Investors know the hot industry of one year can become the dog of the next.
The whiplash from 2008 to 2009 was especially jarring. To take one example of many: In 2008, the S&P 500 consumer electronic stocks industry index dropped 75%, but in 2009 industry shares doubled.
As investors enter a new year, they're trying hard to predict which kind of businesses will win market favor in 2010.
Sell-side equity analysts offer their own predictions, in the form of buy, hold, and sell recommendations.
According to the most recent data from Capital IQ, the S&P 500 tobacco industry has the highest rating from analysts these days. (The rating is based on an average of all analyst recommendations on industry stocks.) Lorillard (LO), Altria Group (MO), and Phillip Morris International (PM) on average all get stellar ratings from analysts, meaning the stockpickers see the potential for price appreciation for the shares despite some substantial returns already in 2009. Lorillard and Altria outpaced the market, with 44% and 31% returns respectively, while Phillip Morris lagged the Standard & Poor's 500-stock index's 24% return, with an 11.5% advance.
Excluding industries consisting of only a couple of stocks, Capital IQ data show analysts also positive on: the Internet and catalog retail industry, including Amazon.com (AMZN); biotechnology, led by Gilead Sciences (GILD); electronic equipment, instruments, and components, led by Corning (GLW); and the health-care providers and services industry, which includes Express Scripts (ESRX) and McKesson (MCK).
Analysts' least favorite industry is leisure equipment and products, in which a strong sell rating on Eastman Kodak (EK) brings down more mediocre ratings on Mattel (MAT) and Hasbro (HAS).
Also largely disliked by analysts are commercial banks, including M&T Bank (MTB) and Comerica (CMA); and real estate investment trusts, or REITs.
But analysts often do a better job of reflecting current thinking on Wall Street than predicting the future. For portfolio managers, the goal is to find industries that will be in favor not now, but in several months or a year.
That's why Channing Smith, portfolio manager of the Capital Advisers Growth Fund (CIAOX) has found various health-care industries as fertile ground for investing.
The debate over health-care reform has made investors cautious. Pharmaceutical firms, for example, are worried about government efforts to cut costs, but Smith says there are positive factors, including newly insured Americans using more health care, the aging of baby boomers, and the improvement of health care in emerging markets.
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