With stocks up more than 10% since the beginning of September, the Fed's Pavlovian whispers regarding a second round of money-printing have certainly got investors barking and salivating. If, like me, you prefer to reserve your appetite for more nourishing fare than the artificial sugar of money printing, you may enjoy the menu that Gluskin Sheff economist David Rosenberg recommends.
What works in the "new normal"
Not all sectors will do equally well in the low-growth environment facing advanced economies for the foreseeable future -- the so-called "new normal." As such, Rosenberg looked at stock sectors on the basis for four criteria:
- Low correlations to sluggish U.S. economic growth.
- High correlations to stronger emerging-market growth.
- Dividend yields at least as good as what bonds pay.
- Below-average P/E ratios.
Winners & losers
By these measures, consumer staples, health care, and energy came out on top, followed by utilities. Meanwhile, industrials, consumer discretionary, and financials did not do well.
How can you benefit from this insight? If you own broad-market index funds, you could replace them with more direct exposure to the first set of sectors by using the sector-specific stock ETFs (exchange-traded funds). For instance, Vanguard Energy ETF
3 stocks with the right ingredients
Alternatively, investors with the time and expertise to analyze individual stocks may want to focus their search within the same sectors. Within the three S&P 500 sectors, consumer staples, energy, and health care, I found 27 stocks that meet Rosenberg's third and fourth criteria. They include:
Forward P/E Multiple (based on 2011 Est. EPS)
Philip Morris International
|SPDR S&P 500||13.8||1.98%|
|10-year Treasury Bond||2.43% (yield-to-maturity)|
Source: Capital IQ, a division of Standard & Poor's, State Street Global Advisors.
I think there are good odds that this group of 27 stocks will collectively beat the S&P 500 over the next five to seven years, on average. In an economy that still faces enormous challenges, these defensive, income-oriented names should command a premium. When you can buy them at a discount to the broad market instead, well, that's the sort of promising opportunity that rings my bell.
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