Sectors With Second-Half Appeal
A couple trends that emerged in the first six months of 2016 favored three sectors over others.
• Commodity prices recovered from a weak start to the year, driving energy and materials stocks higher.
• The Federal Reserve's reluctance to raise interest rates pressured financial stocks but helped utilities.
We maintain a cautious stance toward the S&P 1500 Index's biggest winners from the first half of the year: energy, materials, and utilities. Stocks in all three sectors averaged total returns in excess of 13%, as shown in the table below. But the group offers only a shallow pool of Buy candidates.
Together, these sectors offer just 24 stocks (10%) with Quadrix Overall scores above 80 and just eight (3%) with Overall scores above 90. The average stock in each of the three sectors saw earnings per share and revenue contract over the past 12 months. From this group of three sectors, our buy lists feature only one stock: EQT Midstream Partners ($76; EQM), a master limited partnership (MLP) that operates natural-gas pipelines and storage facilities.
The consumer-discretionary sector has lagged this year, with stocks averaging a total return of 3%. The sector has experienced divergence as stocks leveraged to the housing recovery outperformed, while department stores and apparel retailers struggled. But consumer-discretionary stocks average Overall scores of 68 — highest of the 10 S&P 1500 sectors, with 37% scoring above 80 and 17% above 90. The sector is projected to average 9% growth for earnings per share over the next 12 months. Its valuation also looks attractive, with an average trailing P/E ratio of 19 and forward P/E of 17 — both lowest among S&P sectors.
The industrials sector, earning an average Overall score of 64, also looks attractive. The stocks have averaged a total return of 9% this year, yet trade at a discount to the broad index relative to both trailing and year-ahead earnings. The health-care sector also offers growth opportunities, though some stocks have rich valuations.
Remember, we pick stocks, not sectors. Our top ideas for capital gains are reviewed in Capital-Gains Favorites.