Sector Momentum

1/11/2016


The U.S. stock market's post-recession resurgence slammed to a halt in 2015, with the S&P 500 Index eking out a total return of 1% — its weakest year since 2008's disastrous 37% loss. But a closer look at the 10 sectors comprising the index revealed a continuation of well-established trends.

• Consumer-discretionary stocks, averaging a return of 10%, led all sectors in 2015. The consumer-discretionary sector has ranked among the two top-performing sectors in four of the past six years.

• The health-care sector, returning 7%, finished second for the third straight year.

• It's still feast or famine for utility stocks. After an average return of negative 5% in 2015, good for eighth out of 10, the sector has ranked among the top three or bottom three sectors in 12 consecutive years.

• Once again, the energy sector brought up the rear, losing 21%. It has finished last among S&P 500 sectors in two straight years and among the bottom three sectors in four straight years.

CONSUMER DISCRETIONARY SECTOR SETS PACE
------------------------ S&P 500 Sector Index Total Return % (Rank) ------------------------
Sector
2011
----- (%) -----
2012
----- (%)
-----
2013
----- (%)
-----
2014
----- (%)
-----
2015
----- (%)
-----
5-Year
Annual.
(%)
Consumer
Discretionary
6
(5)
24
(2)
43
(1)
10
(7)
10
(1)
18
Consumer
Staples
14
(2)
11
(8)
26
(6)
16
(4)
6
(3)
14
Energy
5
(6)
5
(9)
25
(8)
(8)
(10)
(21)
(10)
0
Financials
(17)
(10)
29
(1)
36
(4)
15
(5)
(2)
(6)
10
Health Care
13
(3)
18
(4)
41
(2)
25
(2)
7
(2)
20
Industrials
(1)
(8)
15
(5)
41
(3)
10
(6)
(3)
(7)
11
Materials
(10)
(9)
15
(6)
26
(7)
7
(8)
(9)
(9)
5
Technology
2
(7)
15
(7)
28
(5)
20
(3)
6
(4)
14
Telecom
Services
6
(4)
18
(3)
11
(10)
3
(9)
3
(5)
8
Utilities
20
(1)
1
(10)
13
(9)
29
(1)
(5)
(8)
11
S&P 500 Index
2
 
16
 
32
14
1
13

Prevailing wisdom suggests that after years of lagging returns, downtrodden stocks might be poised to rebound, while top performers should be overdue for a breather.

Yet it's tough to find much reason for optimism about the energy sector. Stocks in all industries within the energy sector averaged double-digit losses last year, with the exception of refiners.

Operating momentum has been equally poor, as energy stocks' per-share profits averaged an 11% decline in the past 12 months on 20% lower sales. The near-term future doesn't look any brighter, with earnings per share projected to fall an average of 31% over the next 12 months. The downturn in profits has boosted energy stocks' average trailing P/E ratios of 24, higher than any other sector.

A tanker of crude oil left the U.S on Dec. 31, the first such shipment since lawmakers repealed a 40-year ban on exports. U.S. refiners no longer have a captive source of discounted supply from domestic oil drillers, which have more potential buyers. At the same time, the world is already awash with excess crude oil, keeping prices low.

For now, Quadrix warns investors to proceed with caution. Stocks in the energy sector average Quadrix Overall scores of just 32, versus 59 for the S&P 500 as a whole. We do not recommended any energy stocks for purchase.

Conversely, consumer-discretionary stocks still look reasonably priced, despite their years of outperformance. Stocks average trailing P/E ratios of 18.4, comfortably below the index average of 19.7. Consumer-discretionary stocks trade at 17.3 times estimated year-ahead earnings per share, projected to rise 12%. That compares to the S&P 500's average forward P/E of 18.6 and projected profit growth of 8%.

The consumer-discretionary sector is far from homogeneous, with companies ranging from broadcasters to automakers to homebuilders. Performance within the sector was similarly varied last year, with internet retailers and restaurants among the top industries. Conversely, shares of many traditional retailers — including apparel, luxury goods, and specialty and department stores — experienced steep losses.

Our favorite stocks in the sector include Comcast ($55; CMCSa), Disney ($100; DIS), Foot Locker ($65; FL), Goodyear Tire & Rubber ($30; GT), and Lear ($113; LEA). Lear is reviewed briefly on page 4, while Comcast is this week's Analysts' Choice. Comcast, Foot Locker, and Lear are rated Focus List Buys and Long-Term Buys. Goodyear is a Buy and a Long-Term Buy. Disney is a Long-Term Buy.


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