Categorized | Investing, Personal Finance

Best Sectors in next 12 months

If one is trying to pick the best sectors to invest their money in the next 12 months, there are a couple places they could look:

  • the most beat up sectors
  • the sectors which will grow their profits the most

Most Beat Up Sector

Since Q3 2007, when the market peaked, 5 sectors out of 10 have saw decreases in their earnings.  Sectors and percent decreases are:

  • Financials: – 193%
  • Consumer Discretionary: -49%
  • Materials: – 12%
  • Telecommunications: – 10%
  • Utilities: – 5%

It is not surprising that Financials have seen the largest decrease in earnings (from a gain of $5.89 to a loss of $5.46). 

So if you’re looking for the most beat up sector, Financials are by and far the winner. 

Financials can be bought in an ETF (VFH).  Its largest holdings include Bank of America, JP Morgan, Wells Fargo and US Bancorp.  And this ETF has a 4.35% yield.  The US Banks will recover eventually.  And if you buy them now, you are getting them at more than a 60% discount since Oct 07.  The S&P is down only 38% in that time. 

Sector with Best Profits Looking Forward

The sectors which are supposed to grow their profits the most from CY 2008 to CY 2009 are:

  • Consumer Staples: 30%
  • Consumer Discretionary: 27%
  • Telecommunication: 15%
  • Health Care: 13%
  • Utilities: 9%

Consumer Staples can be bought in an ETF (VDC) and its largest holdings include Proctor & Gamble, Walmart, Phillip Morris and Coca-Cola.  It makes sense that Consumer Staples would be somewhat recession proof.  People need the goods sold at WMT regardless of the recession.

Consumer Discretionary can be bought in an ETF (VCR) and its largest holdings include Nike, McDonalds, Walt Disney and Home Depot.  This is the only Sector which makes both lists (most beat up sectors and best forward looking profit sectors).  These are the companies you think of when you think of the USA, McDonalds, Walt Disney, Nike, etc.  I think these brands/companies are so powerful is because Americans have used them for many many decades and will more than likely continue to use them going forward.

Telecommunications can be bought in an ETF (VOX) and its largest holdings include AT&T and Verizon.  This ETF has a yield of 4.45%.  Cell phones have largely replaced home phones and pay phones.  They are a way of life.  If I am without my cell phone for a day, it drives me crazy.  And many younger kids send/receive over 5000 text messages per month.  I think that VZ and T have fairly stable income streams looking forward.  People will always use their phones. 

Health Care can be bought in an ETF (VHT) and its largest holdings include Johnson & Johnson, Pfizer, Merck and Abbott Labs.  In this day in age, with every country on the globe seeing its population getting older, there is a high demand for health care.  Health care is fairly inelastic which means that price does not affect quantity demanded very much (if someone needs a specific drug to remain alive/healthy, they do not care how much that drug costs). 

Utilities can be bought in an ETF (VPU) and its largest holdings include Exelon, Duke Energy and Dominion Resources.  This ETF has a 3.81% yield.  Since October 2008, Utilities are flat (0% return), while the S&P is down more than 10%.  In the last yr, VPU has outperformed the S&P by that same 10% (fairly equal until Oct 08).  Utilities seem to hold up a little better than the average stock.  Utilities stocks are somewhat similar to health care, it is a plain fact that people need utilities regardless of the economy. 

Data is taken from S&P 500.  It can be found here.

All mentioned ETFs are Vanguard brand and very low cost.  They have expense ratios of 0.2% (for every $1000 invested you’ll pay $2 per yr in fees).

One Response to “Best Sectors in next 12 months”

  1. Rob Viglione says:

    Sir, can you post the sources for earnings projections?

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