You Can Still Ride the Rotation

 | Jun 03, 2013 | 11:30 AM EDT
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Investors got tested on Friday by a large selloff that accelerated significantly in the last hour of trading. As I stated in a quick blurb in Columnist Conversation this morning, the rotation between sectors in the market right now is substantial, and it's one of the reasons volatility and intraday reversals have picked up over the last month.

This was in full display last week. Financial and industrial stocks posted small losses, and the tech sector even managed a nice gain (0.84%) while investors continue to flee the defensive sectors. Utilities, consumer staples and telecom posted large losses, between 2.75% to 4.7%.

I believe this rotation will probably be in place for a while, especially if interest rates continue to rise. For investors who are looking to "buy the dip" and take advantage of the rotation in the market, I have highlighted a couple of solid plays in these stronger sectors.

Qualcomm (QCOM): There is a lot to recommend the stock at these price levels. Qualcomm has not participated in the rally at all this year, and it should be a prime candidate to do well if the rotation into the technology sector continues. A recent report from Strategy Analytics showed that Qualcomm held a 97% share of the 4G LTE baseband chip market in the first quarter. The analyst firm also estimated that Qualcomm had a 59% share of the broader baseband market, up from 52% at year-end 2012.

Qualcomm is not expensive at less than 13x forward earnings, a discount to its five-year average of 17.4x. Unlike most stocks in the defensive sectors, the company is showing robust revenue growth. Analysts expect sales gains of more than 25% this fiscal year and revenue increases of at least 10% in fiscal 2014. The stock sports a five-year projected price/earnings-to-growth ratio of under 1, at 0.78. The shares also yield 2.2%. The company has a robust balance sheet (more than $10 billion in net cash), and it recently raised its dividend 40%.

MetLife (MET): The company's life insurance and other financial services businesses should benefit as interest rates rise and improve its spreads. The stock is up more than 10% since I profiled it in late April, but it still has upside. These rising rates are one reason the financial sector has outperformed the market by a little over 4% in the last month. I would look for this strong performance to continue along with rising rates.

MetLife is cheap at less than 8x 2014's projected earnings, and it also provides a nice dividend yield of 2.5%. This probably understates MetLife's value, as analysts seem to be lagging behind in properly estimating its earnings power.

The company has beaten earnings estimates easily in each of the last six quarters, and consensus earnings estimates for fiscal 2013 and 2014 have risen consistently over the last three months. The company's recent successful divestiture of its banking assets and its de-registration as a bank holding company should also be viewed positively. It was one reason the company was able to increase its dividend 50% in late April, its first hike since 2007.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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