Your Best Bets for the Second Half of the Year

June is drawing to a close and you know what that means -- the year is almost halfway through. After a strong start this year, the S&P 500 has petered out, and though we're still up significantly from where we were this time last year, that index is now very close to where it ended 2010.

With America's lackluster economy, the end of QE2, debt disasters in Europe, and the specter of slowing growth in China, where should investors turn for returns in the back half of 2011? That depends a lot on what type of investor you are.

What's working
Many investors like to stick with what's been working and, from a stock-performance perspective, there's been a very clear winner for the first half of the year: Health care. Here's a look at the top five sectors by median stock performance in the first half.

Sector

Median First-Half Stock Return

Average Stock Return

Health care 9.8% 13.3%
Consumer staples 6.3% 7.4%
Consumer discretionary 6.0% 4.6%
Utilities 4.8% 6.0%
Materials 3.3% 0.1%

Source: Capital IQ, a Standard & Poor's company.

It would appear that concerns surfacing in the first half of the year have sufficiently scared investors into many of the market's traditional defensive sectors, including health care, consumer staples, and utilities.

Digging into health care in particular, the health insurers have been lighting it up so far this year. Humana is up 47% so far this year, Aetna has tacked on 42%, and UnitedHealth is 40% higher. Not only might these have an edge as investors start to think defensively, but concerns about health-care reform -- which were weighing on these stocks -- aren't top-of-mind anymore.

Of course, stock performance isn't the only measure of what's working. How about which sectors are seeing the hottest growth? Below are the top five sectors sorted by trailing-12-month net income growth.

Sector

Median Trailing-12-Month Net Income Growth

Median Trailing-12-Month Revenue Growth

Industrials 35.3% 11.0%
Energy 34.9% 18.1%
Materials 34.8% 12.7%
Telecom 29.6% 15.2%
Information technology 28.6% 17.6%

Source: Capital IQ, a Standard & Poor's company.

There's a very obvious disconnect between which sectors are showing financial growth and which are watching their stocks soar. Infotech was the second-worst-performing sector, with a median loss of 0.7%. With a mere 0.4% gain, telecom wasn't far behind.

So what gives here? These are by and large very economically sensitive sectors, so if the U.S. economy really is slowing back down, then investors can logically expect that earnings growth for these sectors may hit the skids.

In many specific instances, stocks dropped despite eye-catching growth. Earnings per share more than doubled at both Robert Half and PACCAR (Nasdaq: PCAR  ) over the past year, yet the stocks fell by 15% and 16%, respectively. If the market has overblown its economic concerns, companies that have had business momentum but not stock-price momentum could be a good place to look in the second half.

What's cheap
As a value investor, I often am looking for situations roughly 180 degrees from what I reviewed in the section above. That is, I like to find stocks that have been ignored, beaten down, and otherwise mistreated by investors. The pickings aren't always pretty, but there are often some great opportunities hiding out.

Here's a look at the five worst-performing sectors over the first half of this year, along with their projected forward price-to-earnings ratio.

Sector

Median First-Half Stock Return

Median Forward P/E

Financials (3.8%) 13.1
Information technology (0.7%) 13.7
Telecom 0.4% 15.6
Industrials 2.1% 14.2
Energy 2.9% 14.4

Source: Capital IQ, a Standard & Poor's company.

It probably shouldn't be all that shocking that financials continue to be the must-avoid sector. Not only are there still looming questions for the group thanks to the lousy housing market, opaque balance sheets, and a sluggish economy, but there's also a definite "distaste" factor going on for companies like Goldman Sachs and Capital One. But with Goldman trading at 7.6 times forward earnings, Aflac (NYSE: AFL  ) at 7.2 times, and Capital One at 7.9, there may be a very good case for holding your nose and picking through the rubble.

Of particular interest for value investors is that one of the cheapest sectors doesn't even show up on this list. In fact, it topped the list we looked at earlier. Yes, I'm talking about health care. Despite the run-up so far this year, the sector has a median forward P/E of just 13.7. Top performers Humana, Aetna, and United Health were so cheap previously that even after their big runs, they still have respective multiples of only 11.6, 10.4, and 12.1.

Many of the names in big-cap pharma are even cheaper -- Pfizer (NYSE: PFE  ) and Merck (NYSE: MRK  ) trade at 9.1 times forward earnings, while Eli Lilly (NYSE: LLY  ) changes hands at 9.4 times.

What's paying you
Rounding things out, with dividends once again of interest to many investors, you may be looking for the stocks and sectors that are going to give you a nice payout. Here's a look at the top five highest-yielding sectors at this point in the year.

Sector

Median Dividend Yield

Median Year-Over-Year Dividend Growth

Telecom 7.4% 2.4%
Utilities 4.6% 4.4%
Consumer Staples 2.9% 8.9%
Industrials 2.1% 7.7%
Financials 2.0% 1.3%

Source: Capital IQ, a Standard & Poor's company.

As you can easily see from the chart, investors can find some very fat dividends in the telecom sector, but for those who want to balance dividend payouts with dividend growth, other sectors like consumer staples and industrials could be a better bet.

Big payouts like the 7.4% you can grab with CenturyLink (NYSE: CTL  ) are no doubt tempting, but with a challenged industry and a high payout ratio, there's not a lot of room for dividend growth. Meanwhile, the 3.4% payout at Procter & Gamble (NYSE: PG  ) may not wow high-yield lovers, but overseas growth opportunities and a much lower payout ratio give P&G opportunity to continue its long tradition of dividend growth.

Of course, if dividends are on your menu for the second half of the year, you may want to check out the 13 high-yielding dividend stocks my fellow Fools think are worth buying. You can get a free copy of the special report here.

The Motley Fool owns shares of Aflac and UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of Pfizer, UnitedHealth Group, Aflac, PACCAR, and Procter & Gamble. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Eli Lilly, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (9) | Recommend This Article (60)

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 June 29, 2011, at 6:52 AM, plange01 wrote:

    unless obama can be removed from office very quickly the US will have a major collapse far worse than the recent credit crisis.

  • Report this Comment On June 29, 2011, at 8:02 AM, jdmeck wrote:

    plange01 - Even without Obama we are headed for trouble. He he will just make it sooner and longer lasting.

  • Report this Comment On June 29, 2011, at 10:01 AM, TMFKopp wrote:

    @plange01

    You're comments are like a warm ray of sunshine early in the morning. Thanks!

    Matt

  • Report this Comment On June 29, 2011, at 11:46 AM, steelhead52 wrote:

    Yes, let's bring back the Repubs, who inherited a fat surplus from Clinton, and with tax breaks for the rich and a war in Iraq turned into into a whopping deficit. (And remember how Cheney used to go around saying "Deficits don't matter" as his mantra?)

  • Report this Comment On June 29, 2011, at 12:04 PM, BigAl1825 wrote:

    Exactly what has Obama done to hurt the situation that wasn't set in place by his predecessors?

    If anything, this article highlights how the rhetoric of the Right on Obama was exactly wrong: the healthcare sector and health insurers have done gangbusters since the passage of the healthcare bill - exactly the opposite of what the GOP insisted would happen.

    But then again, everything is exactly the opposite of what they think is going to happen. I wish I could know political affiliations, stock pics, and sports bets for the average Republican, so I would know where not to put my money.

  • Report this Comment On July 02, 2011, at 3:40 PM, earlyseller wrote:

    In all silly years of investing my monies, I think that it still comes down to how well the companies are doing. If you rely on the plusses or minuses of politicians (S**T heads) then you deserve to be unhappy with results. They can't run the country except for their own benefit so do not expect them to care about your "retirement" "Health care" "income" "job security" etc. etc. etc.

    Earlyseller and old guy

  • Report this Comment On July 02, 2011, at 9:18 PM, mjmac89 wrote:

    Thanks for not giving us any best bets.

  • Report this Comment On July 04, 2011, at 4:54 PM, ajstudebaker wrote:

    When the financial situation in Greece was critical some time back, we found out that Aflac owned a lot of Greek government bonds. Since then, I have stayed away from the stock.

  • Report this Comment On July 11, 2011, at 3:05 PM, energysystems wrote:

    steelhead52-Clinton didn't balance the budget, the Republican majorities in both houses did. They didn't "inherit" the budget suplrus, they legislated it. The free spending from Democratic majorities in both houses from 2006-2011 certainly helped spend our gov't into it's current situation, or will you just ignore that fact as well?

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