HideAdFrame('StoryToolbarSponsorship');ChangeSponsorAdTitle();What Will Lead
Stocks Higher? Here Are Four CandidatesLEADERSHIP, STOCK MARKET NEWS,
INVESTMENT STRATEGY, RESEARCH IN MOTION, APPLEPosted By: Jeff Cox | CNBC.com
CNBC.com | 15 May 2009 | 02:31 PM ET
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the adage is true that the group that led the last bull market doesn't
lead the next one, that means investors will have to forget about banks
and consider a new array of choices.Some
already have: While banks have led the most recent rally, few expect
the sector to continue its sharp rise upward. The need to raise capital
by selling shares is likely to suppress gains in financial stocks,
leaving open a path of opportunity for other sectors.While
the rebound in stocks is likely to remain uneven, three sectors have
begun to emerge as the new leaders. And some analysts see a fourth
possiblity: picking the top-tier stocks in a variety of sectors. Here's
a look at all four strategies.CommoditiesMarket pros most often mention basic
materials as the group most likely to take the market higher."On
a longer-term basis, commodities are still going to be the main show,
and what we've seen with the financials has just been a sideshow," says
Peter Miralles, president of Atlanta Wealth Consultants. "It's good
that the financials are being capitalized, but long-term the
commodities will continue to perform."Commodity
stocks would be likely to outperform the commodities themselves if
fears about the Obama administration's position toward trading develops
into a worst-case scenario where derivative trading is hampered by
regulations that inhibit speculation.Earlier
this week, Treasury Secretary Timothy Geithner called for legislation
that would take derivatives trading off the over-the-counter markets
and its unregulated environment and onto regulated exchanges and
clearinghouses. Some analysts worried that the longer-reaching
implications could lead to rising costs that would constrict positions.The
changes could lead to "the end of trading life as we know it," Tim
Evans, an energy analyst at Citi Futures Perspective in New York, told
Reuters.Still, portfolio managers are
bullish on commodities and believe the growth will come across the
board, from mining exploration companies down to ETFs like the SPDR Gold Trust
, which tracks movements in the metal through companies that deal in the gold
industry."I'm
one of those guys who believe you have to look at hard assets," says
Chip Hanlon, president of Delta Global Advisors in Huntington Beach,
Calif. "Nothing makes more sense to me now than gold, other than
perhaps silver."Hanlon also recommends precious metal miners who have benefited
from the drop in fuel costs.Consumer DiscretionaryA
drop in energy prices over the past year is just part of the story that
has some analysts high on consumer discretionary stocks. They also
could benefit from the relatively positive consumer trends of late. Even
though the news generally wouldn't be much to get excited about, the
pockets of progress have spurred hope that a turnaround could be at
least in the early stages.Dow Components That Have Outperformed Since March
Low"In
a 'normal' economic environment, retailers' recent release of April
sales numbers would be viewed as bordering on abysmal, but this is not
a normal environment," Brad Sorensen, director of sector analysis at
the Schwab Center for Financial Research, wrote this week in an
analysis. "Big picture, we believe much of the negative part of this
story is already priced into stocks in the discretionary sector,
leading us to believe that outperformance is likely in the near term."As with
commodities, the growth in discretionary is likely to reverberate across a wide
swath of the sector.For
instance, Barclays Capital on Friday upgraded media stocks, believing
that growth in advertising will offset other industry problems in 2010
and 2011."Consensus rule of thumb is that
an upturn to positive advertising growth happens 2 to 3 quarters after
the end of a recession. But in light of their historically depressed
valuation multiples, we think media stocks will anticipate this
recovery," Barclays wrote in a research note. "Media stocks are
inexpensive relative to the market and other US consumer discretionary
stocks, and we can no longer justify that discount."TechnologyThe
Nasdaq has led the market's recovery from its March lows, and the tech
sector is expected to continue to be a strong performer.Information
technology stocks have soared more than 12 percent year to date, due in
part to a trend making the entire group more attractive to investors:
Better balance sheets because of less exposure to risk and less
susceptibility to tightening credit than other sectors."We
believe that if businesses are going to loosen their extremely tight
purse strings for anything, it's likely to be technological
improvements," Sorensen wrote. "These investments are typically
attractive because they tend to increase companies' efficiency and
productivity at all levels, allowing companies to produce more with
fewer workers, which allows companies to cut back on costs and
potentially expand margins."There's also strong sentiment that consumers, even
those under pressure, will continue to buy smartphones from companies like
Apple and Research in Motion ."A
hundred percent, no doubt--tons of cash, and you're going to see
consolidation," Dave Rovelli, managing director of US equity trading at
Canaccord Adams, says of tech's potential for market leadership. "As
far as everyday living, it's food, shelter, smartphones."With Uncertainty, Look
for the BestAmid
the search for leaders to take Wall Street out of its daunting bear
market remains a level of uncertainty about the two-month rally that
began losing steam this week.That has
spurred a school of thought that advocates not looking for particular
sectors but instead focusing on the one or two top companies in each
industry across the board."The
breadth (of the rally) is a little misleading. The leadership of the
rally off the lows is more the low-quality names," says Gary Flam,
portfolio manager at Bel Air Investment Advisors in Los Angeles. "Now
as we look forward we think you're looking at more modest risk-reward
ratios. The leadership is going to come from quality."In
an economic environment that is likely to have to shoulder double-digit
unemployment and continued pressure on both consumers and companies to
cut costs, quality could be key."The
recovery from this economic downturn and this recession will be muted.
In a tough economic environment it's going to be the strong getting
stronger," Flam says. "Companies that are leaders in their businesses,
franchises that are self-funding with good balance sheets, that are
going to invest in their businesses, that are going to acquire some of
the missing pieces in their businesses to strengthen their competitive
positions, those are the ones that are going to do well in the next
year-plus."© 2009 CNBC.comvar url=location.href;var i=url.indexOf('/did/') +
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