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We didn't need yesterday's closing numbers to tell us the second quarter wasn't pretty, but they're telling nonetheless. The S&P 500 lost 12% for the quarter and is now down over 15% from its April 23 high. Those losses do have an upside, though: There are now more (and better) bargains in the stock market than there were in mid-April. Here are three sector ETFs and three stocks that could help you prep your portfolio for gains in the second half of 2010 or beyond.
I've been vocal about favoring stocks in defensive sectors in the current environment. Health care has underperformed the market so far this year because of fears about the impact of health-care reform and patent expirations. I think health-care firms will evolve to meet these challenges and at 11 times this year's estimated earnings, health care is the second-cheapest sector in the S&P 500. Those are reasons to like the Health Care Select Sector SPDR (NYSE: XLV ) , which tracks health-care stocks in the S&P 500.
Goldman Sachs upgraded orthopedic implant manufacturer Zimmer Holdings (NYSE: ZMH ) on Tuesday. That's no reason to buy the stock in itself, but it looks like a smart call. The thesis here is straightforward: At 12.7 times estimated 2010 earnings -- less than the market multiple -- you can buy a piece of a global leader in a growth market. The stock doesn't pay a dividend, but the company earns solid returns on shareholders' equity, so it's not a deal breaker.
Energy has a bad name right now, tainted by BP's (NYSE: BP ) Deepwater Horizon fiasco and fears of a slowdown in the global economy. It's one of the worst-performing sectors in the S&P 500 (-13.2% year to date) and it tops health care as the cheapest sector in the S&P 500, commanding just 10.9 times this year's estimated earnings. Despite the fact that energy is not a defensive sector, I like the Energy Select Sector SPDR (NYSE: XLE ) and the Vanguard Energy ETF (NYSE: VDE ) .
You don't have to go down any rabbit holes looking for individual names in energy -- they're hiding in plain sight. Take oil and gas supermajors ExxonMobil (NYSE: XOM ) or Total (NYSE: TOT ) , for example. Both are among the best operators in the industry, earning great returns and gushing cash. They also return a lot of that cash to shareholders through dividends (Total's dividend yield is 5.1%) and share buybacks.
Think defensively, but expect volatility
There you have it: two sectors, three ETFs, and three stocks. More conservative investors may choose to favor health care, but don't fool yourself: This market is driven by macro concerns, and no area is protected from rising volatility right now.
One of the hallmarks of a high-quality stock is a sustainable, above-average dividend. Jordan DiPietro has identified the best dividend stock. Period.