Four Sectors Ready to Lead
January 18, 2017, 11:33 am
Matt and I hope you enjoyed Friday’s kick-off to our special series! (If you missed it, you can check it out here.) We have a lot more in store for you leading into and continuing after Inauguration Day, so let’s get right to today’s topic.
One major theme that has sent several sectors higher since the presidential election has been the so-called Trump Trade – areas investors believe will benefit the most from a new administration under Donald Trump. They include infrastructure, financials, aerospace/defense and energy to name a few. These sectors did well in the post-election rally to wrap up 2016, and they remain attractive opportunities in 2017 as well. But there are other areas that aren’t getting as much attention that also look poised to not only outperform in 2017, but lead the market higher.
Technology: This sector has lagged the post-election rally, with the S&P Global Technology index up less than 2% and moving mostly sideways over the last month. But the underperformance has made valuations within the sector even more attractive than they were early last year. While the group is not considered a favorite of President-elect Trump (who has kept his distance from Silicon Valley), it’s difficult to argue with the growth estimates for the entire sector and several niche areas.
One example is the Internet of Things (IoT), which is expected to grow sales from $157 billion in 2016 to $662 billion by 2021—more than 400% growth in just five years. That potential combined with attractive valuations puts the tech sector at the top of our list for 2017. One interesting way to play this group is through a relatively new ETF, the Global X Internet of Things Thematic ETF (SNSR). It began trading last September and has a global reach with about 34% invested in semiconductors. With a wide diversification, including exposure to niche areas, this could be an attractive investment on the sector’s trend higher.
Small Caps: This is another sector with eye-catching valuations, but this time it has the support of the incoming administration thanks to big initiatives involving lower taxes and less regulation.
Lower taxes will equate to higher paychecks for consumers that will likely spend that money locally at smaller, U.S.-based companies, and will also serve as a boost to smaller companies that do not pay big bucks to tax accountants to avoid and minimize taxes. A reduction in regulations will help small domestic companies more than the multinationals that already have lobbying in D.C. Plus, the byproduct of a Trump administration should result in faster economic growth that will once again benefit smaller companies that derive most of their revenue from inside the United States.
One name that stands out to us in this accommodating environment is Hi-Crush Partners (HCLP), one of the largest U.S. producers of sand for hydraulic fracturing. The stock’s chart action around technical support makes it more of a short-term trading candidate than a long-term holding, and we’re currently recommending it in our Breakout Stocks service as a buy under $18.80.
Emerging Markets: This group was negatively affected after the Trump victory over fears of trade issues as well as rising interest rates and a strong U.S. dollar. The group has started to bounce back this month, but still lags the broader market. That makes it a standout as a pure valuation play. As of late November, its P/E ratio was 30% below its long-term average. Charts are firming up to offer buying opportunities for a good year ahead, and the three countries on our radar right now are Russia, China and Greece. Those might not seem like traditional “emerging” picks, but each has been lagging for years and the best way to make money is to get in when everyone else is on the sidelines. Russia has already begun to break out with a 45% gain in 2016 but still has upside with a P/E ratio below 8. China and Greece were both down about 2% last year and we believe they’re on the verge of a very strong 2017.
Outside of those areas, Chile offers some attractive opportunities in the mining sector. Specifically, Southern Copper Corporation (SCCO), a copper miner across South America, and Chemical Mining Company of Chile (SQM), one of the major lithium players, are on our radar right now.
Infrastructure: We couldn’t make a top sectors list and not include this one. It shouldn’t come as a surprise since the group has already made a big move in the wake of Trump’s election due to his plan to spend up to $1 trillion on upgrading the country’s infrastructure system in the next decade. It remains to be seen just how much spending the House will actually approve, but any number close to his promise should be a boost for this group for years to come. Since the sector has already seen a lot of movement, we recommend watching for pullbacks as buying opportunities so you don’t overpay.
We recommend adding the VanEck Vectors Steel ETF (SLX) and Eagle Materials (EXP) to your watch list. SLX is an ETF made up of 27 stocks that represent the global steel industry, and was in an uptrend for much of 2016. With big spending on infrastructure ahead, it is poised to resume this rally in 2017. EXP produces construction materials, and its concrete division could be a boom in the fixing of America’s roads and bridges. The company has big earnings expectations (increasing from $3.58 a share in 2016 to $6.32 by 2019), and if Trump fulfills his plans the numbers will be much higher.
It’s a good time to be an investor, and cash is coming off the sidelines and back into the market. We have a lot of attractive options, from growth to value to trading, and we hope today’s bulletin has given you some food for thought for your portfolio as we prepare to make the most of the bull market environment. Some of these names are already in our Buy Lists while others are on our watch lists as we wait for the right opportunities to add them in.
In our next bulletin, we’ll talk about areas of the market we are avoiding in 2017, so stick with us as our special series continues!