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These Two Industries Will Outperform All in 2012

Almost three-quarters of S&P 500 companies that have reported third-quarter results have beaten analysts' estimates. Still, Wall Street is trimming forecasts for next year.

S&P 500 companies are now expected to post almost 8 percent growth in 2012 earnings per share. But material and industrial stocks will be the driving force, generating growth of 12 percent to 16 percent, said Morgan Stanley.

When the global economy begins to recover, those so-called cyclical stocks will benefit the most. Material and industrial stocks are already showing early signs of growth in the U.S., making it a good time to consider buying their shares.

Outside the New York Stock Exchange in lower Manhattan.
Photo: Oliver Quillia for CNBC.com
Outside the New York Stock Exchange in lower Manhattan.

Health-care and utilities companies beat analysts' third-quarter earnings estimates more than any other sector. That's because defensive industries tend to perform better in a weaker economy, which can also be seen in the stock performance of the groups. Utilities stocks this year have rallied 15 percent, and health-care shares are up 1 percent.

In October, the tables turned and cyclical stocks outperformed defensive shares. EPS growth from the cyclical sector is now expected outpace all others in 2012. Materials and industrials stocks will lead the charge as sales growth in the U.S. makes up for the moderation in sales growth in emerging markets.

S&P 500 companies' EPS estimates for 2012 have been declining for some time now, given increasing uncertainty surrounding growth prospects for the global economy. For cyclical sectors, estimates have declined by about 4 percent over the past three months, better than the 5.1 percent drop for the entire S&P 500, which was dragged down the most by financial, energy and telecom companies. They have had 2012 earnings estimates revised down by 7 percent to 11 percent in the past three months.

Cyclical companies to review include:

LyondellBasell Industries — one of the world's largest plastics, chemical and refining companies. The stock is up 2.6 percent this year and on top of that it has a solid 2.3 percent projected dividend yield.

Broadcom — the company designs and develops semiconductors for wired and wireless communications. With a price-to-earnings ratio of 12, it is trading about 40 percent below its five-year average multiple. Also, it has a net cash cushion of $4.50 per share.

General Motors — the world's largest auto maker. At $24, this stock has declined 39 percent from its 52-week high as earnings estimates have fallen. Currently the stock is trading at only five times earnings. The long-term potential for this company, coupled with $20 per share in cash, make this an attractive investment.

The Timken Co. — a leading maker of industrial and automotive bearings. The stock has declined 24 percent from its 52-week high and is trading at a price-to-earnings ratio of 8.5, about half its historical level. Additionally, recent insider buying means management thinks the stock is undervalued.

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TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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