Four Sectors Most Likely To Lead The Market - Winterizing Your Portfolio 2009 - Special Report

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Four Sectors Most Likely To Lead The Market

Published: Wednesday, 28 Oct 2009 | 2:57 PM ET

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By: Jennifer Woods,
Special to CNBC.com

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.

Recovery sign
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 Industrials to hit 11,000 by the end of 2009 and 13,000 by the end of 2010.

Economy: In Focus

“Through the next 14 months there are a couple of sectors that are going to lead us through this recovery,' says Froehlich.

Financials

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.

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WSFS Financial [WSFS Loading... () ], 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 [PEI Loading... () ], an equity REITs with a focus on retail shopping malls and power centers.

Technology

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.

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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 [IDTI Loading... () ], 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 [INTC Loading... () ] reporting good quarterly results, it will help IDT going forward.

He also likes Microchip Technology [MCHP Loading... () ], 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 [LLTC Loading... () ], a semiconductor company that designs, manufactures and markets a line of standard linear integrated circuits, is attractive.

Industrials

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 [MWA Loading... () ], a play on water infrastructure that will benefit from stimulus plan spending on new or rebuilt water systems.