We are nearing the home stretch, and in the home stretch we get a pattern that plays out whenever the indices are having a terrific year -- something that you have only really participated in if you are invested in the S&P 500.
The combination of seemingly endless corporate takeovers and the concentration of winners in areas that had been least expected -- namely, in companies that do well when rates plummet on U.S. Treasury bonds and commodity inflation is in check -- has eluded most stock pickers. It makes sense because, from the very beginning of the year, the groupthink has revolved around the need for higher rates. With these fund managers, the macro -- the idea the Federal Reserve would have to take action -- totally defeated the micro. But the micro ruled.
The sectors that stand out? I have found 12 of them -- 12 sectors where you can almost throw darts and win, with a couple of rare exceptions. I think the gravitational pull of these sectors is so strong that you can expect some of the stocks within them will be anointed. That is, they will be adopted on every dip and will be "go to" names as if they are wide receivers, targeted over and over because they have such obvious technical support.
Going into December, I have always identified the best of the best -- the stocks I have expected would be supported no matter what. I would begin to accumulate these using deep-in-the-money calls out several months, and I would simply buy more calls on every single dip.
So let me give you the 12 sectors, and the best of the best within those sectors, starting with the strongest: health care.
1. Health Care. This group is ideal in a slow- growth, low-inflation environment. It's become obvious of late that U.S. economic growth, aided by lower petroleum prices, has been better than expected. But, somehow, this group just won't quit. That's in part because there are so many takeovers in it, and in part because many investors still don't believe the strength can continue.
The distribution in health care is highly unusual. First, none of the big dogs fits in. This was not a Pfizer (PFE)-Merck (MRK) year. Valeant (VRX) and Actavis (ACT) have replaced that tandem. It's been a year of McKesson (MCK), AmerisourceBergen (ABC) and Cardinal Health (CAT) to control health-care cost. It's an Edwards Lifesciences (EW), Bard (BCR), Becton Dickenson (BDX), Hospira (HSP), Stryker (SYK), Zimmer (ZMH) kind of year for consolidations. Then, if you just want to marvel at a small group, consider the dental-supply companies: Henry Schein (HSIC), Patterson Dental (PDCO) and Dentsply (XRAY).
The health-care cost containers came on strong, as well, and the obvious one is UnitedHealth (UNH) because it's a Dow Jones Industrial Average stock. But Humana (HUM), Aetna (AET), Cigna (CI) and WellPoint (WLP) all have a ton of game. You want to know what else works? The real estate investment trust companies. Ventas (VTR) and Healthy Care REIT (HCN) stand out here. (REIT stocks, in general, have been terrific -- but the health care ones, I think, have the most to run. That said, I think you could make a case to just buy the iShares U.S. Real Estate ETF (IYR)).
If you want the strongest and most visible names, it's going to be Actavis. Mckesson is the easiest -- that group is loved so much it's hilarious. UnitedHealth for visibility. Ventas for dividend yield.
2. Biotech. This sector has been monstrous this year. You really don't want to out-think this. We have senior and junior biotechs that work. Celgene (CELG) and Regeneron (REG) are coin flips. Both are having remarkable years on new products that hadn't even been in the numbers at the beginning of the year -- Celgene with a psoriatic arthritis therapy, and Regeneron with cholesterol and asthma answers.
Some think the last move in Amgen (AMGN) may be the beginning of something big. However, I don't like guesswork. Same with Gilead (GILD) and Biogen-Idec (BIIB). They are resting. We won't know for Gilead until we see more from competitor AbbVie (ABBV) on hepatitis C treatments. Biogen-Idec needs to put up better numbers for its next reported quarter.
The juniors -- Isis Pharma (ISIS), BioMarin (BMRN) and Agios (AGIO) -- make the most sense. Isis has several drugs in Phase III trials that seem on the verge of blockbuster status. BioMarin just made a well-acclaimed acquisition, and Agios has a new kind of method for killing cancer.
3. Defense. With the U.S. Senate going Republican, and with a soon-incoming wartime defense secretary to follow the coming departure of Chuck Hagel, this is a moment when any defense stock is going to win. That's because it is inconceivable to most investors that the U.S. defense budget won't get restored to pre-sequester levels. These are dart throws: General Dynamics (GD), Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN) all work. My favorite is Northrop Grumman, if only because Lockheed didn't have good things to say after its last quarter.
4. Autos. Here's an oddity -- the auto companies are just beginning to perk up on the decline in oil, and that breeds bigger truck purchases, for which the gross margins are bountiful. But the stars of the group? Auto parts. You have to marvel at O'Reilly Auto Parts (ORLY), Genuine Parts (GPC), Snap-On (SNA), Advance Auto Parts (AAP) and AutoZone (AZO). The latter has that amazing share-buyback program, but O'Reilly has become the loved stock. I am partial to Snap-On, but it doesn't have O'Reilly's momentum.
5. Housing. It has taken some time, but housing has finally become a favorite. How did this happen? I think it's the easier lending standards that are being adopted, which allow for lower FICO credit scores. It could also be the lower gasoline prices at the pump, which may be providing for a spending boost.
When it comes to pure housing, it's all about Lennar (LEN). You just can't go down to D.R. Horton (DHI) or Pulte (PHM). People would love Sherwin-Williams (SHW) with a consolidation in the group, although don't rule out PPG (PPG) if you want a little more industrial bent. Whirlpool (WHR) stock is having a standout run -- but, if that's the case, do you go with Home Depot (HD) and Lowe's (LOW)? These sure haven't let you down. Oh, and Williams Sonoma (WSM) works for the high end for certain. Don't overlook Stanley Black & Decker (SWK), either, as Home Depot says the tool aisles are hot -- although you have to deal with some European exposure there.
6. Retail and related. That lower gasoline price is putting money in peoples' pockets, and that last decline is going to make the retail group even hotter than dreamed. Wal-Mart (WMT) and Target (TGT) shares have been laggards until now. I think that they have been stuck in the mud, and are now unleashed. We've got some really strong earnings stories, CVS (CVS) and L Brands (LB), both of which can go higher still. Ross Stores (ROST) had been a great growth story, and now it looks like it is back.
Any dollar store would work -- I like Dollar General (DG). VF Corp (VFC) is a fantastic weather story that is all about the North Face and Timberland brands. Best Buy (BBY) is strong. Oh, and don't forget two holidays stories: Best Buy back from the dead, and GoPro (GPRO), whose stock acted funky after the company's secondary share offering, but which is now roaring.
Restaurant stocks are working, as well -- although the roadside player, Cracker Barrel (CBRL), has beaten out Chipotle (CMG), Brinker (EAT) and Darden (DRI) for the stealth play. You like supermarkets? I know Whole Foods (WFM) is coming on. Nevertheless, the smart money is betting that Kroger (KR) is going to $60 -- maybe in a straight line. Small-cap aficionados will want to be in a resurgent Tractor Supply (TSCO).
But let's not out-think this: The smart money is all on Costco (CSCO), which has never missed for retail, and Nike (NKE), which had a remarkable run since the last quarter. Call options on both, please.
7. Insurers: Remember how everyone got the rates wrong? You would think that would mean the insurers wouldn't be able make a stand. You would be wrong. Allstate (ALL), Hartford (HIG) and Chubb (CB) are all incredible. Again, though, you know it's Traveler's (TRV) by a nose, mainly a nose that's a Dow stock. What's behind the move? I think benign pricing and easy year-over-year comparisons -- and the fact that anything in Traveler's investment portfolios that hadn't come back to life sure has done so by now.
8. Transports: Here's a must for any stock picker to show genius: transports. Every railroad stock -- and I mean every rail, from Kansas City Southern (KSU) and Norfolk Southern (NSC) to Union Pacific (UNP) and CSX (CSX) -- are all red hot. I like Union Pacific best, as it has less coal and more visibility. I think the world's going to pile into FedEx (FDX), even though UPS (UPS) is cheaper -- remember, though, this is about anointing, and that means FedEx.
Meantime, it's rough to sort through the airlines for a winner, as they are all winners -- Delta (DAL), American (AAL), Southwest (LUV), even JetBlue (JBLU). But it's Southwest that has the percentages. It's the one to bet on.
9. Financial Services: Maybe it's an aversion to owning the banks, but the bank-relateds look awfully good here -- the processors, the ancillary businesses and the like. Take a stock such as Dun & Bradstreet (DNB). Under CEO Bob Carrigan, it's is a monster -- no losing with that one. The mutual funds look terrific, among them a Bill Gross-aided Janus (JNS), Legg Mason (LM) and BlackRock (BLK). All totally work. Again, though, you want visibility, which means MasterCard (MA) or Visa (V). Each had a terrific quarter. Like 'em both.
The rest of the winning segments are a little hit-or-miss with some extraordinary standouts. Take tech, for instance.
10. Tech: You know that Apple (AAPL), at 2 discount points to the average S&P 500 stock, will be the stock that people must show they own. The chipmaker stocks -- Intel (INTC), Micron (MU), Altera (ALTR) and, best of all, RF Micro (RFMD) off a merger -- look good.
However, it's the semiconductor-equipment group that's incredible: KLA Tencor (KLAC), Applied Materials (AMAT) and, best of all, Lam Research (LAR). Lam CEO Martin Anstice came on my Mad Money show recently, and I sense a multiyear move in the stock. It's a must-own -- the best call play in the group, shy of Apple. That last quarter will draw money toward Hewlett-Packard (HPQ), though, and you can do much worse than that. Of course, Yahoo! (YHOO) will get money if Alibaba (BABA) shares get marked up, and that's exactly what I think will happen.
11. Packaged-goods stocks: This is another oddity. I think the decline in raw costs, which will come on a delay pattern because of hedges, has boosted Procter & Gamble (PG), Kimberly-Clark (KMB) and Clorox (CLX). It's the carbonated stocks that have shown the best game, though. I don't know if there's enough consciousness about Dr. Pepper Snapple (DPS) for it to be anointed. Mondelez (MDLZ) stock may have made its move too late. That brings the hot money to Pepsico (PEP), which has delivered the best earnings, the best momentum and the most high-profile activist action. Don't forget Monster Beverage (MNST) -- its takeover and earnings can let this stock roll higher.
12. Industrials: Finally, someone always wants an industrial. Parker-Hannifin (PH) delivered a remarkable last quarter. International Paper's (IP) had a good move recently. As has Boeing (BA). Yet, I think that Honeywell (HON) is the beacon, the one with the big-five year plan that's been delivering consistently.
It's funny, I came to the anointment process out of jealousy and anger. I would see these same stocks roll over and over again. I thought they were extended, overbought, too loved. Yet what happens in the last month of the year is mesmerizing. The visible winners become like magnets for money. I picked call options, not common stock, for extra juice. I just needed to play. I needed the action. It served me well in the last month of the year. I hope it serves you well, too.