It's a Stock Pickers Market This Year

 | Jan 06, 2016 | 8:00 AM EST
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Despite a pretty good economy, five sectors of the stock market produced negative returns in 2015. The S&P 500 ended the year about flat.

I think 2016 could be another challenging year for the stock market. Most investors nowadays were in diapers the last time we had to battle increasing interest rates and have no experience managing in this kind of environment. I don't think a 25-basis-point increase will kill off the stock market, it will just make it more treacherous. It will truly be a stock pickers market.

Looking back, energy was the big loser in the S&P 500 in 2015. Oil prices fell about 40% in 2015. The energy sector was down over 20%, while utilities, industrials, materials and financials were down between 3% and 9%. Believe it or not, consumer discretionary was the best-performing sector, but that's only because Amazon (AMZN) and Netflix (NFLX) were up over 100% and 140%, respectively.

Technology was up about 5%. There are 73 stocks in the S&P 500 tech sector. Two tech names that nobody talks about led the sector higher. Computer Sciences (CSC) and Activision Blizzard (ATVI) were up between 95% and 100%.

By my count, there were 170 stocks in the S&P 500 that were down 10% or more (not counting dividends). In fact, if you bought the wrong half of the S&P 500 Index (246), you would have lost money. Only 158 stocks returned double digits.

And there were only seven "told you so" names in 2015 -- as in, "I told you to buy Nvidia (NVDA) at $20." Those returned more than 50%.

With interest rates increasing, obviously the banks will benefit. Most bank loans today are adjustable, so bank stocks should begin to see some modest strength. The big money center banks, like Citibank (C) and JPMorgan Chase (JPM), will be the go-to names for most portfolio managers. Probably in anticipation of a rate hike, year to date, JPM is up about 6% and has outperformed the S&P 500. If the Fed is done for the year, then most of the easy money in the bank stocks has probably been made.

Despite a strong showing in 2015, the consumer discretionary sector usually has a tough time during a rising rate environment. Headwinds from the strong dollar, the slowdown of tourist dollars and the growth in off-price retail make big parts of the sector uninvestable. Big brands like Nike (NKE) and Under Armour (UA) were big winners last year and should be pretty good performers into the New Year. Off-price retailers like TJX (TJX) continue to execute well and are properly positioned to win in the retail trenches. Unique concepts, like Ulta Beauty (ULTA), should continue to perform well. (Amazon and Under Armour are part of TheStreet's Growth Seeker portfolio.)

I think the big surprises in the discretionary sector will be Amazon and Netflix.

Of the two best-performing names in 2015, only Amazon will continue to outperform. I believe Amazon is disrupting a much larger market than Netflix.

I think increasing content costs will begin to catch up to Netflix. Netflix announced it would double its original content from 16 series to 31 in 2016 as well as releasing 10 new feature films, 30 kids' shows, 12 documentaries and 10 stand-up comedy specials. Given the amount of original programming, I think it will be difficult for Netflix to keep its costs under control. Not all of these programs will be hits. Netflix is turning away from being a cheap place to rent movies on a dateless Saturday night and into an online broadcast television network. Subscribers many begin to wonder why they have to wade through a bunch of mediocre TV shows to find a movie they missed at the theater.

Meanwhile, Amazon will continue to grow its top line to $130 billion, up from $48 billion just five years ago. While investors are fascinated with Amazon's cloud business, I think its grip on e-commerce is tightening. With an estimated 70 million Prime members, Amazon's customer lock-in is reminiscent of Costco's (COST). Reportedly, Amazon is building its own logistics network and is working hard to deliver packages the same day to Prime "heavy" areas of the country. Same-day delivery will steal more market share from the brick-and-mortar retailers. To the amazement of everyone, I think Amazon shares will continue to trade higher.

As investors have turned their attention toward cloud computing, the traditional tech plays -- like semiconductors, semi equipment and networking names -- have been all but forgotten. On Dec. 3, I mentioned I was very positive on shares of Avago (AVGO).

I think AVGO can trade higher simply because the company is becoming dominant in so many important technologies. Networking companies like Arista Networks (ANET) and Applied Materials (AMAT) should also work. I think Arista continues to take market share away from Cisco (CSCO) and should be able to grow. Arista's brilliant attack-from-below strategy is hard to defend against. I think the stock can get back into the mid-$80s without too many problems. (Costco and Cisco are part of TheStreet's Action Alerts PLUS portfolio.)

Applied Materials is always an important tech company and seems to have its sea legs back. I think AMAT could get back to $25 in short order.   

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