Part 1 of this article looked at the three main sectors that lifted the stock markets.
The rest of the winners are simply total surprises that the market is frantically trying to get its arms around.
First, the retailers. Amazon (AMZN) had been, for, ages, the only retailer that mattered, and we had a total zero-sum situation. That's totally changed since the holiday season, and it has now encompassed all but Sears (SHLD) and perhaps JC Penney (JCP) , although the latter is turning into a decent spec.
What's happened here? I think it is two-fold. One is that the consumer is so robust and spending so much -- twice the pace of last year, according to Bank of America -- that there is enough to go around. Second is that the remaining retailers have figured out strategies to take on Amazon, both with buy online, pick up in store and with an ecommerce strategy dictated by a lot of help from tech: think Salesforce.com (CRM) , Adobe (ADBE) and all the big data consultants like Splunk (SPLK) or Tableau Software (DATA) .
The combination has taken the pressure off even the mall, as inventories are lean and companies' balance sheets are no longer stressed. That's how you get a resurgence in companies like Target (TGT) and Kohl's (KSS) and the Walmart (WMT) ascendance. There's been tremendous shrinkage in stock supply here, too.
The e-commerce impact on so many companies big and small in the freight forwarding business, led by Federal Express (FDX) and United Parcel Service (UPS) is very stark. It's an extra boost and an ancillary way many are using to focus on the internet.
The second line of retail that's working so well is anything home improvement as people improve their principal asset, their home: Lowe's (LOW) , Home Depot (HD) , Stanley Black & Decker (SWK) and anything kitchen, bath and paint resounds. The storms were an added strength. I think this trend, more than anything else, can explain the fabulous resurgence in Best Buy (BBY) , which, other than Kohls and Amazon itself, is a real star. I wish people would stop denigrating this one; it's an obvious winner.
It's too early to crown sector leaders within retail ex-homegoods, but the Walmart, Burlington (BURL) , Dollar Store (FDO) , Dollar Tree (DLTR) group stands out, I think because they can come in under the price of Amazon. Throw in Costco (COST) and you may have all you need. Oddity: with thin inventories and a non-promotional background, PVH Corp (PVH) , V.F. Corp (VFC) and even Kors (KORS) seem pretty unstoppable here.
The consumer's strength is spreading to the travel and leisure and experiential economy, including the airlines, and the casinos and hotels -- shortages all there too, both in investing opportunities and stock that has been bought back. Here, the experiential theme is playing our broadly: the cruise lines are the strongest sector, as there is a dearth of ships and a plethora of younger people who have found these backdrops as the most prominent for Instagramming.
Do not rule out a stock like Thor Industries THO, because coaches are red hot for experience and selfies. Needless to say, you need Estée Lauder (EL) to make it all work, especially with the new, more powerful phone cameras.
Speaking of surprises, there is a remarkable resurgence in the country's machinery, manufacturing, commodity and resources companies. We tend to see only Caterpillar (CAT) and Boeing (BA) as the stars here, but we have so many cycles going on, it is hard to catch them all. But here they are, as I see them.
First, we have discovered so much oil and gas in the last few years that, under the protection of an OPEC umbrella and the taking offline of Venezuela, once such a huge producer, has allowed for a dramatic expansion of the Permian and the southeast, where the oil and gas are made into products or shipped. We went from being in a deficit with natural gas to being by far the biggest and one of the lowest cost producers, which has triggered a building boom of all sorts of stripes.
The actual building of factories and pipelines and shipping terminals is beyond comprehension and often overlooked. The move isn't broad-based enough yet. We have only seen the refiners really surface as winners. But the nascent moves in the growth independents and even the master limited partnerships show the possibilities here. I think the base is here and the potential so great, that it is still worth getting into. The need for more horsepower in any form you can get it, whether it be Cummins (CMI) or Caterpillar or Eaton (ETN) and Parker-Hannifin (PH) is pretty palpable and unstoppable, for that matter.
Second, our leadership in aerospace has become unchallenged and Boeing is only a symbol of the strength. Honeywell (HON) and United Technologies (UTX) and all the parts that go into planes aren't going to quit because we have multi-year cycles.
What's interesting and sad to note is that if you look at these two cohorts, the natural investment would be General Electric (GE) . Throw in health care equipment, and you would have even more to cheer for. But Action Alerts PLUS charity portfolio holding General Electric is one of only a handful -- and I mean a handful -- of companies with balance sheets decked by too many high cost acquisitions as well as a ridiculous asset stewardship.
Someone should have stopped previous management from that capital destruction. I don't think it is too late to save, but more money, much more money is needed and the dividend is just too large to be sustained if assets can't be offloaded in a short period of time. Oil and gas equipment and service are in such short supply, as are aerospace engines and power equipment, you would think something can be done here. I have to investigate further to see what's possible and what's not.
A couple of standout smaller groups keep getting attention as a combination of scarcity and Republican dominance. There's a game of endless leapfrog of defense companies; Raytheon (RTN) to Northrop Grumman (NOC) to General Dynamics (GD) and Lockheed Martin (LMT) are the biggest winners. Those who default to Leidos (LDOS) , L3 (LLL) and Harris (HRS) have done well, too.
Finally, there's a cohort just developed to economic expansion of the workforce, whether it be Automatic Data Processing (ADP) or Cintas (CTAS) or Manpower (MAN) and the like. Stocks of companies that go hand and hand with an economic expansion just won't quit.
Here's a certainty: if you own a stock that is not covered by one of these themes, then you are in the wrong part of the market and run the risk of some pretty severe underperformance. There are only a handful of stocks like Pepsico (PEP) and Tyson Foods (TSN) and Colgate (CL) , not enough to do the job. If you use typical S&P weightings and are not in the strongest stocks in the cohorts that are winning, you might fail, too.
Here's the good news, though. We are getting lots of mini-rotations and selloffs. You've just been given the only guide you need to pick among the winners for the best choices. Don't let the astounding nature of the rally blind you: it's very much for real, and it is based on the fundamentals, ones that are just now, with tax reform, coming to the fore.