Sector ETFs: Healthcare Reigns

by: Scott Martindale

Despite its value orientation making it take a relatively defensive posture, Sabrient’s fundamentals-based SectorCast-ETF model has been performing well even as the market continues to hit new highs. This is because leadership has swung to traditionally defensive sectors like Healthcare, which continues to score at the top of the rankings while also showing strong momentum. With the Massachusetts election victory of Republican Scott Brown putting in doubt the Obama administration’s healthcare plan, I’m eager to see how healthcare stocks react.

Latest rankings: SectorCast is designed to take a one-month forward look, and this week shows almost no change in the relative scoring. Healthcare (XLV) comes back this week to reign supreme with the same high score of 80, and Utilities (XLU) stays in second place with a score of 75. Their leading scores are powered primarily by their low aggregate projected price to earnings ratio. Return ratios are also strong—particularly return on equity for XLV and return on sales for XLU.

In the middle of the pack, InfoTech (NYSEARCA:IYW) strengthened while Telecom (NYSEARCA:IYZ) weakened, due to the number of analyst upward earnings revisions among their constituent stocks during the week.

Top-ranked stocks within XLP and XLV include Merck (NYSE: MRK), Humana (NYSE: HUM), American Electric Power (NYSE: AEP), and Edison International (NYSE: EIX).

At the bottom of the rankings, we find the usual suspects of Materials (XLB) and Industrials (XLI). XLB continues as the fundamentally most overvalued sector with a low score of 30, and now its technical strength has waned as the dollar has stabilized. There is no change in its relatively high aggregate projected P/E and poor return ratios—both return on equity and return on sales. XLI came in this week with a score of 39. It remains hampered by a poor projected change in year-over-year earnings across the sector.

Low-ranked stocks within these sectors include Alcoa (NYSE: AA), Vulcan Materials (NYSE: VMC), PACCAR (Nasdaq: PCAR), and Monster Worldwide (NYSE: MWW).

These scores represent the view that Healthcare and Utilities stocks may be undervalued overall, while Materials and Industrials stocks may be overvalued.

Performance: The table below shows the performance of each of the prior four weekly portfolios as of the market close on Tuesday, 1/19/10.

Click to enlarge

The cooling of Materials as the dollar has stabilized, while Healthcare continues to forge ahead, has allowed the model portfolio performance to shine once again. Sector Detector has demonstrated that an absolute return approach is effective in positioning an ETF portfolio to survive and thrive in any market climate.

Disclosure: Author has no positions in stocks or ETFs mentioned.