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Are you ready? We’re once again on the doorstep of another round of company earnings reports as we wind down the first quarter, one I see as crucial for divining what the market can do in 2014.
So far, it seems that investors are willing to bid up share prices on the notion that the economic recovery is likely to continue. Still, until just the past couple of weeks, it has been a cautious market indeed, with the most defensive sectors performing best. In fact, healthcare and utilities continue to lead.
But just below the surface, we can note some positive movement among a few pro-cyclical sectors, as well. In recent weeks, it has become clear that materials and tech have also been “catching bids,” meaning they’re going up. The one anomaly in this, of course, has been a weak performance by the consumer staples area.
So what’s wrong with this picture?
With two of the most defensive sectors still outperforming, but some cyclicals coming up on the outside, I think if we can just get through earnings season without too many major disappointments, we may finally see the hand-off, or sector rotation, into the more cyclical plays. And that hand-off should be considered bullish, in my view.
It’s not just observation of the various sector performances that has me maintaining my bullish tilt. I’m seeing it in the Weiss Ratings Model results, too. Among the highest-rated 100 or so stocks, there is scant representation in utilities and healthcare. The highest-rated list does have concentrations in some of the higher-beta sectors currently. Financials, for example, are quite well represented in this top-of-the-list grouping.
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| The Ratings Model is warming up to financial stocks. |
Many of the firms are very small, so they may be inappropriate choices for investors with little time to parse SEC documents for scores of small affairs. However, I spotted one — Fifth Third Bancorp (FITB — rated A+) — that I think is an easily accessible (and assessable) stock you might consider.
Digging a little deeper into the top 100 or so rated stocks, I’m also struck with the notable representation of energy and materials stocks. Energy is on a rocky road right now. But if you want a specialist drilling firm whose operations dovetail nicely with the explosion in shale oil and gas recovery, take a look at Helmerich & Payne (HP — Â rated A+).
The materials sector may also contain some of the most volatile stocks out there as we move through 2014. But for one — Packaging Corp (PKG — Â rated A+) — the recovery in the U.S. economy has a direct impact on the firm’s results, so it should benefit even if other materials areas — mining, for instance — provide such an unclear picture at the moment.
Yes, 2013 gave us a great market, with the S&P 500 Index shooting up to close out the year with a 29.6 percent return. And that last-gasp move occurred on the assumption of fourth-quarter earnings rising just under 10 percent and with revenues up only 0.7 percent from Q4 2012.
If the market can see past first-quarter expectations — looking for earnings for the S&P 500 to be down about 1.5 percent year-over-year — hang in there at the point we’re at now (which isn’t much better today than where we were at the beginning of the year), I think we will have a more robust rally in the earnings season’s wake.
I’m still looking at adding to my pro-cyclical exposures, focusing now on tech, but warming up to more and more names in the sectors highlighted by the Rating Model’s anomalies: Finance, energy, and materials.
Best,
Don Lucek
