The market is going higher, says Citigroup's chief equity strategist Tobias Levkovich, but that's still not a reason to listen to sell side analysts.
Earnings expectations, positive valuations, and better-than-expected credit conditions in the U.S. underscore Citi's S&P 500 target of 1,425 this year — $146 higher than the current market, he says.
Before this bullish backdrop, Levkovich shares his market dos and dont's:
Dos:
1) Semiconductors
"The semiconductor industry spent a lot of money in 2011 — 70 percent more building new fabs [chip fabrication plants]. This year, chip spending is down 30 percent," he says. "That's very positive for chip stocks, because you don't have new capacity to mess up their pricing."
Deutche Bank also upgraded semiconductorson Monday, sending the sector's index 1.7 percent higher.
2) Equity Income
"Dividends are important to bring investors back," Levkovich says. "You can buy some really high quality names with three to four percent dividend yields, and potentially get market appreciation. That's why the baby boomers haven't left equities."
3) Energy and Telecom
"The cash flow yields of these companies are substantially higher than are the financing costs of doing a deal," he says. "In energy, cash flow is 11 percent higher than their junk bond yields. So, we expect more mergers and acquisitions in energy and telecom services."
Don'ts:
4) Chemicals and Mining
"Chemicals are spending much more. Mining is spending about 20 percent more as well," Levkovich says. "That's going to put downward pressure on those commodities ."
The Dow Jones US Chemicals Index has been underperforming the S&P 500 since September 2011.
5) Health Care
"I'm not a big-fan of health care. Budgets will keep that under pressure," he says. "But, more importantly, the spread between cash flow yields and junk bond yields is about [4 percent]."
"Cash flow yield" is simply the amount of cash flow each share earns. The higher this yield is, the better able the company is to finance its activities. By contrast, "junk bond yields" indicates that the company is needing to borrow.
High corporate funding costs are, for Levkovich, separating the winners from the losers, who encourages investors to follow sector spending levels.
Additional News: US Bans New Mining Claims
Additional Views: Semiconductors Won't Shine Until Second Quarter
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Disclosures:
According to Citigroup policy, no part of Tobias Levkovich's compensation was, is, or will be, directly or indirectly, related to the specific recommendations expressed by him in public appearances.
Disclaimer