23-Year Trend: First-Quarter Market Gain Predicts Up Year – Sectors to Watch

According to the research folks at S&P Capital IQ, the fast start in the first quarter is likely a harbinger of more good times to come. The rest of the year could be especially profitable for Health Care Select SPDR ETF (XLV), Consumer Staples Select ETF (XLP) and Utilities Select SPDR ETF (XLU).

First, a quick history lesson: Since 1990, in years in which the market had a positive first quarter, it continued to post strong gains the rest of the year 86% of the time. The average gain from April through December was a none too shabby 8.5%. And the hot hands tend to stay hot. When the S&P 500 has a positive first quarter, the three sectors with the strongest gains at the start of the year went on to post positive gains for the rest of the year 93% of the time and the average gain was 12.1%.

The S&P 500’s three best sectors in the first quarter of 2013 were health care, consumer staples and utilities. Here’s the performance of the three ETFs that track those sectors:

XLV Chart

XLV data by YCharts

There’s just one potential problem: those three sectors aren’t exactly cheap. All are trading at PE’s above their historic norm, which isn’t exactly surprising given that the market is at an all-time high. (If you want cheap, Info Tech is where you need to be shopping.)

Using YChart Stock Screener you can sort through each sector for the most compelling values. On the left side of the page under the "All Companies" drop down select "Indexes" and then "S&P 500." Once you’ve pulled up that Screen, Pro subscribers can choose “Intersect” and plug in one of the sectors. From there you can add all sorts of metrics.

Starting with Health Care, only WellPoint (WLP) is rated Attractive according to YChart’s valuation measures. A sub-9 PE ratio is less than half the level for Johnson & Johnson (JNJ) and DaVita (DVA). Abbott Labs (ABT) is the only other health care stock with a sub 10 PE ratio.

Next up, the Consumer Defensive sector. The darling of scared-off investors just now returning to the stock market, staples have been bid up by the defensive minded. The sector’s 15.7 PE in 2012 was well above the 13 for the entire S&P 500. Its 2013 estimated PE is expected to be around 17, compared to 14 for the market.

YChart Stock Screener turns up Lorillard (LO) and Safeway (SWY) as the only Attractives in the sector. Safeway’s 10.7 PE ratio is the cheapest in the group. You also pick up a nice 2.8% dividend yield from a company that has managed to more than triple its dividend over the past year, while keeping its payout ratio below 30%.

SWY Dividend Chart

SWY Dividend data by YCharts

The Health Care is another fave of the cautious crowd, in large part because of its enticing 4%+ yields. But on average the sector is mighty pricey. Historically this slow-grow segment of the market has traded at a discount to the rest of the (faster-growing) market. Not now. The estimated 2013 PE for the sector is nearly 16; way higher than the 14.1 for the overall S&P 500. The only two Attractives in this sector are Entergy (ETR) and PPL (PPL). Both face uphill slogs in their markets, but for the yield chaser a 5.2% dividend yield for Entergy and 4.7% for PPL gives you an immediate payoff while you wait for a rare undervalued stock in the utility sector to rebound.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com.

Read more articles about: Investing Ideas  

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