This Year's Laggards Can Be Next Year's Leaders

A quick assessment of a few of them

2018 has been one of the weirder years I have seen in the past 32 (the span of my investment industry career). So, I take it in stride that while 5 of the S&P 500’s 11 sectors are up at least 5% this year through November 30th, 5 others are down between 2% and 10%. Of the laggards, 3 are down at least 5%. But in a market that changes its sentiment toward economic sectors more often than most humans eat breakfast, it is worth noting that today’s trash can be tomorrow’s treasure...or at least next year’s.

By no means am I predicting here. I am merely pointing out that buying what is currently out of favor is as intriguing a strategy as it ever has been, in a stock market that is whipped around by fast-money traders, hedge funds that don’t really hedge and ETFs, which make the buying and selling of “baskets” of stocks as easy as buying individual companies’ shares used to be. Given the massive volume increase in the ETFs devoted to S&P 500 sector investing (whereby one rotates in and out of tech, healthcare, energy, financials, etc.), I will safely assume that increased volatility between and within every one of those 11 sectors is now officially “a thing.”

That means that for reasons that transcend the market’s immediate opinion about the global economy, simply looking at what is down this year is at least a decent starting point to find the ever-elusive “value” in a stock market that in aggregate appears dangerously overvalued to me. But when we look at the 3 biggest losers of 2018 so far: Communications, Materials and Energy, the potential is there to have them re-considered as this year’s headlines fade into next year’s realities.

The communications sector has been revamped this year by S&P, and now contains a collection of businesses that used to reside in a few different sectors. TV programming businesses as well as internet ad giants and mobile phone kings adorn the sector, represented as symbol XLC. Some of the biggest in this group have taken a hit this year, but to the extent the broad market is resilient (a big, giant IF), the industry leaders here could play catch-up as investors hunt around for what was left out of 2018’s stock market gains...which again have been driven by only 5 of the 11 sectors.

Materials and Energy fall into the same bucket in that the fate of their companies’ stocks is typically a bi-product of the growth of the global economy. As I have written here during 2018, I believe the potential for a recession before most expect it is a big risk to investors. What precedes a recession? A slowdown in the positive rate of economy growth. This is already underway in parts of the world and I think it will hit the U.S. during the first half of 2019. That could put a lid on the prices of already depressed Materials and Energy stocks within the S&P 500.

But isn’t this article about current losers becoming winners? It is, but this is an ideal time to remind you of one of my favorite investing rules: always account for what can happen if you are wrong! So, if the economy goes all Freddie Krueger on us and just won’t die in 2019, I would expect to focus some attention on the potential to “buy low” in Materials and Energy. We are not there yet, but investing is about looking a few steps beyond today, so that you can be proactive, not reactive to major market events.

Perhaps the biggest “discovery” you should make after reading this article is that the stark divergence between S&P 500 sectors is something to watch carefully as the calendar turns. I have seen big mistakes made by investors that simply assumed that the year just-completed was some sort of prophesy about the following year. Don’t get caught in that trap.

For research and insight on these issues and more, click HERE.

I am the Chief Investment Officer of Sungarden Fund Management, the subadvisor to a long-short mutual fund (DNDHX) and the founder of Sungarden Investment Research, an investment management and equity research firm. Over the past three decades, I have managed daily liquid po... MORE

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Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors