%)
Buy
List
(%)
L-T
Buy
List
(%)
Average
Trailing
P/E Ratio
Curr.
Year
(%)
Next
5 Yrs.
(Annual.)
(%)
YTD
(%)
12-
Mos.
(%)
Average
Number
Above 80
Cons. Discretionary (252)
1,631
(12)
27
18
16
18
9
15
8
8
60
61
Consumer Staples (78)
1,575
(11)
0
0
2
17
8
10
4
8
50
7
Energy (91)
1,386
(10)
0
6
7
15
4
14
(13)
(19)
57
24
Financials (263)
2,182
(16)
7
7
7
20
12
9
7
3
51
38
Health Care (155)
1,600
(11)
13
13
15
18
7
12
6
(3)
61
32
Industrials (219)
1,515
(11)
7
4
4
17
15
14
2
(1)
61
49
Materials (96)
520
(4)
7
4
3
17
12
12
4
(3)
56
18
Technology (263)
2,733
(19)
27
36
31
19
2
15
2
(6)
53
35
Telecom (18)
396
(3)
0
0
0
19
0
9
(1)
(12)
50
1
Utilities (65)
534
(4)
0
0
0
17
(1)
5
2
14
40
0
All Index Stocks (1,500)
14,072
(100)
18
8
12
4
0
56
265
† Forecasts weighting determined by target weights presented in our Recommended Stocks.       
‡ Quadrix scores are percentile ranks, with 100 the best.

 


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