Every few months, hedge-fund managers take a fresh look at the
, trying to figure out key trends that will
the best returns in the months ahead. Once they complete their
analyses, they rotate some money out of sectors that no longer
appeal into sectors that provide the freshest upside.
With 2011 winding down, this is a good time for individuals to
anticipate where the action will be later this winter, and on into
the spring and summer.
To be sure,
as I've recently noted
, the economic outlook for 2012 doesn't look all that different
than 2011. The economy should grow at a modest pace,
should remain benign, and the U.S. consumer will likely get a
little healthier. But you can sense a slight shift in sentiment as
fears start to diminish and hopes that we may start to see more
solid growth start to build -- at least in 2013 and beyond. This
means what worked in 2011 won't necessarily work in 2012.
For example, utility stocks posted solid results this year, rising
roughly 15% on average, as they represented safety in a storm.
and health care stocks rose about 10%, according to Goldman Sachs.
There's no reason to sell these kinds of stocks in 2012, but
there's also little reason to expect them to lead the
once again. Instead, here's my sector-focused game plan for 2012.
The crisis in Europe has been especially hard on banking stocks as
fears of a Lehman Bros.-like contagion began to build. A typical
financial services stock fell roughly 10% this year, but many
within the group fell far more sharply. We've discussed the merits
of Warren Buffett's favorite bank stock,
Wells Fargo (NYSE:
I remain convinced
represents the best upside in a group that is likely to rotate back
into favor in 2012.
Many bank stocks -- including Citigroup, now trade well below
-- which is reason enough to expect a sector rally when the
European crisis recedes. Yet Citigroup's fast-increasing exposure
to Latin America and Asia still fails to get much respect on Wall
Street. This is bound to change as these foreign operations
generate superior returns to those seen in Europe and the United
States. By 2013, Citigroup could also be talking about improving
operations domestically, as the housing market gets back on its
This group rebounded nicely from the March 2009 levels, but many
key stocks have slipped considerably after peaking this past
spring. Stocks such as
have slid 25% from their peaks, even with their long-term outlooks
remaining quite bright. Yet for my money, the biggest gap between
investor perception and reality can be found among automakers and
auto-parts suppliers. These companies emerged from the 2008/2009
economic downturn in far stronger shape, and even though they're
well up off the lows seen back then, they're also well below their
Auto-parts suppliers such as
Magna International (NYSE:
are 30% to 40% off of their 52-week highs and look awfully tempting
trading at seven or eight times projected 2012 profits. Yet two
publicly-traded auto stocks may be the biggest bargains of all,
trading at even lower multiples.
represents the biggest value
in the group, as its entire operations are assigned zero value
after its net cash is excluded from the
represents the better operator of the two. Which one appeals the
most depends on your investing preference.
3. Consumer discretionary
For the past three years, we've been hearing tales of consumer
deleveraging. Millions of Americans have sought to repair their
personal balance sheets by paying off
loans, shortening vacations and getting a little more use out of
old clothes and appliances.
The retrenchment in spending has been partially fueled by fears
that the U.S. economy may fall off a cliff. But it's becoming
apparent that the worst-case scenarios for the U.S. economy simply
won't come to pass. This should, with each passing month, make
consumers a little less cautious. Few expect a spending boom in
consumer discretionary spending, but even a modest upturn would
have an outsized effect for any businesses that operate with
high-fixed costs and low-variable costs.
Does thismean consumers will replace aging washing machines and
dishwashers? If so, then
, trading at around six times projected 2011 profits, looks like
quite the bargain. Will Mom and Dad treat the kids to a vacation
instead of a "stay-cation?" If so, then
, trading at levels seen back in 1998, may get a solid lift.
For my money, the major airline and hotel stocks stand out as
consumer discretionary subsectors with the strongest upside
potential. Both of these industries may sell more plane seats and
hotel rooms, respectively, so they may be able to boost prices for
each seat and room as well -- a double-barreled gain that could
Delta Airlines (NYSE:
should fare very well in a slowly-improving economy -- if oil
prices don't shoot through the roof. In the lodging space, keep an
Starwood Hotels (NYSE:
Marriott International (NYSE:
REIT Host Hotels (Nasdaq:
, all of which are well off of their 52-week highs.
Risks to Consider:
Right now, the risks start and end with Europe. The U.S.
economy appears to be on the mend, but a deep slump in Europe would
blunt any momentum we may be seeing here at home
Action to Take-->
Keep your expectations in check. Few of these stocks (outside of
Ford, GM andDelta ) appear capable of really big stock price gains
in 2012. But all appear poised to deliver respectable 20% or even
30% returns in the coming year if the U.S. economy keeps showing
signs of improvement.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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