We typically focus on individual names at Real Money, but I want to look today at what sectors are most attractive for new investment on the long side.
As I do with individual ideas, my starting point is the estimate-revision trend and valuation. I look for the lowest expectations, because those names are most likely to surprise to the upside and provide excess returns. What works for stocks also works for groups and the market as a whole.
The table below summarizes names in the S&P 500 with these key criteria to get started. As always, I don't look simply at the change in the 2013 earnings per share consensus estimate, I rank the change compared to all the other names in the index. The "revision rank," as I call it, characterizes the strength of revisions compared to the other groups -- 1 being the best, 10 being the worst. Since we are looking at group averages, they will naturally cluster closer to the average, or 5. For the price-to-earnings multiple, look at the market-cap-weighted average for each group.
The key conclusions may qualify in the "Surprises of 2013" genre that people are currently working.
Of the best earnings-momentum sectors, there are several shockers. Consumer durables include homebuilders, so that is no surprise. But retail and health services? Really? My answer is yes, at least for retail. Everyone expected Christmas to be a dud, so expectations were already low. The surprise is that everyone I know is spending their gift cards, which translates into January sales (gift cards are counted as unearned revenue and not sales, so they don't pass through the P&L until spent). January comps are going to be surprisingly strong, and retail will perform better than expected in the near term. With a PE in line with the market, you are not paying up for the earnings strength, either.
Health services are more of a wild card due to Obamacare, which I believe will be a disaster eventually. But in the near term, every health insurer is raising premiums like crazy, so near-term sales and margins could get a nice bump. The group is trading below a market multiple, as well.
Everyone hates technology, but the group is dirt cheap right now at 12x 2013 EPS. I can't advocate buying on valuation alone, but when people hate something, keep an eye on it. Once earnings stabilize, the group will be buyable because technology still has the most robust long-term growth prospects.