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In
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A few days ago,
we mentioned a sector-based outlook and discussion was on the way. Though
at the time the intent was to simply update our 2010 sector an industry
forecast (and post some current charts), the more our research staff
dug into waning and emerging trends, the more important this discussion
became to
everyone.
So, rather than
bury it in a blog, we're issuing our sector and industry expectations -
specifically
for small cap stocks - in this edition of the newsletter. Traders and
investors will both want to take notice, as the divergence between
winners and losers may well be the key to beating the market in what's
apt to be a tepid summer.
And remember,
the goal is to find the next big winner - not the previous big winner,
or even the current big winner.
As
said above, there's a tricky difference between 'strong' and 'near the
end of the rally'.... and most small caps within most sectors do indeed
look like their better days are behind them. So, we've deliberately screened
each and every sector from a comparative, stand-alone, fundamental, and
momentum perspective in an effort to find the next big winners from the
small cap world. In no particular order, they are:
 Telecom
Depending on
which grouping you're considering, this may or may not include wireless,
and may or may not mean 'integrated' telecom. For our purposes though,
we're considering all domestic telecom stocks as part of the telecom sector.....
landline, wireless, and long-distance carriers, etc. It's an important
distinction to make, since the international long-distance providers
are weighing the group down (dead weight that's obvious on our chart).
Though the S&P
600 Small Cap Telecom Sector Index has been the worst-performing small
cap sector for almost any time frame since March of last year, that
lag may finally be coming to a close. The index has kept pace with the
rest of the market over the last month or so, as investors start to acknowledge
they need safer holdings as we enter phase two of a shaky economic recovery.
 Financials
Yes, it's a
little obvious, but no, the rally from the small caps in the group isn't
over
baked yet - there's quite a bit more upside left ahead. The S&P 600
Financial Sector Index, for example, is still about 40% under 2007's peak
highs. And, unlike most other sectors and/or other market caps,
this group's bullish pace is not slowing at all.
Granted, part
of this recent strength is stemming from the rebound in the banking industry
(regionals, in this case) and real estate/REITs. It's still a rebound though,
with lots more room to recover; don't miss an opportunity trying to rationalize
why something shouldn't be going higher.
 Consumer
Discretionary
The small caps
from the consumer discretionary segment have done well since the March
'09 rebound, but have really turned up the heat since February....
probably the result of year-over-year comparisons that didn't look disastrous
anymore.
Whatever the
reason, the S&P 600 Small Cap Consumer Discretionary Sector Index has
been almost bulletproof as the economic revival wears on; we'll just deal
with the fact that it's overbought. (The best of the best of the best trends
manage to stay overbought with no problem - a rarity, but it happens.)
Notes on
Sector Outlooks
None of this
is to say that small caps from other sectors won't or can't move higher
over the foreseeable future. Our only point is that these are arenas you
may want to make sure you have some, or even a little extra, exposure
to.
Now, as for
detailed industry outlooks....
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Emerging
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While we should
expect - and do generally see - consistency between sector and industry
outlooks (the bullish outlook on the telecom sector dovetails into a bullish
outlook specifically for wireless stocks, for instance), there are certainly
going to be worthy exceptions to the bigger picture sector calls when we
drill down into individual industries.
In any case,
we view the following industries as areas that are better positioned, technically
as
well as fundamentally, than others for the next several months:
 Healthcare
Facilities
Hospitals,
for
the most part. The uncertainty of what the healthcare overhaul would look
like kept the buyers away at a point in time when the industry was recovering
profits, making now the proverbial 'perfect storm' for healthcare
facilities.
Computer
Hardware
It's a vague
definition, but probably for the best - this could have almost as easily
been a bullish call on the tech sector. Nevertheless, our focus is actually
on the companies that make physical, tangible pieces of computers (as opposed
to software, or service providers, or IT consultants).
Household
Products
What exactly
constitutes a 'household product'? It's another catch-all term that
includes durable as well as non-durable items..... everything from batteries
to soap, and from lawnmowers to furniture. That open-endedness can be a
good and bad thing if you're trying to pick a specific stock though.
Home Entertainment
Software
If it rings
a bell, it's because we specifically went bullish on the smaller names
in this group back
in February. Nothing's really changed since then, except now, we're
actually seeing some progress.
Insurance
This includes
all insurers - life, health, property, and even insurance brokers. Investors
remained gun-shy a little too long in the wake of the AIG debacle, overlooking
the fact that most of these names are still very profitable. In fact, some
of the smaller names thrived in the nasty environment.
Thrifts/Banks
Since we're
talking about small caps specifically, almost by default we're talking
about regional banks in this category, many of which didn't venture too
far into the now-disastrous subprime loan market. Don't forget about thrifts
and S&Ls either .
Aerospace/Defense
Here's another
one we've looked at before.... back
in mid-February. While it can be tough to carve them out, we're especially
interested in the 'defense' names within the aerospace/defense group. Be
sure to check out our original comments for specific stock ideas.
Steel
And finally,
what
would any economic rebound be without an increase in the usage of steel
to build all those cars, building, and machinery? This industry's stocks
are still a little hit and miss though, so don't get sloppy with any picks.
They're all talking big games for 2010; not all will deliver
on the hype. Still, it's a recovering industry and a young rally from
its stocks.
By the way,
the red lines on the small cap industry chart are 200-day moving average
lines. As you can see, in almost all cases, these stocks are just
beginning to make upward moves. Most other indices are dangerously
extended beyond their 200-day lines.
Notes on
Industry Outlooks
As was the case
with the sector outlook, these industries aren't the only investment-worthy
ones, nor are these guaranteed to outperform the market. However, given
the underlying corporate performance along with the fact that most are
just now starting to move on a technical basis, we can say these
groups offer better odds of strong results in the foreseeable future.
We'll start
posting some specific 'best of' stock ideas in the blog later this week.
Stay tuned.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
