Sectors Tell Their Stories

2/23/2015


Seven weeks down, 45 to go.

We're about 13% of the way through 2015, but to me it feels like the year just started. There's so much going on — sharp moves in oil prices, the U.S. dollar gaining strength, weak corporate earnings and guidance despite a solid economy — that investors have barely had time to breathe.

So far in 2015, the average S&P 1500 Index stock has returned 2%, a respectable return for one-eighth of a year. But anyone who's actually owned equities this year knows the path to that modest gain was far from smooth. And you needn't dig very deep to find gradations between stocks in different sectors. Check out the table below, which breaks the index down into its 10 sectors. This week we'll look at those sectors from four angles:

Performance

The energy health-care, telecom, and technology sectors are the top performers so far this year. No surprise given the strength of the U.S. consumer, stocks in the consumer-discretionary sector also outperformed the broad market over the last three months, joining health care and technology as the top three sectors during that period. In contrast, the average energy stock in the S&P 1500 has delivered a negative 13% return over the last three months. Oil prices have rallied 19% since Jan. 28; energy stocks have averaged a 17% return since then, tops among the sectors.

Advice: Strong performers in sectors with price momentum include Aetna ($97; AET), Cognizant Technology Solutions ($61; CTSH), Shire ($238; SHPG), and Skyworks Solutions ($83; SWKS).

Growth

Only three sectors — financials, industrials, and utilities — averaged per-share-profit growth of at least 9% over the last year. However, stocks in seven sectors are expected to deliver double-digit growth in their next fiscal year. The industrial and financial sectors offer particularly appealing blends of historical and year-ahead profit growth.

Advice: Growth investors might like Ameriprise Financial ($136; AMP) and United Rentals ($95; URI).

Value

From a value standpoint, we see few surprises. Energy, industrial, materials, and utility stocks average the lowest price/earnings ratios (the only four at 21 or lower). Only energy and utilities stocks average Quadrix® Value scores above 60. In contrast, health-care and consumer-staples stocks score below 50. Despite their low P/E ratios, utilities look especially pricey relative to their growth potential, as measured by PEG ratio.

A peek through the prism of valuation relative to historical norms tells a different tale. Not surprisingly, energy stocks are the cheapest (averaging 15% discounts to their five-year averages) and among the most likely to be cheap (40% of stocks trade below the historical average, versus 31% for the index as a whole). However, the traditionally pricey technology sector's average P/E ratio isn't much higher than the index. Tech stocks average a 1% discount to historical norms, with 41% trading below those norms.

Advice: While some sectors appear cheaper than others, you can measure value in multiple ways — and find attractive values in different places. Magna International ($104; MGA), ManpowerGroup ($78; MAN), and Micron Technology ($32; MU) have appeal for value investors.

Fundamentals

Our Overall score takes into account nearly 100 individual statistics. Stocks with high scores tend to look good from a variety of angles. Three sectors — consumer discretionary, financials, and industrials — average Overall scores of at least 60. In contrast, the consumer-staples, materials, and telecom sectors average scores below 55. While even low-scoring sectors will contain a few high-scoring stocks, you'll find more options in sectors with superior scores.

Advice: Investors seeking only the fundamentally strongest stocks should start with Alaska Air ($64; ALK), Apple ($129; AAPL), and Lear ($109; LEA), all of which earn at least 99 Overall.

Conclusion

Following sector trends is both wise and useful, but don't rely too heavily on them. Every strong sector has a few stinkers, and sometimes you'll unearth a gem in the most unlikely places. Sector trends help us find the best place to dip our nets, but we're still picky about the fish we pull out.

HOTSPOTS BY SECTOR AND SIZE
All numbers other than the company count are averages for stocks in S&P 1500 Index sectors. The PEG ratio is the P/E ratio based on expected year-ahead earnings, divided by estimated long-term profit growth.
Stock-
Market
Value
($Bil.)
Total
-- Return --
12-Month
-- Growth --
Est. EPS
---- Growth ----
--------- P/E Ratio ---------
----------- Quadrix Scores -----------
Group
(No. Of Cos.)
YTD
(%)
3
Mos.
(%)
Sales
(%)
EPS
(%)
Next
Fiscal
Year
(%)
Next
5 Yrs.
(Annual.)
(%)
Trailing
Discount/
Premium
To 5-Yr.
Avg.
(%)
% Of
Stocks
Trading
At Disc.
PEG
Ratio
Momen-
tum
Value
Quality
Overall
Consumer
Discret. (237)
12.3
2
7
7
5
16
14
22
17
22
1.5
52
55
70
63
Consumer
Staples (70)
31.6
1
5
5
7
10
11
23
20
11
2.3
47
46
64
52
Energy (100)
16.9
3
(13)
14
5
(5)
6
18
(15)
40
1.7
48
78
59
58
Financials (297)
13
1
4
9
9
12
9
23
4
34
1.8
55
57
57
60
Health
Care (157)
19.3
5
10
13
0
18
15
27
22
18
1.8
57
40
64
55
Industrials (219)
11
1
3
7
9
15
13
21
4
40
1.5
53
59
68
62
Materials
(101)
8.1
2
2
5
7
21
11
21
8
27
1.7
45
58
60
53
Technology
(245)
18.1
3
7
10
5
17
14
23
(1)
41
1.5
51
51
65
59
Telecom
Services (14)
31.8
3
3
4
(3)
5
8
28
23
29
2.3
44
57
41
50
Utilities (60)
11.1
(4)
0
9
9
5
5
18
9
25
3.3
52
62
41
56
S&P 1500
Index (1,500)
15
2
4
9
6
14
12
22
8
31
1.8
52
55
62
59
Notes: Averages exclude some outliers.     Quadrix scores are percentile ranks, with 100 the best.

 


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