Sorting Out The Sectors

12/21/2009


While it wasn’t by design, the Forecasts has made some decent-sized sector bets.

As we’ve written before, the Forecasts does not set target portfolio weightings for sectors. While we try to limit risk by diversifying our sector exposures, we are not very concerned with how our portfolios look relative to the weightings of major market indexes. We tend to end up overweighted relative to the market when we find a lot of stocks we like in a sector.

All three of our recommended lists — the Focus List, Buy List, and Long-Term Buy List — have a far higher percentage of their assets in technology stocks than does the S&P 1500 Index. We’re also overweight energy and health care relative to the index.

Conversely, none of our lists holds even 8% of its assets in financials, versus 13.9% for the index. We are also strongly underweight industrials, with none on the Focus List and less than 4% of the assets of the Buy List and Long-Term Buy List in the sector, well below the index’s 10.9%. These weightings exclude our recommended cash position, currently 20% to 25%.

All of our recommended lists are somewhat diversified. But the Focus List, as its name implies, focuses on our best ideas for year-ahead gains. That list currently features 15 companies from just seven of the 10 market sectors and has 40% of its assets in technology.

Our Buy and Long-Term Buy lists generally contain 25 to 40 stocks, more in keeping with what academic research and our own work suggest is the optimal portfolio size — diversified enough to limit volatility, but still small enough to reward good stock-picking.

Subscribers should not read our sector weightings as either an endorsement or a criticism of a given sector or stocks and funds from that sector, only as a reflection of how many appealing stocks we happened to find.

Of more investment value are the characteristics of the sectors, as shown in the table at right. The sectors with the highest average Overall Quadrix® scores are consumer staples and health care. Both of those groups average Value scores of at least 65 and boast solid long-term profit-growth potential. Other sectors with modest valuations include telecommunication services and utilities, while the technology and consumer-discretionary sectors offer superior profit-growth prospects.

SECTOR CHARACTERISTICS
Average P/E
—–— Ratio —–—
Average EPS
—– Growth –—
S&P 1500 Sector
(# of Cos.)
Total
Stock-
Market
Value
($Bil.)
Trailing
Trailing
Over
5-Yr.
Avg.
Next
Fiscal
Year
Est.
(%)
Next
5 Yrs.
Est.
(Ann.)
Value
Overall
Cons. Discret. (258)
1249.5
20
1.07
21
13
60
60
Cons. Staples (77)
1342.9
17
0.85
11
11
70
73
Energy (88)
1228.2
19
1.38
24
9
54
49
Financials (258)
1618.9
23
1.16
10
8
51
48
Health Care (174)
1523.1
18
0.78
14
14
65
74
Industrials (217)
1271.7
22
1.19
23
11
59
55
Materials (85)
435.7
22
1.27
32
9
52
49
Technology (255)
2240.0
24
0.98
29
13
45
49
Telecom (16)
320.2
19
0.88
12
9
72
66
Utilities (71)
450.4
15
0.90
11
7
79
65
All S&P 1500 Stocks
11680.5
21
1.06
20
11
57
57
Note: Averages exclude P/E ratios below 0 or more than 75 and growth rates of more than 200%.    * Percentile ranks, with 100 the best.

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