Our Four Favorite Sectors

8/3/2015


The Buy List's 23 stocks span only six of the 10 broad market sectors. Just four sectors — consumer discretionary, financials, health care, and technology — account for 83% of the equity portion of the list. For comparison, those groups account for 65% of the capitalization-weighted S&P 500 Index.

Why the love affair with only four sectors? Chalk it up largely to Quadrix.

TOP SECTORS THREE DIFFERENT WAYS
When shopping among standouts in Quadrix, we focus on those from high-scoring sectors. Below we identified timely groups three different ways. Currently, 11 of the 35 stocks in the S&P 500 Index with Overall scores of 90 or higher are financials. Among the 88 financial stocks, 11 (13%) earn high Quadrix scores. At the end of the second quarter of 2015, consumer discretionary had the highest percentage of high scorers.
Most Stocks With
Overall 90 Or Higher
(No. Of Cos.)
Largest Percentage W/
Overall 90 Or Higher
(% Of Stocks)
Highest Average
Overall Score
(Average Score)
Recent
Financials (11)
Financials (13)
Cons. Discret. (67)
2nd qtr. 2015
Financials (9)
Cons. Discret. (11)
Cons. Discret. (68)
1st qtr. 2015
Technology (9)
Technology (14)
Cons. Discret. (66)
4th qtr. 2014
Cons. Discret. (12)
Technology (16)
Technology (70)
3rd qtr. 2014
Cons. Discret. (15)
Telecom (20)
Technology (71)
2nd qtr. 2014
Cons. Discret. (21)
Cons. Discret. (25)
Cons. Discret. (73)
1st qtr. 2014
Financials (15)
Telecom (40)
Technology (71)
4th qtr. 2013
Financials (18)
Financials (22)
Technology (69)
3rd qtr. 2013
Financials (17)
Financials (21)
Cons. Discret. (68)
2nd qtr. 2013
Financials (18)
Financials (22)
Cons. Discret. (67)
1st qtr. 2013
Financials (15)
Financials (19)
Health Care (67)
4th qtr. 2012
Technology (9)
Technology (13)
Health Care (66)
3rd qtr. 2012
Financials (10)
Energy (18)
Health Care (67)
2nd qtr. 2012
Health Care (6)
Energy (12)
Health Care (68)
1st qtr. 2012
Technology (14)
Energy (23)
Health Care (70)
4th qtr. 2011
Technology (13)
Energy (29)
Health Care (72)
3rd qtr. 2011
Technology (18)
Technology (24)
Health Care (72)
2nd qtr. 2011
Technology (18)
Technology (24)
Health Care (75)
1st qtr. 2011
Technology (26)
Technology (35)
Technology (73)
4th qtr. 2010
Technology (22)
Technology (29)
Technology (76)
3rd qtr. 2010
Technology (17)
Technology (22)
Health Care (72)
2nd qtr. 2010
Cons. Discret. (16)
Health Care (20)
Health Care (74)
1st qtr. 2010
Cons. Discret. (19)
Health Care (25)
Health Care (81)
4th qtr. 2009
Health Care (19)
Health Care (37)
Health Care (82)
3rd qtr. 2009
Health Care (18)
Health Care (34)
Health Care (81)
2nd qtr. 2009
Technology (12)
Energy (25)
Health Care (78)
1st qtr. 2009
Technology (10)
Energy (24)
Energy (77)
4th qtr. 2008
Energy (16)
Energy (41)
Energy (85)
3rd qtr. 2008
Energy (14)
Energy (35)
Industrials (77)
2nd qtr. 2008
Energy (24)
Energy (62)
Energy (84)
1st qtr. 2008
Energy (20)
Energy (56)
Energy (85)
4th qtr. 2007
Energy (19)
Energy (56)
Energy (86)
3rd qtr. 2007
Energy (20)
Energy (61)
Energy (84)
2nd qtr. 2007
Energy (23)
Energy (74)
Energy (88)
1st qtr. 2007
Energy (22)
Energy (69)
Energy (88)
4th qtr. 2006
Energy (22)
Energy (71)
Energy (87)
3rd qtr. 2006
Energy (22)
Energy (76)
Energy (87)
2nd qtr. 2006
Energy (22)
Energy (76)
Energy (90)
1st qtr. 2006
Energy (20)
Energy (67)
Energy (86)

Our stock-rating system can tell you a lot about a sector and the attractiveness of its underlying stocks. Today, among S&P 500 companies that earn Overall scores of 90 or higher, about 80% hail from consumer discretionary, financials, health care, and technology.

Those four groups have been our largest sector bets since December. And since 2010, on average, our Buy List has been nearly 75% invested in those sectors. On the surface, it would seem we're stuck in a rut. But during that period and based on stocks with Overall scores of at least 90, an average of 72% of S&P 500 stocks were from — you guessed it — consumer discretionary, financials, health care, and technology.

To be sure, those four sectors are quite populous, representing 58% of all S&P 500 stocks. And, occasionally, they fall from favor. Hurt by the global banking crisis, not a single financial stock among the 84 in the S&P 500 at the end of 2008 earned an Overall score of at least 90. Historically, an average of about 10 financials in the index have earned 90 or better each month.

Moreover, other sectors occasionally have their day in the sun. A year ago, energy stocks accounted for about 16% of the Buy List. Today, we don't recommend any, compared to a 7% weighting for the S&P 500. That's partly because Quadrix scores have tumbled. The 40 energy stocks in the S&P 500 average Overall scores of 48, down from 69 a year ago.

Our approach

Not every stock with solid Quadrix scores that hails from a good-looking sector is worth buying. That's why we always scrutinize a company's fundamentals, making sure Quadrix snaps an accurate picture and that a stock truly represents a sector standout.

Still, the Forecasts generally goes where Quadrix takes us. Our largest sector bet is technology at 26% of the Buy List, followed by financials at 20% and consumer discretionary at 19%.

BUY LIST SECTOR EXPOSURE
Buying top-ranked stocks from top-ranked sectors is a strategy that works. Today, four attractive sectors — consumer discretionary, financials, health care, and technology — account for 83% of our Buy List, versus an average of 75% since 2010 and above the 65% for the market-weighted S&P 500 Index.
----------- Since Start Of 2010 -----------
S&P 500
Index
(%)
Average
(%)
Maximum
(%)
Minimum
(%)
Current
(%)
Consumer Discretionary
18
26
11
19
13
Consumer Staples
4
8
0
9
10
Energy
7
16
0
0
7
Financials
14
24
3
20
17
Health Care
13
26
3
18
15
Industrials
8
21
0
9
10
Materials
4
13
0
0
3
Technology
29
42
19
26
19
Telecom Services
1
7
0
0
2
Utilities
0
3
0
0
3

In technology, we're finding high scorers supported by solid earnings and cash-flow growth. Meanwhile, the expansive financial sector allows us to diversify with Quadrix leaders in attractive industries ranging from asset management to real estate to insurance. Our consumer-discretionary picks are mostly reasonably valued growers. The health-care sector, accounting for 18% of the Buy List, is benefiting from solid operating and share-price momentum, partly reflecting heightened takeover activity.

Reviewed below are top picks from the four sectors most heavily weighted on our Buy List.

Comcast ($62; CMCSa) earned $0.84 per share in the June quarter, up 12%, excluding special items, to match the consensus estimate. Revenue climbed 11% to $18.74 billion, comfortably ahead of the consensus of $18.14 billion. Cash from operations rose 17%, while free cash flow jumped 46% to $990 million; both metrics have now risen by more than 15% in four straight quarters.

The cable unit grew sales 6% as more video customers subscribed to multiple products. Comcast's average revenue per user rose 4.5% to $143 per month. The video business shed 69,000 net subscribers, an improvement from 144,000 net subscribers lost in the year-ago quarter. NBCUniversal reported 20% higher sales, driven by 93% growth from filmed entertainment and 26% growth from theme parks. The cable networks posted 1% lower sales, partly due to 3% lower ad revenue. NBCUniversal is reportedly exploring deals with several online publishers in a bid to attract younger consumers who tend to watch less traditional TV. Comcast is a Focus List Buy and a Long-Term Buy.


Gilead Sciences ($116; GILD) said June-quarter earnings per share surged 33% to $3.15, topping the consensus by $0.44. Sales advanced 26% to $8.24 billion, well ahead of the consensus of $7.61 billion. Hepatitis C drugs Harvoni and Sovaldi combined for sales of $4.90 billion, up 41%. Gilead has offered an average price discount of about 46% on the drugs.

Gilead raised its 2015 sales guidance to a midpoint of $29.5 billion, above the previous guidance but still below the consensus of $30.36 billion at the time of the announcement. It also lowered its projected expenses and tax rate for the year. Gilead's stock advanced on the results yet trades at just 11 times estimated 2015 profits, less than half the median for S&P 1500 health-care stocks. Gilead is a Focus List Buy and a Long-Term Buy.


Google ($661; GOOGL) has rallied 10% since the company's June-quarter report. It has also rebounded in Quadrix, now scoring an 80 for Momentum, 98 for Earnings Estimates, and 86 for Overall. All three scores had slipped below 70 prior to the report.

New CFO Ruth Porat, the former CFO of Morgan Stanley ($39; MS), has given investors hope that Google could introduce a dividend or stock buyback, while reigning in its spending habits. Capital spending swelled to 49% of Google's operating cash flow in 2014, versus 20% in 2012.

Porat didn't disappoint during the earnings call, vowing to install cost controls. She also described how she would prioritize Google's cash to maximize return on investment. Capital spending remains most important, followed by "smart targeted acquisitions," and lastly potentially capital returns. Just days later, Google made good on its second priority by agreeing to acquire Pixate, a company that helps application makers build visual prototypes that run on Apple and Android devices. Terms were not announced. Google, with net cash of $94 per share, is a Buy and a Long-Term Buy.


Jones Lang LaSalle ($176; JLL) continues to benefit from the rebounding labor market, which has pushed office rents higher and vacancy rates lower. The company grew June-quarter earnings per share 20% to $2.01 excluding special items, topping the consensus of $1.85. Sales climbed 8% to $1.37 billion, or 16% at constant currency. The investment-management unit reported 29% higher operating revenue, while real-estate services posted a 7% gain on growth across all geographic segments. Shares rallied on the results.

The company has now grown sales by more than 5% in nine straight quarters. The investment-management unit has helped drive recent operating momentum, with assets under management climbing 12% to $56.0 billion over the past year. Jones Lang supplements organic growth with a steady diet of deals, announcing or completing 10 acquisitions in 2015. Jones Lang LaSalle is a Focus List Buy and a Long-Term Buy.


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