Stock picks for the second half

Traders on the floor of the New York Stock Exchange.
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Traders on the floor of the New York Stock Exchange.

Monday's violent selloff could be the prelude to a more volatile second half, but strategists still expect the S&P 500 to rise 7 percent or more this year.

In the worst trading day of the year so far, several analysts were on the lookout for opportunities in their second-half sector picks—financials, health care and technology.

"We don't anticipate the news over the weekend or the market reaction to that to impact the second half of the year," said Mike Arone, chief investment strategist at State Street Global Advisors. "We think cyclical parts of the economy—consumer discretionary, health care, tech and financials (will do well)."

Economic growth should average 2.5 percent in 2015, U.S. Bank Wealth Management said in its midyear outlook. The firm forecasts a 7 to 9 percent return from the S&P in 2015, with earnings growth of about 5 percent.

Greece aside, that pickup in the economy should support the key event on the calendar for the United States: the first rate hike in nine years.

"Factors determining sector performance over the next six to eight months appear to be the result of capital expenditures, a continuing rise in consumer technology and the Federal Reserve's plans to normalize monetary policy," Brad Sorensen, managing director, market and sector analysis at Charles Schwab, said in the firm's midyear report.

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"As a result, we believe that both technology and financials could outperform, while we are negative on the prospects for interest rate-sensitive sectors, such as utilities and telecommunications," he said.


The Federal Reserve has indicated it could raise short-term interest rates as early as September, especially as economic data continue to point to moderate growth.

Banks and diversified financials (68 percent of financials sector) are "more likely to benefit from modest increases in interest rates" in the three months leading up to a Fed tightening cycle, according to historical analysis by Ned Davis Research.

Financials also perform well in the three months after a Fed tightening cycle, as do information technology and health-care stocks, while consumer discretionary has the worst returns, the Ned Davis note said in June.

Health care

Analysts continue to see further upside for the top-performing sector in the S&P 500. Up more than 8 percent year to date, health care has several tail winds from the Supreme Court ruling on the Affordable Care Act last week and anticipated deals.

The S&P managed-health-care sector is up more than 2.5 percent in the last month and more than 30 percent so far this year amid talk of consolidation among the major insurance providers.

"You just want to listen to the market and the market is saying there is going to be more and more consolidation in the major health-care names," said Marc Chaikin, CEO of Chaikin Analytics. He recommends buying heath-care stocks such as Humana and Cigna on weakness.

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Merger and acquisition volume for the first half of the year is more than 30 percent above the same period last year, with health care the top-targeted sector, according to Dealogic. The sector has led deals in three of the past five quarters and is expected to see more action.

Brian Hennessey, co-portfolio manager at Alpine Funds, favors Medtronic and UnitedHealth Group for their ability to generate positive free cash flow every year for more than 25 years and offer dividend growth.

Information technology

In addition to health care, Hennessey is bullish on technology. His top pick in the sector is TE Connectivity, which is one of the world's largest electronics connector companies.

"We think this is a great way to invest in the secular growth in electronic content in the automotive industry as autos get more efficient, more connected and more autonomous," he said.

Kim Forrest, senior equity analyst at Fort Pitt Capital, said the firm maintains long-term holdings on IT names within the sector such as Intel, Xilinx and Sandisk.

After a visit to Asia, Pacific Crest analyst Michael McConnell on Monday reiterated overweight positions on chipmakers Avago, Qorvo and Skyworks. The firm remains bullish on Xilinx and Intel, but reduced price targets on the stocks due to near-term headwinds.


The bullish outlook on technology and health care supports continued gains in biotechs. Positive catalysts for the sector could come if there are favorable decisions from the U.S. Food and Drug Administration this summer on drugs from Biogen, Regeneron and Amgen, said Paul Yook, portfolio manager of the $55 million BioShares fund. He recommends investors buy biotech stocks on pullbacks.

Such buying opportunities could increase, especially given the market's sensitivity to the unsolved Greece crisis. Several analysts expect a pullback of 5 percent or more in the stock market this summer, before recovering.

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"U.S. stocks have managed to nudge their way higher so far this year, but have been in the narrowest range in S&P 500 history. Historically, narrow ranges have typically broken to the upside, but a risk of correction still exists," Charles Schwab analysts said in a June note.

Disclosure: Hennessey has positions in Medtronic, UnitedHealth and TE Connectivity.