According to S&P Equity Research, the energy sector has performed best in the third year of bull markets since 1970, returning 16.2% to investors. This time around, energy stocks already appear to be a good bet for the next year.
Uprisings in the Middle East have led to surging crude prices. Violent protests that led to the ouster of Hosni Mubarak in Egypt have also unsettled Libya, where anti-government protesters are rebelling against Moammar Gadhafi's regime. Those uprisings have sparked similar protests in other Middle Eastern and North African countries, including Bahrain, Saudi Arabia, Yemen, Tunisia, Cote D'Ivoire and even Iran.
Since the Egyptian protests began Jan. 25, oil prices have steadily risen above $100 a barrel, taking a toll on the broad stock-market index. However, 15 of the top 25 best-performing stocks on the S&P 500 are energy-related companies, including Chesapeake Energy and Chevron .
RDM Financial's Sheldon say the energy sector is clearly the beneficiary of the rise in oil prices. For investors, he recommends diversified energy exposure on a global basis, while also looking for dividend yields.
Sheldon's firm has $650 million in assets under management, and it doesn't make big bets on stocks or mutual funds. Instead, the firm has many equally weighted stocks in the portfolios that RDM owns.
While Sheldon declines to offer specific equity picks, other portfolio managers have recommended Exxon Mobil because of the company's international exposure, revenue growth, access to capital and dividend payment.
Health Care Sector
With the uproar over health-care reform in the U.S., it's no wonder health-care stocks have lagged the market. The Health Care SPDR ETF is up 44% since March 2009, about half that of the S&P 500.
As the chart above shows, Teva Pharmaceutical has been one of those laggards. But with later-cycle, early-defensive sectors like health care expected to outperform this year, at least one fund manager expects Teva to be a winning pick.
Albert Meyer, manager of the Mirzam Capital Appreciation Fund , used to work with noted perma-bear investor David Tice of the Prudent Bear Fund . Rather than capitalize on the market with short bets, Meyer goes long on companies that don't have egregious executive compensation programs, which has brought him to Teva.
Meyer says Teva's long-term strategy is "very sound," referencing the bullish argument that a generic drug maker like Teva will be able to capitalize on the expiration of drug patents that other companies will be facing shortly. With baby boomers aging and middle classes forming in emerging markets, Teva seemed like a surefire bet for many investment managers.
But Teva's shares have underperformed, falling 16% over the past 12 months. "I'm puzzled by the lack of performance, but I'm not disappointed and I'm not giving up," Meyer says.
One of the company's weaknesses has been Teva's multiple-sclerosis drug, Copaxone, which ironically faces competition from generic drug makers. "They are fighting that and appear to be very successful," Meyer notes. "I think they'll grow their generic part of their business to offset this."
The good news for Meyer—and Teva shareholders—is that S&P Equity Research data show that the health-care sector has an average return of 9.5% during the third year of a bull market.
It took a 150% rally from the March 2009 low, but the consumer-discretionary sector now has a positive return of nearly 4% since Oct. 9, 2007, when the market was at an all-time high.
Consumer staples, on the other hand, rose just 55% since the March 2009 low, and yet the sector is the best performer since the market's record highs in late 2007. Investors who took a cautious approach to limit downside risk are winning, even taking into consideration the epic market collapse and recovery.
What's more, S&P Equity Research data show that consumer staples typically rise 8.3% in the third year of a bull-market rally. Consumer staples are considered safe during economic downturns and high inflationary periods while typically providing big dividends to investors.
Suddenly, those boring defensive stocks like Kraft Foods , Procter & Gamble and Colgate-Palmolive don't seem so boring after all.
Johnson & Johnson may be grouped among health-care companies, but fund manager Russell Croft views the stock as a contrarian consumer-staples selection with a strong balance sheet and attractive dividend yield of 3.5%.
"It's not the sexiest name in the world, but it's a triple-A rated company," Croft says. "In terms of composition, J&J is 40% pharma and 35% medical devices, but it is 25% consumers. It has broad-based customers, and half the revenue comes from outside the U.S."
Based in Baltimore, Croft Leominster has $800 million in assets under management, with $325 million in the Croft Value Fund . Croft has been a co-portfolio manager of the Croft Value Fund since he joined the firm in 1997
While not necessarily a consumer staples name, Mirzam Capital Appreciation Fund's Meyer says Paychex would similarly benefit from a rebound in consumer spending.
Paychex, Meyer says, is allowed to take payroll deductions for taxes or Social Security or Medicare, and hold on to them for 31 days, which they then earn interest on. The stock has underperformed given high unemployment and low interest rates, but that could change soon.
"When interest rates are up, they have a $4 billion float that they don't own but on which they earn money," Meyer says. "So higher employment means more payroll deductions and more paychecks for them. And if interest rates increase, it will really boost their earnings. And they have a nice 3.7% dividend."