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Make Money With the Laggards

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The best stock strategy in the second quarter could simply be putting money to work in sectors that lagged in the first quarter.

JPMorgan chief U.S. equity strategist Tom Lee, in a note, said that trade has worked in four of the last four years, and in 11 of the last 13 years. The years in which the strategy failed were 2002 and 2008, both down years for the market.

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So this year, Lee suggests investing in first-quarter laggards, specifically materials and technology. Other factors also support outperformance by these sectors, he argued. The price-to-earnings ratios of these sectors are their lowest levels in a decade, even as analysts expect to see earnings per share growth of 17 percent for materials and 10 percent technology—well above the S&P 500.

For contrarians, a level of bearishness abounds in these sectors. For instance, short interest for both materials and technology has surged to multi-year highs, and for technology, it's at the highest level since 2006.

Lee highlighted names that he and the JPMorgan team believe are buys: AVG Technologies, Apple, Taser International, Tibco Software, Broadcom, Cadence Design Systems, Agilent Technologies, Check Point Software, and Rockwell Automation.

Not every Wall Street strategist agrees with this call, however. In an interview with CNBC, Jonathan Golub of UBS said he remains neutral on both materials and technology.

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As to the former, he pointed to falling commodity prices, as well as series of disappointing economic data, including Friday's jobs report, as clearly pointing to weaker overall demand. Also, analysts already are expecting relatively robust growth from this sector, he said, which creates opportunity for disappointment.

As for technology, on the consumer side, segments such as handsets and tablets are maturing markets, and there doesn't seem to be any disruptive, innovative products on the horizon, he said. Meanwhile, he noted, when it comes to enterprise, there is little indication that businesses are willing to spend their cash.

Instead, Golub remains bullish on consumer discretionary and consumer staples. The economy is weak, he said, but the consumer will benefit from higher asset values. He added that lower interest rates and falling debt burdens are having an important impact on funds available for discretionary purchases.

By CNBC's Josh Lipton

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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