Key Sectors and Industries for Stock Investments - dummies

Key Sectors and Industries for Stock Investments

By Paul Mladjenovic

Many stock investors can benefit from a practice referred to as sector rotation (not quite like crop rotation, but close enough). The idea is that you shift money from one sector to another based on current or expectant economic conditions. There are a number of variations of this concept, but in most cases, they follow some essential ideas.

If the economy is doing poorly or if the outlook appears bearish, you shift to defensive sectors such as consumer staples and utilities. If the economy is doing well, you shift money to cyclicals such as technology and base materials. Given today’s problematic economic conditions, sector rotation makes sense and is worth a look by long-term investors.

The automotive sector

Cars are big-ticket items and are another barometer of people’s economic well-being — people buy new cars when they’re doing well financially (or at least perceive that they’re well-off). A rise in car sales is usually considered to be a positive indicator for the economy.

The automotive sector is still feeling its way. Although the government has used taxpayer funds to rescue some individual companies (such as General Motors), the automotive industry is still not on a healthy track. The growth opportunities are not yet clear for stock investors.

The computers and electronics sector

In recent years, technology stocks have become very popular with investors. Indeed, technology is a great sector, and its impact on the economy’s present and future success can’t be underestimated. The share price of technology companies can rise substantially because investors buy shares based on expectations — today’s untested, unproven companies may become the Googles and Apples of tomorrow.

With the success of Apple as it forges a path in the world of personal electronics (such as the iPhone and related technology), this area will continue to show growth as worldwide consumer demand continues to show strength. Don’t lose sight of the fundamentals as this industry continues to mature.

In spite of the sector’s potential, companies can still fail if customers don’t embrace their products. Even in technology stocks, you still must apply the basic rules and guidelines about financially successful companies. Pick the best in a growing industry, and you’ll succeed over the long haul.

The financial sector

Banking and financial services are intrinsic parts of any economy. Debt is the most important sign of this industry for investors. If a company’s debt is growing faster than the economy, you need to watch how that debt impacts stocks and mutual funds. If debt gets out of control, it can be disastrous for the economy.

As one credit specialist, Doug Noland, points out in his column, the amount of debt and debt-related securities recently reached historic and troublesome levels. This trend means that many financial stocks are at risk if a recession hits anytime soon.

Financial stocks have emerged from a tough period of troubles in subprime debt and related difficulties. Because this is an area susceptible to debt troubles, problems will persist during 2013–2014. Investors should be very selective in this industry and should only embrace those lenders that are conservative in their balance sheet and are generally avoiding overexposure in areas such as international finance and derivatives.