Finding the Sector Stars of 2007

While value trounced growth in '06, S&P says almost everything went right for market investors. Which sectors will lead the way this year?

There aren't many years where one can say that almost everything went right, but stock market investors may wish to point to 2006 as one example. Take a look at the performances of equity benchmark, sector, and industry groups. International benchmarks gained from 6% in Japan to 45% in Brazil.

Domestically, as seen in the accompanying tables, small caps beat large caps for the seventh year in a row, with the S&P Small Cap 600 advancing 15.1% to the S&P 500's 14.1% gain.

Value trounced growth as the S&P 500 Pure Value index rose 17.6% vs. the S&P 500 Pure Growth index's rise of 7.2%. On the sector side, Telecom Services jumped 31.7%, reversing its 9.0% decline in 2005, while Energy repeated as a double-digit gainer, climbing more than 23%. And while Health Care and Information Technology were the laggards in 2006, each posted advances, by registering increases of 6.1% and 7.9%, respectively.

Benchmarks & S&P 500 Sectors
Name % Chg. (YTD thru 12/29/06)
Telecommunication Services 31.7
Energy 23.4
Consumer Discretionary 17.7
S&P 500/Citigroup Pure Value 17.6
Utilities 17.1
Financials 16.9
Materials 16.4
S&P SmallCap 600 15.1
S&P 500 14.1
Consumer Staples 12.3
Industrials 11.6
Nasdaq 10.0
Information Technology 7.9
S&P 500/Citigroup Pure Growth 7.2
Health Care 6.1
S&P 500 Best-Performing Industries
Industry % Chg. (YTD thru 12/29/06)
Steel 77.7
Diversified Metals & Mining 45.3
Broadcasting & Cable TV 43.7
Integrated Telecom. Svcs. 43.4
Investment Banking & Brokerage 40.2
Motorcycle Manufacturers 36.9
Fertilizers & Agricultural Chemicals 36.9
Construction Materials 33.7
Department Stores 33.5
Metal & Glass Containers 33.4
S&P 500 Worst-Performing Industries
Industry % Chg. (YTD thru 12/29/06)
Education Svcs. (36.1)
Homebuilding (20.9)
Internet Software & Svcs. (20.4)
Gold (14.9)
Electronic Manufacturing Svcs. (13.6)
Internet Retail (10.8)
Semiconductors (9.4)
Managed Health Care (6.6)
Airlines (5.6)
Specialized Consumer Svcs. (5.6)

Like too many passengers on one side of a ship, there was a definite tilt to the positive side in 2006, as fewer than 10% of the nearly 130 subindustry indexes in the S&P 500 posted declines in the year just ended. By comparison, 35% of all industries posted price declines in 2005, while 65% of them fell in 2002. This year's leaders were Steel, Diversified Metals, Broadcasting, Telecom, and Investment Banking, each recording increases in excess of 40%, while Education Services, Homebuilding, Internet, and Gold came away with tarnished reputations as each index fell 15% or more.

Which subindustries do S&P analysts think will be the leaders in 2007? I selected one subindustry index from each of the 10 sectors in the S&P 500 that has both a positive fundamental outlook and a relatively high aggregate S&P STARS ranking. These are shown below, along with an index member with a favorable STARS ranking.

Industry Company S&P STARS Rank Price (12/29/06)
Air Freight & Logistics FedEx (FDX) 5 $108
Apparel, Accessories & Luxury Goods Coach (COH) 5 $44
Computer Storage & Peripherals Western Digital (WDC) 5 $21
Managed Health Care UnitedHealth Group (UNH) 5 $54
Metal & Glass Containers Ball Corp. (BLL) 4 $44
Oil & Gas Refining & Marketing Valero Energy (VLO) 5 $52
Other Diversified Financial Svcs. Bank of America (BAC) 5 $54
Soft Drinks Coca-Cola (KO) 5 $49
Water Utilities Aqua America (WTR) 4 $23
Wireless Telecom. Svcs. Sprint Nextel (S) 4 $19

So there you have it. 2006 has come and gone, and the outlook for 2007 is fairly upbeat. Last, but not least, I hope that your 2007 exceeds analysts' expectations.

Industry Momentum List Update

For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Industry Company S&P STARS Rank Price (12/28/06)
Agricultural Products Archer-Daniels-Midland (ADM) 4 $32
Apparel, Accessories & Luxury Goods Coach (COH) 5 $44
Broadcasting & Cable TV Comcast (CMCSA) 4 $43
Department Stores Federated Dept. Stores (FD) 4 $38
Diversified Metals & Mining Freeport-McMoRan (FCX) 4 $56
Fertilizers & Agricultural Chemicals Monsanto (MON) 2 $53
Integrated Oil & Gas Exxon Mobil (XOM) 5 $77
Integrated Telecom. Svcs. CenturyTel (CTL) 4 $44
Investment Banking & Brokerage Merrill Lynch (MER) 5 $94
Metal & Glass Containers Ball Corp. (BLL) 4 $44
Motorcycle Manufacturers Harley-Davidson (HOG) 3 $71
Movies & Entertainment Disney (DIS) 5 $35
Steel Carpenter Technology (CRS) 4 $103
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