As the US economic recovery looms larger, the gray cloud that has hung over the stock market for so long is finally starting to fade.
So whether you’re making broad sector bets or picking individual stocks, now is the time to put your money back to work and start rebuilding your hard-hit portfolio.
“The recovery has just started," says Bob Froehlich, senior managing director at The Hartford. The Dow’s move "from 6,600 to 10,000 is giving us back what we should have had in the first place,”
He expects the Dow Industrialsto hit 11,000 by the end of 2009 and 13,000 by the end of 2010.
“Through the next 14 months there are a couple of sectors that are going to lead us through this recovery,' says Froehlich.
Financial services is one. Because it has been so beaten down with investors overreacting to the economic fallout, financials "are positioned better than any other industry."
An expected uptick in mergers and acquisitions, combined with increased IPO activity and a steepening of the yield curve also bode well for financials—especially firms with investment banking franchises.
Sam Dedio, senior portfolio manager and head of U.S. equity at Artio Global Investors, is not quite as bullish on the financial sector as a whole, but he believes there is some opportunity for smaller banks, non-banking firms and diversified financials.
WSFS Financial , a regional bank based in Delaware, is one example.
“We think they have weathered this period better than others and will gain share as some of their competitors have been weakened,” he says.
Sam Stovall, chief equity strategist with Standard & Poor’s, says that as a result of the 2008 meltdown, the financial services sector has fallen out of their higher quality rankings – which assigns high scores to companies with above average consistency in raising earnings and dividends, dividend yields of 3 percent or more and a buy or strong buy recommendation from their analysts.
However, within the sector one name he does like is Pennsylvania Real Estate Investment Trust , an equity REITs with a focus on retail shopping malls and power centers.
This sector also has the potential to remain a market leader.
“I think the tech sector will be even better in 2010 than in 2009, says Froehlich, who adds, “technology tends to do well when the global economy is doing well.”
Referring to the bursting of the tech bubble and the September 11th terrorist attacks, Froehlich says, “we dealt with two dramatic crises in the U.S. which stopped the tech sector from rebuilding. We are doubly overdue for a replacement cycle within technology.”
The thinking is that going forward companies with money on their balance sheets will be more likely to spend it on technology than new hires.
Dedio, who has been overweight in tech for awhile, says he has started to scale back a bit because he thinks “a lot of the early money has been made.”
There are still some pockets that he expects will do well. One is Integrated Device Technology , a company that he says hasn’t really benefited yet from the recovery yet.
While the company has lagged thus far, he says it is leveraged to PC cycle, and with Intel reporting good quarterly results, it will help IDT going forward.
He also likes Microchip Technology, which he considers a good dividend play (the yield is over 5 percent) with 20-percent potential upside in the stock price.
Stovall—who notes that technology stocks rank pretty low based on their criteria with 60 percent of technology stocks coming in below average, mainly because they don’t offer a dividend—says Linear Technology, a semiconductor company that designs, manufactures and markets a line of standard linear integrated circuits, is attractive.
This is another sector that has the economic cycle in its favor.
“If this is a bona fide recovery, at some point the industrials will be among top three of four sectors in the Russell 2000,” says Dedio. “We are making sure we have a modest overweight in industrials now and have been adding to that."
Dedio likes Mueller Water Products , a play on water infrastructure that will benefit from stimulus plan spending on new or rebuilt water systems.
Stovall notes the industrial sector ranks second in terms of the greatest percentage of companies with above average earnings and dividend-quality ranking.
One name that scores particularly well is Caterpillar .
Dedio is also overweight in this area.
“Health care is a defensive play,” he says, but is quick to add some areas can still be very risky.
Dedio generally doesn’t invest in companies that are non-earners, such as drug developers that are far away from profitability.
At the moment, he favors diagnostic companies and orthopedic companies, such as Myriad Genetics . This molecular genetics diagnostics company makes a blood test that is used to detect gene mutations within people who have a high risk of certain types of cancers.
Myriad, he says, not only dominates its market but has great margins. It is also benefiting from the increased medical focus on early detection.
As a group, Stovall says health care ranks fairly low, largely because of increased regulation. In addition, he says, “we have seen a lot of major pharmaceutical companies…with dwindling product pipelines.”
One name that does rank well is Johnson and Johnson.
Other stocks, representing a variety of sectors, also place high on Stovall’s list.
In the consumer staples sector, which is currently the highest ranking sector, there is Altria Group.
In the energy and materials sectors—both of which are very commodity oriented and are at the mercy of the economic expansion and geo-political events—Chevron and PPG Industries score well.
In utilities, which rank below average as a group, Stovall likes Florida Power and Light . And in telecom, which also ranks fairly low, he likes CenturyTel . "I think because the sector has gone through a few personality changes." muses Stovall.
When looking at stocks, financial advisors say investors should also be sure to include non-U.S equities on their list.
“In terms of positioning globally, I would have 40 percent of assets in the U.S. and 60 percent in stocks outside U.S., " says Froehlich. "The story outside the U.S. will be better.”
He recommends 90 percent of that be allocated to emerging markets, particularly China, Brazil and Eastern Europe. To get this kind of exposure, a good option would be a diversified emerging markets ETF.
While there are various segments so the market that are likely to perform well as a whole, Stovall warns that the important thing is to invest in solid companies.
“Always pay up for quality because you’ll never be disappointed.”