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:

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.