Post by Bozur on Jan 29, 2008 1:46:38 GMT -5
Three Sectors To Watch In 2008
January 11, 2008 | By Ryan Barnes
Whenever January rolls around, I like to take a little time to analyze how the markets have performed over the course of the past year by sector.
While it's quite possible for a sector to fall into a multi-year slump, those that significantly deviated from the broad market averages in 2007 are worth a second look to see if today's environment suggests outperformance in 2008. With 2008 now underway, there are three sectors in particular worth looking at that had a big variance from broad market returns during 2007. (For an overview of how stocks are influenced by the business cycle, see Sector Rotation: The Essentials.)
A Quick Framing
Specific companies may fall in between one person's definition of a sector and another, but, on the whole, these broad categories of stocks can provide insight into the overall economy and ideas of where to look for stocks that are primed to beat the market going forward. In my figures and comments below, both U.S. and foreign-based ADRs are included.
Benchmark Review
Let's start by getting our benchmark averages out of the way. The almighty S&P 500 gained only 4.9% in 2007 (including reinvested dividends). It was the fourth quarter that really dampened returns with a 3.3% drop. So far 2008 has not been kind to the index, with all gains from 2007 now wiped out on the S&P. The tech-heavy Nasdaq finished the year at just under 9.5% growth, while the DJIA was up a little over 6% for the year. With those benchmarks in mind, let's take a look at our three sectors of interest.
Technology
Tech stocks in general had an outstanding year, far outpacing the S&P with sector gains of 11%. Previous standouts like Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL) extended their impressive profit and share price growth, while bellwethers such as Oracle (Nasdaq:ORCL) and Nokia (NYSE:NOK) regained some lost ground and market leadership with great individual years.
For 2008, tech stocks had a little extra momentum going into the last quarter because of their perceived distance and safety from housing and credit-related problems. As I've commented in an earlier article, I don't believe that's a viable investment strategy anymore. (To read my previous take, see Tech Sector No Longer A Safe Haven.)
As fears of recession mount, technology stocks are susceptible to valuation concerns and questions about the health of the consumer. For 2008, focus on companies that do a large portion of their business with corporate customers, and those with substantial international sales. The rest of the world is growing much faster than the United States, and this might be the year in which companies who are participating in that growth see some valuation multiple expansion.
Financials
The financial sector was quite a drag on overall returns, down over 6% for the year and nearly 10% in the fourth quarter alone. The deteriorating housing and mortgage markets proved to be too embedded in our financial system to hurt just a few isolated, pure subprime players. Major banks have already written off tens of billions in balance sheet assets that were invested in mortgage-backed securities; meanwhile home foreclosure rates have yet to reach a peak.
For 2008, while valuations are currently very low for some of the banks and investment houses, investors should still tread these waters with extreme caution. There are still plenty of falling knives out there, and corporate earnings will take time to stabilize while we wade through asset write-downs and balance sheet clean-ups. By the time business conditions start to look favorable again, financials may have easily dropped another 10% to 20%. The safest investment options here will be companies that made a concerted effort to avoid subprime-related mortgage debt, and those with transparent balance sheets. (To learn more, read Analyzing A Bank's Financial Statements.)
As a side note, trading volumes were strong across all the stock exchanges in 2007, and this bodes well for the exchange operators themselves in 2008. There's still some big consolidation happening in the industry, but volume growth and the proliferation of derivatives have made the growth rates attractive for growth-oriented investors.
Energy
Energy stocks dominated across the board in 2007, led by the massive integrated oil companies like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) which saw record profits once again. Oil in the $100 range certainly helps the cause, and the success spilled over to oilfield equipment and services firms as well as refining and distribution companies.
For 2008, while green initiatives continue to gain steam, the world still runs on oil - a lot of oil. Keep sector allocations in-line or higher to benefit from the favorable supply/demand balance. Oilfield service companies should continue to perform well as long as the price of oil stays high. (To learn more about valuation for this sector, see Oil And Gas Industry Primer and Unearth Profits In Oil Exploration And Production.)
research.investopedia.com/news/IA/2008/Three_Sectors_To_Watch_In_2008.aspx
January 11, 2008 | By Ryan Barnes
Whenever January rolls around, I like to take a little time to analyze how the markets have performed over the course of the past year by sector.
While it's quite possible for a sector to fall into a multi-year slump, those that significantly deviated from the broad market averages in 2007 are worth a second look to see if today's environment suggests outperformance in 2008. With 2008 now underway, there are three sectors in particular worth looking at that had a big variance from broad market returns during 2007. (For an overview of how stocks are influenced by the business cycle, see Sector Rotation: The Essentials.)
A Quick Framing
Specific companies may fall in between one person's definition of a sector and another, but, on the whole, these broad categories of stocks can provide insight into the overall economy and ideas of where to look for stocks that are primed to beat the market going forward. In my figures and comments below, both U.S. and foreign-based ADRs are included.
Benchmark Review
Let's start by getting our benchmark averages out of the way. The almighty S&P 500 gained only 4.9% in 2007 (including reinvested dividends). It was the fourth quarter that really dampened returns with a 3.3% drop. So far 2008 has not been kind to the index, with all gains from 2007 now wiped out on the S&P. The tech-heavy Nasdaq finished the year at just under 9.5% growth, while the DJIA was up a little over 6% for the year. With those benchmarks in mind, let's take a look at our three sectors of interest.
Technology
Tech stocks in general had an outstanding year, far outpacing the S&P with sector gains of 11%. Previous standouts like Google (Nasdaq:GOOG) and Apple (Nasdaq:AAPL) extended their impressive profit and share price growth, while bellwethers such as Oracle (Nasdaq:ORCL) and Nokia (NYSE:NOK) regained some lost ground and market leadership with great individual years.
For 2008, tech stocks had a little extra momentum going into the last quarter because of their perceived distance and safety from housing and credit-related problems. As I've commented in an earlier article, I don't believe that's a viable investment strategy anymore. (To read my previous take, see Tech Sector No Longer A Safe Haven.)
As fears of recession mount, technology stocks are susceptible to valuation concerns and questions about the health of the consumer. For 2008, focus on companies that do a large portion of their business with corporate customers, and those with substantial international sales. The rest of the world is growing much faster than the United States, and this might be the year in which companies who are participating in that growth see some valuation multiple expansion.
Financials
The financial sector was quite a drag on overall returns, down over 6% for the year and nearly 10% in the fourth quarter alone. The deteriorating housing and mortgage markets proved to be too embedded in our financial system to hurt just a few isolated, pure subprime players. Major banks have already written off tens of billions in balance sheet assets that were invested in mortgage-backed securities; meanwhile home foreclosure rates have yet to reach a peak.
For 2008, while valuations are currently very low for some of the banks and investment houses, investors should still tread these waters with extreme caution. There are still plenty of falling knives out there, and corporate earnings will take time to stabilize while we wade through asset write-downs and balance sheet clean-ups. By the time business conditions start to look favorable again, financials may have easily dropped another 10% to 20%. The safest investment options here will be companies that made a concerted effort to avoid subprime-related mortgage debt, and those with transparent balance sheets. (To learn more, read Analyzing A Bank's Financial Statements.)
As a side note, trading volumes were strong across all the stock exchanges in 2007, and this bodes well for the exchange operators themselves in 2008. There's still some big consolidation happening in the industry, but volume growth and the proliferation of derivatives have made the growth rates attractive for growth-oriented investors.
Energy
Energy stocks dominated across the board in 2007, led by the massive integrated oil companies like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) which saw record profits once again. Oil in the $100 range certainly helps the cause, and the success spilled over to oilfield equipment and services firms as well as refining and distribution companies.
For 2008, while green initiatives continue to gain steam, the world still runs on oil - a lot of oil. Keep sector allocations in-line or higher to benefit from the favorable supply/demand balance. Oilfield service companies should continue to perform well as long as the price of oil stays high. (To learn more about valuation for this sector, see Oil And Gas Industry Primer and Unearth Profits In Oil Exploration And Production.)
research.investopedia.com/news/IA/2008/Three_Sectors_To_Watch_In_2008.aspx