Even though I favor indexing and asset allocation over stock picking, I still keep an eye on which sectors and sub-sectors have something going on.
It's not a bad idea to understand sector rotation, particularly if you have some "satellite" allocations in addition to your core index holdings. Specifically, if you use actively managed funds that focus on narrow slivers of a sector, it's important to know which types of businesses may be in or out of favor.
For example, within the broader tech sector, makers of database software have been trading higher in the past few weeks. Of course, the 800-pound gorilla in that sub-sector is Oracle (ORCL), with a market cap of $177 billion. Technically, Oracle has been struggling of late. Its 50-day average is below its 200-day -- not a bullish sign. The stock is trading just at its 200-day line, at $39.36.
But despite the lackluster performance of Oracle, some small and mid-caps from the sub-sector are emerging as technical leaders. Small-cap ePlus (PLUS) bolted 16% Thursday after a better-than-expected second-quarter report. The company provides info tech software and services to corporate and government customers.
In a market-cap weighted index, this company, with a capitalization of $535 million, won't make a dent. The biggest mutual fund holder is the Heartland Value fund (HRTVX), which owns 4.70% of ePlus shares, accounting for 1.64% of fund assets.
A mid-cap from the database industry is Open Text (OTEX). Specifically, this Canada-based firm has expertise in Enterprise Information Management (EIM), an area of info tech that focuses on structuring and distributing data across organizations.
Not surprisingly, Open Text's targeted area for growth is cloud computing, as more and more companies store and access their data over the Internet, rather than on local servers. The stock rallied to an all-time high of $58.86 on Friday.
The top mutual fund holder of Open Text is the Franklin Mutual Beacon Z fund (BEGRX), with 0.69% of shares, accounting for 0.93% of fund holdings.
Tableau Software (DATA) is a fairly recent IPO, having made its debut in May 2013. It's trading well below its February highs, but has been in rally mode since mid-October. Tableau provides business intelligence and analytics for corporate clients. A specialty is data visualization, which is more or less what it sounds like: graphics such as charts, tables and graphs, which allow users to clearly view and understand the data being presented.
Tableau, which has a market cap of $5.83 billion, beat analysts' expectations in its fourth-quarter report earlier this month. The top mutual fund owner is the Wells Fargo Advantage Growth fund (SGROX), which holds 1.20% of Tableau shares, constituting 0.54% of fund assets.
It's trickier to gauge sub-sector strength in a situation like this, when the market cap leader is struggling, while smaller stocks are technically stronger. An understanding of the performance of different market caps within a sector or sub-sector may help you make better decisions when allocating your portfolio holdings.
