From: James Cramer
Sent: Monday, January 2, 2011 6:02 PM
To: Nicole Urken
Subject: Re: The playoffs
Comments below. I am playing it strictly by the book for analysis looking at the best S&P and the best Nazz
This week on Mad Money, we have been combing through the best performers of 2011 in a ‘Superbowl competition’ of the stocks that locked in the most upside in the S&P and Nasdaq.
So who cares? Isn’t 2011 behind us? Well, yes. But identifying what has worked in the past twelve months can be one important tool used to best position yourself as an investor going into 2012. Why? Because, as much as we like to think (for the sake of New Year’s resolutions) that January 1st welcomes in a complete new leaf and fresh beginning, the calendar shift is ultimately psychological (with all due respect to the Mayans!) and won’t instantly trigger major rotations into new sectors. And thinking about what sectors are going to work next year is key—because, after all, a great deal of a stock’s move does depend on its sector—to some degree due to the “ETF-ization” of stocks, as Jim discussed on Tuesday.
In addition, the defensively postured sectors that were the best performers in 2011—the utilities, consumer staples, and healthcare groups—continue to be well-situated in the current environment given continued macro uncertainty in Europe. (It’s notable, too, that the best performers of the Dow were also defensively postured names—McDonald’s , IBM , and Pfizer. Plus, as Adam Parker of Morgan Stanley pointed out in his strategic outlook note on Tuesday, the market continues to reward dividend yielders … Not to mention that over the past century, over 40 percent of the S&P total return has come from dividends (data courtesy of Wharton wizard Jeremy Siegel). With cash balances at record highs (over $1.4 trillion in net cash on the balance sheets of the largest 1500 US companies), there are many opportunities to seek returns in companies that are returning this cash to shareholders via dividend payments—particularly at a time when treasuries are yielding less than 2 percent.
However, this approach should not suggest that you should blindly buy the top names in the utilities, consumer staples and healthcare, where the sectors were up 14.8 percent, 10.8 percent, and 10.1 percent, respectively, in 2011. This strategy is misguided for the following three important reasons, with some key stock takeaways:
(1) While dividend yields do offer some downside protection, they are less attractive the higher a stock moves. Particularly when it comes to ‘accidentally high yielders’ –names whose dividend yield has surpassed 4 percent because the stock has not performed well—there is less downside protection after the stock runs up and the yield, consequently, comes down. The attractive yield and valuation of AT&T is one of the reasons we highlighted it over Verizon on Tuesday’s show for example.