Where Should You Be Looking?

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Okay I'm just going to say it: The market is nuts right now! Tax reform is steadily being weighed out by more and more companies and the almighty orange President keeps doing things that are driving the market higher. Now I'm not in the politics game so don't crush me if you think this is Obama's doing, but nevertheless the market continues to fly.

So where should you be looking as value investors if you believe that the market as a whole is overpriced? If you read my post, "The Re-balancing Act" you will see that I am currently looking at jumping in some foreign stocks, bonds, and REITs.

I received some very unhappy messages being sent my way that going into bonds is kind of a conservative way out (my point exactly) for a guy that they thought was going to only be picking individual company stocks. 

I hear you people. You have spoken, and now I will answer.

Here is where I would be continuing to look if I was only going to invest in individual companies and had no limits in terms of positions or weights.



When markets swing upward I always look at individual sector performance and see what is getting shunned by Mr. Market and his friends. I like to use Fidelity's Sectors & Industries Overview tool. Here is a look at it currently:

So this is an initial litmus test for me is just taking a look at the industries 1-Year % Change column and see what is well behind the S&P 500. It should be no surprise that Information Technology leads the way at 43% gain and second is Consumer Discretionary. 

Before I go further let me note that just because Consumer Discretionary, for example, has beat the S&P it doesn't mean there are not bargains inside that sector. What it means is that it may be a place that money is soon to be cycling out soon in profit taking from the funds. Obviously what I am looking for is the opposite, what is undervalued that funds may cycle back into in the near future. By purchasing quality companies as the market cycles out of them you will be left with more value and thus more returns.

What is a good example of this? How about the retail swing that has occurred since November? Take a look at the S&P Retail ETF XRT and you will see that in November it was sitting at $38 and now is pushing North of $48. Has there really been that much of a change in the sector or has market sentiment simply shifted due to expectations being re-aligned and funds grabbing some value? 



Back to the list we go and really there are four sectors that stand out to me:

  1. Energy
  2. Real Estate
  3. Telecommunication Services
  4. Utilities
    (If you want to add a 5th, Consumer Staples is still well behind)

The next step is to dig into these sectors and see what subsets contain the companies that are holding back the sector.



Now you really begin to have a narrowed focus as to what is really undervalued and what is not. In the Energy sector it appears that everything is well behind the S&P but equipment more than the actual fuels. Real estate development actually has done quite well but REITs (which make up a much larger market cap) have been almost stagnant. Telecommunication has done very poorly, and the utilities, with the exception of renewables hasn't necessarily done very well.



Here is where the research really pops in and helps you narrows things down even more. What potential headwinds do each of these sectors face and is it going to potentially drive them even lower? After perusing through a lot of outlooks written by analysts here is the common themes that I have found:

  1. Energy - The oil price has risen substantially over the past year and the potential at this point for a drop is a relative concern.
  2. Real Estate - The ever growing worry about retail going online is killing the REITs, the fed raising rates also is concerning.
  3. Telecommunications - Getting even more highly competitive, margins shrinking.
  4. Utilities - Rising rates and an economy that is on a tear means that these could be shunned since they are normally defensive positions.

Now which ones of these are major concerns? For me the biggest concern would be the competition in the Telecommunications sector. This is the only thing that will truly effect the underlying earnings of the companies involved. In terms of REITs losing market share to online retail, I say you look for positions that have diversified holdings and are in spaces that can thrive even with an Amazon (AMZN). The oil price has increased again but it has been down for so long that I believe many of these companies are just playing catch up. What to watch for are the companies that haven't made the climb yet and still are holding a substantial yield. Finally the utilities is simply a market disdain due to fear that money will stay out of the sector due to the Bull Market and when it leaves it will be because of rising rates, and money will go to savings accounts and bonds instead. I'm not so sure that will be the case.



Here are a few stocks in each sector that I like:

  1. Energy
    EQT Midstream Partners, L.P.(EQM) - Over 5% yield with an opportunity for potential merger with EQT latest acquisition
    Buckeye Partners, L.P. (BPL) - Wrote about this extensively in my newsletter. Love the opportunity.
    BP plc (BP) - Own this and love to add it. Gulf fines are almost over and their investment in renewable energy is increasing. Still think this is undervalued.
    TransCanada Corporation (TRP) - Just over a 4% dividend and a lot hinges on the Keystone XL pipeline project. But Institutions have been adding...
  2. Real Estate
    Public Storage (PSA) - Recently hit a new 52wk low, great dividend history, and a business that isn't going away.
    Tange Factory Outlet Centers, Inc. (SKT) - Talked about this early in 2017 and it still is priced to own. I believe that outlets can compete with Amazon and the 5% yield is enticing too. Did I mention 25yrs of growth?!
    STAG Industrial, Inc. (STAG) - A warehouse REIT that could have huge potential. Let me ask you this: If online retail expands what do they need to ship/manufacture? Warehouses!
    Federal Realty Investment Trust (FRT) - Honestly just read this great article by Dividend Sensei 
  3. Telecommunications-
    China Mobile Limited (CHL) - Biggest in mobile in the world's biggest market where growth is still expected. Enough said.
    AT&T Inc. (T) - Just a great yield get locked in with a company that is consistent and reliable. With 33 years of consecutive dividend growth, call this Old Reliable.
    Verizon Communications Inc. (VZ) - Another large yield with growth history. If I'm buying T I'm getting this too.
    Nokia Corporation (NOK) - I really like their involvement in the push for 5G. Cheap enough at this point that I think it is a no-brainer to set and forget a small position in every portfolio. 
  4. Utilities-
    Brookfield Renewable Partners, L.P. (BEP) - I like what this company does in terms of re-investment and growth strategy. Think slower dividend growth with a focus on business growth.
    Spark Energy, Inc. (SPKE) - Another one I wrote about in my newsletters.
    The Southern Compnany (SO) - Construction woes have this stock at lows. Nice yield, nice growth history, if you have time to wait then get in on this one.
    Dominion Energy, Inc. (D) - Great opportunity here as people shy away. Recently announced acquisition plans of SCANA and that sent it lower. This is prime-time to buy if you as me.


So I gave a very quick rundown of some sectors and 16 stocks that I like between those sectors. That doesn't mean go buy them immediately, that means they need to be on your radar as I believe they are great potential additions to you portfolio.

I hope that you enjoyed hearing my thoughts on how I, as a primarily buy and hold investor, look at trying to consistently have high returns. This sector approach has worked for me many times in the past and I will continue to stick with it in the future.

As always let me know your thoughts below!