Previously we discussed Technology, energy as well as the healthcare sectors to see if we can beat the S&P500. In this piece we will investigate the consumer discretionary, financials as well as materials. As with the first part of the article, we started with the following:
As previously noted, with the market's stellar performance on Wednesday, it is getting a little bit more difficult to make the case that there is no such thing as a "February effect." This time the source of the gains were sparked by upbeat global manufacturing data as well as the progress with Greece as the country appears to be edging closer to the prolonged setback deal with private creditors. There continues to be much optimism in the market even though the economy showed to have slowed in the fourth quarter of 2011.
"Optimism" continues to be the operative word and it is one that I've sensed continues to be the theme of this sustained rally. But another premise for the increased buying is that investors have developed the sense that things are not as bad as they could be. The fact is, thought the recent numbers in terms of economic growth have brought about some disappointment, investors are beginning to realize that our economy is only a couple of years removed from discussions that once mentioned "the end of the world." For some perspective, today, the talk is of "slow growth" as opposed to of "slow death" from three years ago.
On Thursday, the Dow gained 6.51 points to close at 12,890.46. While the S&P 500 and Nasdaq edged up 1.99 and 11.37 points respectively. In particular, the S&P 500 has been on an impressive run so far on the year. But also tells a story of just how differently investors are thinking in 2012 when compared to the end of 2011 in terms of the sector gains.
As the chart shows above, both materials and financials are currently leading in terms of gains while consumer staples and utilities are in the red. The question is why, and what does this say about our investments and where you should be placing your bets in 2012? Let's take a look at some candidates here.
Consumer Discretionary - up 6.2%
With the consumer discretionary sector being up year to date by a respectable 6.2%, this means although the economy may not be growing as fast as we would like, we are still spending money on several items that are considered non-essential. We don't have to look too far before or perhaps only ever 10 steps before we see a new iPad or an iPhone. This obviously makes Apple (AAPL) a very attractive stock, as if this needed much convincing.
The interesting thing here is that while I categorize Apple under consumer discretionary, I am well aware that it really belongs under technology. But with so many options in terms of what defines "discretion," I think it also justifies this description. The company markets to consumers, and knows what we want before we have a need. The stock should be bought at any level under $500 as I feel it is heading to $600 within the next 12 months.
As with Apple, there are subscription services such as Sirius XM (SIRI) and Neflix (NFLX), and both certainly qualify as consumer discretionary. For the year, both companies are up by high double digits, while Netflix in particular is up over 70%. This is one reason that I think the stock should be sold until it takes a breather. I suspect that it will fall under $100 to consolidate before it will build more upward momentum.
As for Sirius XM, what can be said that has not already been said? Simply put, the stock is like a magician. It is one of those situations where one can only shake his head and appreciate the true meaning of misdirection and "sleight of hand" -- also known as volatility. With six trading days left until earnings, I am not sure if the stock is edging up in anticipation or merely going with the flow of the market. But regardless, without putting too much undue pressure on the company, it needs to deliver this quarter when it reports earnings on Feb 9. After having been in the stock for eight years, I am becoming less patient and less tolerant of disappointments.
Financials - Up 9.7%
If it surprises you that financials have been able to make the type of rebound that they have in 2012, well - it surprises me also. Even more remarkable is that its leader is the once vilified Bank of America (BAC). Getting straight to the point, Bank of America remains a buy in my portfolio by virtue of its recent fourth quarter earnings announcement where it reported a profit of $2 billion - essentially answering all questions as to its ability to execute. The stock is likely heading to $10, and investors will be looking for early indicators of what is to come in the next quarter
But its valuation continues to be the subject of much debate. On that note, with the bank sporting a P/E of 6, doing some simple calculations, I believe the bank might be considered as trading cheaply relative to its peers. If you couple this with the fact that it has approximately $2.2 trillion in assets, I continue to wonder just how undervalued its stock might still be if it only produces a "decent" return on these assets.
On $2.2 trillion, a half percent to 1% return on assets would equate to net income in the area of $22 billion, thus making the stock pretty undervalued. Investors want to know, with the stock being up 30% so far on the year, is now the time to sell - being that the January effect might be over? I don't think so. I sense this is not only a beginning for a Bank of America recovery, but a rebound within the entire financial sector.
Materials - Up 12.2%
Alcoa (AA) has recently made it to my portfolio because it continues to show just how much it believes in itself. At the start of the year I recommended Alcoa for several reasons and so far the company has done all it can to affirm my belief by having announced excellent Q4 2011 earnings. The stock and sector should continue to see upward movement with the recent study that suggests aluminum prices could spike up to $2,400-$2,500 per tonne.
Since my initial recommendation, the stock is up 17% to $10.20. As with other companies, the stock has been beaten up of late, due to slowness in business spending. For me, the optimism rested on the company's own confidence - to the extent where it believed in its ability to execute, assured that its long term fundamentals were intact. I continue to believe that this is a stock that should be acquired as it is heading toward $15 at some point during the year.