Which sector do you think will perform best in 2022? In this clip from "The Rank" on Motley Fool Live, recorded on Jan. 31, Fool.com contributors Jason Hall, Dan Caplinger, and Matthew Frankel, CFP®, take a look at a sector that encompasses a wide range of stocks and discuss why they think it will continue to lag the market this year.
Matt Frankel: Moving onto No. 8. These rankings were boring. We're all in agreement with most of these. We all ranked this either 8 or 9, so coming in at No. 8, this is the communication sector. This includes industries like telecommunications, entertainment, interactive media. This is a broad array of companies. This includes everything from boring telecom providers like Verizon and AT&T, all the way up to social media companies like Facebook are in the communication sector. Jason, why don't we start with you, tell us about the communication sector and why you ranked it toward the bottom.
Jason Hall: Here's an interesting thing. You guys might know the answer, but what are the two largest stocks in the communication sector? Do you happen to know?
Frankel: One's got to be Facebook -- Meta.
Hall: Meta is No. 2, Alphabet is the largest, and I named two companies that everybody that's watching just immediately assume were tech companies. That's the weirdness of the way these sector cohorts are built. That to a certain extent makes this I don't want to say it's like that's what it is to me. It's just a reminder that it's no longer valid practice to rebalance your portfolio by sector. Because if you're just buying the index-based to build a sector exposure, you are going to get exposed to all kinds of stuff that is or isn't what you think it might be. I think that's a reminder to me. I guess this is one where I feel like we're just going to see a lot of companies are just going to lag. We're going to see continued consolidation in the entertainment space. That's a big part of the communications industry and I'm not sure that a lot of that consolidation is necessarily going to be shareholder rewarding really quickly. Some of the biggest companies are just going to get bigger and richer. Many of these companies are already so mature and generally the space is very mature and so much of the money that the companies are generating, they're reinvesting right back into the business. There's not necessarily earnings that flows back out to investors. Think about Netflix as an example. This is a company that generates really strong cash flows now, but they have to spend every bit of it to generate new programming just to remain on the top of the heap and I think in general that is of emblematic to me of why this is difficult in areas where there are growth and I'm not sure that other companies that are like the traditional telecoms, like AT&T, which hasn't increased dividend in two years and it's probably going to cut it and then Verizon, which its growth is slowing so much and they've had to revamped their strategy, are going to be able to outperform. It's just in the middle of the pack. Dan?
Dan Caplinger: Yeah, I just saw this. This sector, I feel like, there was a whole bunch of stuff that got pulled forward into 2020, into 2021. You had so much of the option to social media, the option to 5G network exposure. So much of this, you've had trends pushing it higher over the past couple of years. Whether it's true or not, and I've seen some research that suggests that it's not true, but I'm still a big believer in mean reversion. I feel like it fits into behavioral psychology as far as what the investor mindset is. When you have some things that get pulled forward, then people just naturally try to gravitate toward other areas that are going to be faster growers and let the previous fast-growers coast and have a little bit of renewal and rest period. That's what I see here. Yeah, as you pointed out, Jason, it's a funky mix of these higher growth areas combined with the almost, I mean, Verizon and AT&T, I don't know if they were technically used to be utilities, but they were very utility-like. Everybody treated them like utilities, again, regardless what the sector was called. That's why I put it in my bottom third. I think it can do fine. It's just not going to be what it has been the past couple of years, and it's got enough components that are going to be coming off of really high periods that I think it will hold that back a decent amount.
