As we enter the late stages of the economic and stock market cycle, prices tend to get more volatile and performance dispersion can vary greatly. Early in bull markets, momentum and resurgent growth tend to “lift all boats,” with every category of stocks generally performing well. Late in a cycle that changes and investors have to be more cautious about where they over and underweight their portfolios. Some sectors and categories will do better than others.
Below we’ll take a look at a few sectors and provide our outlook:
Healthcare – a nice blend of growth, innovations and defensive corporate strategies make this sector very interesting. Innovations in different areas of medical treatment, like oncology and immunology among others, are ongoing and make long-term growth prospects look promising. Expansion opportunities are opening up in the Asiatic region and U.S. pharmaceuticals. Additionally, medical device and supply companies are revamping their Asian sales models and secular earnings and growth for these companies are not only plausible but likely. Within healthcare, we at Zacks Investment Management categorically like healthcare distributors, healthcare supplies, healthcare facilities and managed healthcare.
Technology – growing internet usage and ever-rising demand for smartphones worldwide are expected to drive ad revenues for companies like Facebook and Google. Additionally, with that, companies like Amazon should benefit from increasing web accessibility for consumers to goods for purchase. A stronger dollar has been somewhat problematic in this space. For example, in 2015 U.S. information technology companies generated about 60% of their sales from overseas, compared to 48% for companies in the broader S&P 500 index. Also, a stronger dollar makes goods more expensive for the foreign customer. Apple Inc., for instance, generates about 66% of its revenue from outside the U.S. and, in its earnings statement, said that the stronger dollar had cost it nearly $5 billion in Q4 2015 earnings. These are just headwinds, however, and aren’t necessarily insurmountable. In the technology sector, we like information technology and semiconductors at the moment.
Defense (sub-sector of Industrials) – increasing geopolitical tensions make the defense sub-sector interesting in 2016. With the rise of terrorism, defense spending will almost assuredly rise validated by the fact that the U.S. government is expected to spend nearly $80 billion on defense in the next two years. A positive outlook for the military budgets coupled with bargain valuations in the sector make defense spending and related stocks worth considering.
Bottom Line for Investors
Even if you have conviction about a certain sector, it doesn’t necessarily mean every stock in the sector can or will do well. Investors have to examine individual companies and their competitive advantages to decide which ones will outperform within the group. At Zacks Investment Management, we have created a sophisticated stock screening process to rank stocks by a variety of fundamental factors, perhaps the most important being forward looking earnings estimates and adjustments.
Disclosure