3 Sectors to Avoid in 2017
January 20, 2017, 6:00 am
We want to thank everyone for their wonderful feedback on the profit guide series so far – we’re so glad you’re enjoying it! We’ve made it to Inauguration Day, but we’re excited to keep the fun going into next week when we’ll conclude the series with an exclusive, members-only chat. Keep an eye on your inbox for an invitation to this special event!
Today is an important day, and Wall Street will be watching along with the rest of America. That said, making the most of the year ahead is about more than just one day. It means knowing where to put your money in the current environment (which we talked about in our last bulletin), but just as important is knowing where not to put your money. The incoming administration is built on lower taxes, less regulation and increased spending on infrastructure. While these three pillars will help buoy the economy and overall market, not all sectors will perform equally. Today, let’s talk about three in particular that we believe should be avoided in 2017: utilities, REITs (real estate investment trusts) and consumer staples.
These sectors may not surprise you as all three had started to lag the market even before the presidential election and continue to underperform the major indices. A big reason we see this trend lasting in 2017 is the Federal Reserve. The central bank has already made it clear that more interest rates are ahead this year and that’s a negative for these dividend-paying sectors. Utilities, REITs and consumer staples all pay above-average dividends, so they have been sought after with rates near 0% for so long. Rising rates will make them less attractive and limit the number of buyers as other income options become more attractive.
The sectors are also trading at valuations well above their historical average, making them even more susceptible to any selling – not even value investors will be able to justify investing in them at these levels. Plus, a rotation into high-growth stocks that become more attractive will hurt these three groups, further dampening an already limited outlook.
Of course, some stocks within these groups will get hit harder than others, so we want to share one name from each sector that we most recommend avoiding:
First up is Duke Energy (DUK), one of the largest utility companies in the United States. The stock trades with a trailing P/E (price-to-earnings) ratio of 22 and earnings are expected to fall in 2017. DUK has been downgraded multiple times over the last year, most recently to a “sell” by Citigroup (C). We happen to agree.
One name in the REIT sector to avoid is Equity Residential (EQR). This is a large REIT that trades with a forward P/E ratio of 48 and has very little growth projected not just in 2017 but over the next few years. EQR’s focus on multi-family buildings will also be a detriment as a shift to single-family homes has become a better investment option.
Finally, although Colgate-Palmolive (CL) is a well-known household and personal products company, it’s one you should forget this year. The stock’s chart is already breaking down and will be further hurt by a rising dollar. Trading at a forward P/E ratio of 21.7 with very little growth expected ahead, we don’t see CL having a squeaky clean year.
Our job is to keep you in only the top opportunities that Wall Street has to offer and we take it seriously. As we discussed on Wednesday, we see a lot of attractive options ahead so we don’t want you to waste your time or money in areas of the market that just won’t cut it. We’ll be talking more about how to keep your portfolio in prime position next week, so stay tuned.