Our biggest sector bets

8/4/2008


Nobody will mistake the Dow Theory Forecasts for an indexer.

While we try to limit risk by limiting exposure to any single sector, we don’t worry about deviating from the market’s sector weightings. Ten of the 28 stocks on our Buy List come from the technology sector, for a 36% weighting on a fully invested basis, or more than twice that of the S&P 1500 Index. In contrast, we recommend only one consumer-staples stock and no consumer discretionaries, giving us a roughly 4% weighting, versus a combined 20% for consumer stocks in the index.

We don’t set out to make large sector bets, but we go where our research leads us. As the chart above illustrates, we’ve found a number of attractive names in the technology, energy, and industrials sectors. Telecommunications and the consumer sectors have fewer attractive stocks.

SECTOR ANALYSIS
Not surprisingly, the sectors in which Dow Theory Forecasts’ is overweight relative to the S&P 1500 Index tend to have solid Quadrix Overall scores. We are more likely to find appealing stocks in sectors with high Quadrix scores, such as energy, industrials, or technology. All of the data below except for the company count and market value represent equal-weighted averages for the sector or index.
———————— EPS Growth ————————
—— Quadrix Overall Score ——
No. of
Cos.
Market
Value
($Mil.)
Div.
Yield
(%)
P/E on
2008
Est.
PEG
Ratio
Last 12
Months
(%)
Calendar
2008 Est.
(%)
Calendar
2009 Est.
(%)
Next 5
Yrs. Est.
(%)
Current
One
Year
Ago
5
Years
Ago
Consumer Discretionary
279
1,181
1.4
17
1.16
48
(1)
16
15
55
56
66
Consumer Staples
79
1,448
1.8
18
1.62
21
10
14
11
59
59
65
Energy
85
1,675
0.6
14
0.88
21
29
20
17
82
82
56
Financials
256
1,988
3.7
17
1.49
2
(10)
13
10
46
65
66
Health Care
168
1,590
0.4
20
1.25
26
10
17
17
63
58
72
Industrials
208
1,554
1.2
16
1.22
23
10
16
14
69
67
54
Information Technology
252
2,114
0.4
20
1.22
44
4
21
16
62
57
41
Materials
86
532
1.8
14
1.30
19
10
16
12
57
65
45
Telecom Services
13
352
3.7
15
2.13
2
(13)
13
8
54
55
63
Utilities
74
518
3.8
15
2.15
6
6
13
8
51
50
58
S&P 1500 Index
1,500
12,952
1.6
17
1.32
26
4
16
14
59
61
59
Notes: PEG ratio represents the P/E on 2008 estimates divided by the estimated five-year profit-growth rate. Averages exclude P/E ratios below 0 or above 75, growth rates of more than 100%, PEG ratios of more than 4, and dividend yields of more than 10%.

Stocks in the three sectors the Buy List and Long-Term Buy List weight most heavily — energy, industrials, and technology — earn the highest average Quadrix Overall scores Less-impressive scores for financial, consumer-discretionary, utility, and telecommunications companies tell another side of the story. The Forecasts focuses on stocks that earn Quadrix Overall scores above 80 for new buying, and high scorers are hard to find in some sectors.

No market sectors look especially cheap or especially expensive at this time, but many stocks in appealing sectors look cheap relative to their growth potential. The average technology stock in the S&P 1500 Index trades at 20 times estimated 2008 earnings but has a PEG ratio of just 1.22.

To calculate the PEG ratio, we divide the price/earnings ratio by estimated long-term growth in per-share profits. Technology, industrial, and energy stocks in the S&P 1500 Index all average PEG ratios below the index average. Couple that with strong Quadrix scores, and it’s easy to see why we find a disproportionate number of strong Buy candidates in those sectors.

SECTOR RETURNS
Within the S&P 1500, the financial, consumer-discretionary, and telecommunications sector indexes have substantially underperformed over the last year, which in turn has led to subpar long-term returns. Fundamentally, none of the three laggard sectors looks particularly appealing.
Index
12-Mo.
Price
Chg.
(%)
5-Year
Price Chg.
(Annual.)
(%)
10-Year
Price Chg.
(Annual.)
(%)
Consumer Discretionary
(24)
1
0
Consumer Staples
3
7
2
Energy
4
24
12
Financials
(35)
(2)
(1)
Health Care
-6
3
2
Industrials
(13)
9
4
Information Technology
(11)
7
1
Materials
1
15
5
Telecom Services
(26)
3
(5)
Utilities
(1)
11
3
S&P 1500 Index
(14)
6
2

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