Monday, March 19, 2012

Sector Performance Divergences and Potential Opportunities

By a number of measures, investor sentiment has risen sharply along with stock prices in recent months.  The increased desire for returns--and tolerance of risk--is evident in the market performance of various sectors of the stock market.  Using Dow Jones Industry Groups, it is apparent that investors are pricing in an economic recovery and the greater market volatility that goes with that.

Industry groups such as paper, autos, home furnishings, hotels, travel, banks, and industrial machinery are leading the market this year (up 20% or more), while pharmaceuticals, food and beverage, telecoms and utilities are roughly flat.  This may simply be a justified reversal of last year's market performance in which stable companies with high dividends provided superior returns.

But there seem to be some anomalies that may provide opportunities--especially assuming the risk tolerance and optimism are warranted.  (I think they are not.)  Though auto stocks are up 20%, tire stocks are down 8%, for example.  A stronger economy would mean that more goods are shipped, yet rail stocks are up only 4%, and truckers are up only 6%.  Is it weakness in coal shipments for the rails and higher fuel costs for the truckers?  I still like the oligopolistic nature of the rail sector and would focus on it after a market decline.  Insurance stocks are up 23%, but insurance brokers are up only 2%.  Similarly, hotels are up 21%, but restaurants and bars are up only 6% and airlines are up less than 5%.

After a market rally that has lifted key indexes more than 25% in the U.S. since last autumn, there are likely few opportunities until prices declines.  But for those who are compelled to be fully invested, there may be opportunities to shift one's emphasis among various industry sectors of the market.

Steve Lehman

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