An Out-of-Favor Sector and Airline That Could Turn the Corner in 2020

In my column last Friday I recapped the market action in 2019. The year has been a good one for investors, with the S&P 500 looking like it will deliver an overall return in the mid-20% range when all is said and done in 2019. This would be the best year for the index since 2013. Equities have forged ahead even as the domestic economy has cooled from last year's 3% GDP growth to around 2% this year and earnings have been flat after 2018's big gains driven largely by the 2017 tax reform package. A big factor buoying the market this year was the Federal Reserve. A swoon in the market late last year and slowing global economic activity persuaded the central bank to quit hiking rates and start cutting them. This shift in gears pushed down interest rates and boosted economy as well as the markets. With the Fed on hold for the foreseeable future, investors should count on this tailwind in 2020. Also, uncertainty around Brexit looks like it finally has been removed by the Tories' historic election win last week The market also was helped late in the year by a notable lessening of trade tensions. Ratification of the United States-Mexico-Canada trade agreement looks almost like a done deal. In addition, it appears Phase One of a U.S.-China trade deal has been agreed to and will be implemented. That said, it is hard to foresee any Phase two agreement until next year's election outcome is known. It also is hard to see the market performing in 2020 anywhere close to how it did in 2019 even as profit growth should return for equities. J.P. Morgan came out last week calling for an 8% increase in the S&P 500 in 2020. I would be more than happy with that performance more than 10 years into a bull market. Being a contrarian investor, I am digging through the sectors of the market that did not participate in this year's rally. Energy production continued to rise in the U.S. this year. The country is now the world's largest energy exporter and is exporting about three million barrels of oil a day, up 50% from a year ago. Nonetheless, the energy sector was one of the market's poorest performers, which especially was the case among smaller exploration and production concerns. Witness the performance of the SPDR S&P Oil Exploration & Production ETF : I am not going to pretend I know which way oil and natural gas prices will head in 2020. However, as I noted in a recent column, the midstream energy space seems as though it is oversold. In addition, these concerns are much less dependent on the price of energy and there has been huge recent insider buying across the sector. For those comfortable with the tax structure of master limited partnerships I have added Energy Transfer and Enterprise Products Partners to my personal portfolio recently. Both pay large distribution yields. Airline stocks also have not done much in 2019. I still like American Airlines Group Inc. here even if the stock has not performed well in 2019. Every flight I am on seems packed and fuel oil prices remain low. In addition, the Boeing 737 Max should be back in the flight schedule sometime in the first half of 2020. Boeing just agreed to paid compensation to Southwest Airlines for the 737 debacle, and I suspect American Airlines will get a hefty settlement as well. The stock appears beyond cheap at under 6x earnings. In my next column I will highlight a few small-cap concerns that I think are set up to be solid performers in the coming year.

An Out-of-Favor Sector and Airline That Could Turn the Corner in 2020

Energy companies and American Airlines haven't fared well in 2019 but could perform much better next year.

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