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
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
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
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
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.
