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3 Sectors to Buy... 2 to Run From

Ross Givens

Ross Givens

43 followers

Not all stocks move together.

While large moves in the major indexes have the tendency to move most stocks in similar fashion, not every issue follows the market tide. To demonstrate this, let’s examine the performance of U.S. equities over the last 36 months.

Over this time period the Dow and S&P have advanced by 26.81% and 35.21%, respectively. Using the GuruFocus All-In-One Screener, I filtered down to the 1,762 U.S. stocks with market caps greater than $1.0 billion that do not trade over the counter. By setting the three-year price change to less than 0% in the Price tab, we find 202 issues that showed negative performance over the period. Using the new Valuation Map view on the far right side of the screener, we can view our stocks by sector and quickly identify underperforming areas of the market.

The worst performing sectors, judging strictly by the number of underperforming stocks, were Semiconductors, Application Software, Oil & Gas Exploration, Metals & Mining, and Specialty Retail.

Most of us are familiar with this concept of sector rotation. What’s hot one year will not necessarily be a Wall Street darling the next. Different sectors of the market shine at different times. Consumer cyclicals tend to outperform in rising markets and underperform in bear. Defense stocks fair better in war times. Mining stocks follow commodity prices. REITs are moved by interest rates. The list is endless.

We could even talk about the institutional flow of money, mutual fund rebalancing, quarterly window dressing, investor sentiment trends and dozens of other reasons why this phenomenon takes place. But it really doesn’t matter.

Instead of trying to forecast the macro picture, let’s look for sectors already in recovery. Having identified the weakest performers since 2011, we now want to further dissect our list to those currently outperforming the indexes. If this relative strength is found in a large percentage of stocks in a given underperforming sector, this should indicate a recovery underway.

Using our same list of 202 stocks in the All-In-One Screener, we can set the 12-week relative price change to a minimum of +5%. This will leave only those beaten down stocks that have outpaced the S&P by 5% or more over the preceding three months.

This filter cuts our list by just over half, leaving 96 stocks meeting our criteria. The Valuation Map view is again used to identify stock-heavy sectors and color-coded performance over the previously established 12-week recovery period.

We now have a fairly clear view of the sectors most likely to be entering a recovery phase. Of 148 available industries, only three contain more than six stocks: Oil & Gas Exploration & Production, Semiconductors, and Metals & Mining.

To take advantage of the coming rotation, there are a few options. It is generally advised to own a basket of stocks in each prospective industry. This will both limit risk and ensure that you take part in the movement of the whole sector. You could buy all of the stocks that showed up in the screen, only those with the lowest P/E or P/B, or lower your commissions by simply investing in the corresponding ETFs. Below are the ticker symbols of the screener results as well as some ETF options:

Metals & Mining Stocks: SWC, NEM, GSM, FCX, CMP, CENX, AA

Metals & Mining ETF: XME (SPDR S&P Metals & Mining ETF) 0.35% expense ratio; -2.52% YTD

Oil & Gas Exploration & Production Stocks: XCO, WTI, WLL, UPL, SD, NFX, CHK, EVEP, DVN, DNR, CRK, APA, HK

Oil & Gas E&P ETF: XOP (SPDR S&P Oil & Gas Exploration & Production ETF) 0.35% expense ratio; +10.90% YTD

Semiconductor Stocks: VSH, VECO, SMTC, RMBS, PMCS, QVTI, ONNN, AMD, HITT, FSLR, DIOD, CODE, ALTR, CAVM, ISIL

Semiconductor ETF: XSD (SPDR S&P Semiconductor ETF) 0.35% expense ratio; +8.74% YTD

Now for the bears…

To find overbought sectors potentially reaching the end of their growth cycle, we can perform the same analysis in reverse order.

Starting with the same list of 1,762 stocks, we will first scan for those outpacing the market by sizable margins. The S&P 500 gained just over 35% in the preceding three years which works out to an 11.78% annualized return absent dividends. I set the three-year annualized price change filter to > 20%. The result is a list of 534 stocks that have outperformed the market by almost double.

Finally, I want to find those issues that are now underperforming the market. To isolate this group, we can set the 12-Week Price Change Relative to the S&P to a maximum of -5%. The resulting list contains 66 stocks that have been outperformers since early 2011 but are now demonstrating weakness.

Looking at the Valuation Map view, two sectors quickly stand out – Application Software and Biotechnology. Some of these stocks are well on their way into a correction. Shares of 3D Systems (DDD), which gained 145.6% in 2013, have already been cut in half. Isis Pharmaceuticals (ISIS) put up an even more impressive 257% return but is now being taken to the woodshed.

For those with exposure here, my advice would be to move out of these sectors swiftly. Do not pass go, do not collect $200, just sell what you own and move on. There are areas of the market far more worthy of your investment dollars.

The sector ETFs further reflect the aforementioned change in momentum. XSW, the SPDR software and services ETF, is down 11.88% year-to-date. Biotech is down 5.11% over the same period and likely has much further to go.

The specific stocks appearing in our screener results are as follows:

Application Software Stocks: ULTI, TYL, SSNC, NOW, N, MDSO, LOCK, CSOD, DDD, ACXM

Biotechnology Stocks: SGEN, NPSP, MDVN, ISIS, INCY, ALNY, CELG, CBST, BMRN, ARNA, ACAD, GILD

Although screeners are most commonly used by stock pickers, this demonstration highlights their functionality for big picture analysis as well. The All-In-One Guru Screener is the best one I’ve ever used and it is one of hundreds of research tools available exclusively for GuruFocus Premium members.

Not yet a member? Sign up for a FREE 7-Day Trial and test drive the full suite of premium tools. If you decide it’s not for you, cancel and owe nothing. It's completely risk free.


Rating: 5.0/5 (5 votes)

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Comments

80below
80below - 6 months ago

i have to agree but i want every stock i see so don't listen to me

aaronbug
Aaronbug premium member - 6 months ago

Great site and screens like this bolsters one's confidence in final stock/ETF selections or rejections.

kfh227
Kfh227 premium member - 6 months ago

That's funny. These results mostly mimic my observations and in turn, tye sectors that I have been heavily invested in lately.

pukkie
Pukkie - 6 months ago

Ross, this was an excellent explanation of all the possibilities this site has to offer. Hope you will provide us, from time to time, with more of this or maybe even some updates on what you wrote.

Thanks

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