Roundtable: Which Sectors Are the Best Bets?

We all want to know which sectors are ripe with opportunity and which are rotten with danger. So we asked some of our writers just that …

Which sectors are the best bets, and which are simply the best to avoid?

Morgan Housel: I like consumer staples.

There's no doubt the American consumer is a different animal today than it was in the past. But fear gets pulled too far and spread over too many companies. When I think of the retrenchment of the American consumer, I think of the end of seven TVs in your car headrests, $10 frozen yogurt, diamond-encrusted teeth, and the kid from Taco Bell driving a BMW.

Toothpaste and cat litter, I hope, are fairly safe. So two companies I like are Procter & Gamble (NYSE: PG  ) and Clorox.

Yeah, both will see a whack to their growth as cheap competition becomes competitive. But the fact that both can be bought for 12-13 times forward earnings reflects this, and then some. These are two of the best-run companies in the world, trading at valuations unheard of in the past.

Sectors I'd stay away from? At the risk of sounding like a broken record, I'll say financials. The amount of optimism in the sector combined with the fact that, be honest, no one has a clue what's still on their books, is scary.

Alex Dumortier: Strictly speaking, the cheapest sectors in the S&P 500 based on their multiple to estimated 2009 earnings are health care and utilities, followed closely by telecoms and consumer staples:

Sector

Price-to-Earnings Multiple
(Estimated 2009 Earnings)

Health Care

12.3

Utilities

12.4

Telecoms

13.3

Consumer Staples

14.2

S&P 500

16.8

Note: These multiples are based on bottom-up earnings estimates derived from a sum of the individual estimates of the sector constituents.
Source: Authors calculations based on data from Capital IQ, a division of Standard & Poor's.

Of these sectors, I like health care and consumer staples best. For stock pickers, I think the former offers some terrific opportunities, as the fear of health care reform and patent expirations (in the case of pharmaceutical firms such as Pfizer (NYSE: PFE  ) , Merck (NYSE: MRK  ) , or Bristol-Myers Squibb (NYSE: BMY  ) ) has taken a harsh toll on valuations.

Finally, although the sector is no longer looks cheap in aggregate (at an estimated P/E of 24.5), I continue to maintain that financials are fertile ground for stock pickers that are willing to bear some price risk over the short to medium term. The spread in analyst estimates for financial firms earnings in 2009 is the highest of any sector. Experienced investors who are willing to bear some of that uncertainty stand to reap commensurate rewards.

Alyce Lomax: There's opportunity in the retail sector for extremely cautious investors. That's going for the best in class, though, stocks like Wal-Mart (NYSE: WMT  ) , Costco (Nasdaq: COST  ) , and McDonald's (NYSE: MCD  ) (they're not going anywhere, and they appeal to bargain-hunting consumers in good times and bad) and bargain stocks like Buckle, which has plenty of cash, no debt, and a low price-to-earnings ratio. On the other hand, many debt-laden, second-tier retailers could get wiped out in the ugly consumer spending environment. That will make the future brighter for the survivors (less competition!), but it's essential to be careful; investors want to be on the right side of that destructive influence.

I'd avoid the banking and financial sector like the plague. The toxic asset issues that have been plaguing them do not strike me as anywhere near resolved, and there are rumblings to that effect. Meanwhile, the consumer's a mess, over-indebted and faced with high unemployment; commercial real estate is another point of weakness. I have a feeling many investors who are gambling with the financial sector don't understand the danger of their balance sheets or the many, many ugly moving parts still at work in our economy.

Rick Munarriz: I'm warming up to casual-dining restaurant stocks again. Diners have held back during the recession, forcing some chains to scale back if not close down entirely. This is a golden opportunity for the casual-dining eateries that are holding up better than the competition. Buffalo Wild Wings, for instance, has managed to grow earnings and comps during the downturn. Imagine how well it's going to do once hungry consumers have a little more money to spend. The first thing folks will do is drive past the "dollar menu" burger chains and pull into their favorite table-service eateries.

The one sector I'm steering clear from is residential developers. There may be signs that the industry is bottoming out, but it will take years before the actual turnaround takes place. It's an inventory issue. The days of a speculator holding a half-dozen vacant properties to flip at higher prices are over. We now have too many empty homes and condos, snuffing out demand for new residential construction.

We've shown you our favorite sectors. Now show us yours in the comments section below.

This roundtable article was compiled by Anand Chokkavelu. Anand owns shares of McDonald's and Pfizer. Costco Wholesale is a Motley Fool Stock Advisor recommendation. Costco Wholesale, Pfizer, and Wal-Mart Stores are Motley Fool Inside Value picks. Clorox and Procter & Gamble are Motley Fool Income Investor recommendations. Buffalo Wild Wings is a Motley Fool Hidden Gems selection. The Fool owns shares of Procter & Gamble, Buffalo Wild Wings, and Costco Wholesale. The Motley Fool has a disclosure policy.


Read/Post Comments (14) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 21, 2009, at 2:25 PM, ozzfan1317 wrote:

    I say energy is a good place to look as well Several Oil companies have solid dividends and room to grow in share price my personal favorite is BP hard to complain about a 7% Dividend.

  • Report this Comment On August 21, 2009, at 3:12 PM, madmilker wrote:

    your best bet is....a snuff can! yes....you take a $100 dollar bill and roll it tightly around a stove match and as you hold the bill gently pull the match out.

    One snuff can holds 22 $100 bills and when the cap is put back in place....it's RAT proof.

    OR....

    shop for American made and keep George Washington in the States not stuck in sum foreign bank.

  • Report this Comment On August 21, 2009, at 4:00 PM, Netteligent09 wrote:

    Stay with fundamental and basic investment. Retail, Real Estate, Home Builders, and most tech stocks are overvalue. PEG, PE, Cash Flow, market shares,

    No Job. No Money. No Honey. No Health Insurance. No House. No Shopping. No New Gadgets.

    Learn painful lessons. Live within your mean.

  • Report this Comment On August 21, 2009, at 4:01 PM, Netteligent09 wrote:

    Cut your credit cards

    Make Love, not Wars

    Living within your mean.

    Credit Score is very toxic

    No More Mortgage slavery

    Big cars do not make a man.

    Do not buy unless it is necessary.

    Stop being Consumers of the World.

    Big ticket items do not make a women

    Enjoy each other at Library or Bookstore.

    Spend more time with your family at the park.

    Stop outsource jobs to India, China and oversea.

    Subway and Public Transport are great for America.

    Stop fill up your house with cool junks and hardly use items.

  • Report this Comment On August 21, 2009, at 4:52 PM, plange01 wrote:

    with the busy summer driving season soon to end and the US now over 8 months into a depression oil will test the years lows.as odd as it sounds auto rentalls were close to the hottest sector this year but their season is ending to...oil and the rentals will be a great sector to short along with real estate who still has its worse yet to come!it looks like for now the best sector will be the financials playing catch up for their major losses with citigroup doing the best this is a easy triple at its current price....

  • Report this Comment On August 21, 2009, at 5:54 PM, ckgz wrote:

    I'm thankful to be a learning fool. Quick recovery sectors are beyond my purview but I would think Utilities and Utilities Services are good bets PWR is a favorite as they are quite lean on the utilities services side w/r to operational overhead.

  • Report this Comment On August 21, 2009, at 6:09 PM, kellan45 wrote:

    hey netteligento9

    stop preaching,you sound like a lib.

    I,ll live my life you live yours

  • Report this Comment On August 21, 2009, at 6:43 PM, gilsh wrote:

    to fear financials and buy others is not intelligent

    assuming there are poisonous assets hidden in the cellars of all large financial organizations, sooner or later these will be revealed, and very much like this round of crumbling economies, we'll have another.

    and guess what ? when financial sector stocks plunge, ALL stocks plunge.

    they just take longer to return to normal, as we see nowadays. but if even dead bodies like FNM and FRE are starting to breath again, and if AIG appears to be ALIVE, then take the BEWARE-OF-THE-FINANCIAL-SECTORS with a grain of salt.

    and if you are a true risktaker, and have the heart to stand the high-waves of the financial stocks, then this is the time to go in.

  • Report this Comment On August 21, 2009, at 8:14 PM, awallejr wrote:

    Financials and energy, everything else revolves around them.

  • Report this Comment On August 23, 2009, at 12:10 PM, Ibeatmykids wrote:

    Hey Kellan45,

    I think netteligento9 had some very wise advice. If you don'y agree with his statements then is fine but there is no need for insults.

    I have a feeling netteligento9 has much more wealth than most on here.

  • Report this Comment On August 24, 2009, at 10:15 AM, catoismymotor wrote:

    Netteligento9 is exactly right. This life is to be lived and enjoyed. Spending your life keeping up with the Jones's and smothering yourself with debt is a horrible way to exist. If anything he has laid out classical New England values, ones that work. Ben Franklin and John Adams would have gladly toasted Nettiligento9's words.

  • Report this Comment On August 24, 2009, at 10:39 AM, catoismymotor wrote:

    I believe consumer staples (FEED, CALM, CVGW) and precious metals (SLW, SLV, JAG) with a sprinkling of technology companies (CPBY, CSR, RAX) is a good way to go. I am aware that consumer staples and precious metals are typical bear market sectors. However I am bullish within those. Smaller food producers with good moats and room to grow along with undervalued precious metals and their miners have the potential to sprout legs and run in either market. By adding a smaller tech company or two, again with a good moat, you stand to gain from its ability to adapt to an ever changing market and hopefully see an increase in sales once the economy turns around.

    Disclosure: I own FEED, CALM, CPBY, CSR and SLW.

  • Report this Comment On August 30, 2009, at 4:48 AM, Doccus wrote:

    I don't think anything i could add to above three entries would be necessary.. 100% right ... live within means so you have cash to invest and then pick informedly and wisely.. classic Asian values too, as well as New England, incidentally.

    I second precious metals... also

  • Report this Comment On August 31, 2009, at 6:08 AM, Doccus wrote:

    incidentally, nettelligent, very Tidy!! .I notice...

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