Wednesday, September 16, 2015

Sector Scoping

Portfolio Gremlin here to talk about sectors.  Currently I am in upstate NY for work and thinking about investing, a lot.  I'm also thinking about how I've been traveling a lot for work, and how it'd be nice to get a little bit of a slowdown.  After all, I don't want to miss important things at home!  But, enough of that talk, time to chat about sectors.  Ever since I've taken up Dividend Growth Investing (DGI), I've seen articles posted about how people view sectors.  Mind you I've seen that since before I started posting anything as well.

So now I will give you my take, and its a little different than others I've read because I view it in a very flexible way.  That way is based upon Tiers, with Tier 1 being the most important and Tier 3 being the least important.  The point of those is to recognize industries that distinguish themselves for always being needed versus those that are either niche / smaller markets or limited in their future growth.  However, it should be noted that sectors and industries are not nor should they ever be considered hard and fast rules.  No level is locked in, and change over time is expected.  Much like companies and stocks themselves, dynamics can change overtime for better or worse.  Even then, sectors are of lesser importance than the quality of the companies themselves.

Tier 1: The Core

Consumer Staples - There will always be a need here.  Until someone learns how to clone and or make food like the future version (of the good future) of Back to the Future II, this will be an important block in the world economy.  The same goes for soaps and other hygiene related products.  Examples: PG, UL, PEP, KO, etc.
Industrials - Much like their more edible cousin above, these are the backbone of the world of getting things done.  What do I mean?  I mean machinery, shipping, chemicals, transportation, and other such things they make.  Fact is they are here to stay, get used to it.  Only exception to this rule is if we can beam stuff places.  Examples: APD, UNP, CAT, GWW, etc.
Financials - Everything and person has a cost.  These guys prove this on a consistent basis and reinforce the fact that cash (whether electronic or in hand), is the grease that turns the wheels of the economy.  Examples: BNS, WFC, BEN, TROW, etc.

Tier 2: The Role Players

Consumer Discretionary - The younger, less cool brother of Consumer Staples, but still on the HS football team and in the popular crowd.  They make cool things; like fashionable clothes or other similar items belong here.  Really awesome super savers could even argue car companies belong here, and I disagree.  These are closer to the things that are truly luxuries no matter how much they are taken for granted, often including your vices and leisure money.  Examples: DIS, VFC, DEO, PM, etc.
Energy - Related in many ways to industrials, but different.  The mix of energy is changing, it could be argued rapidly, but only a fool would think that large players will not adapt.  Yet, at this very moment they are needed and the real change is decades away.  Examples: CVX, BP, KMI, XOM, etc.
Materials - A very similar to outlook to energy, but for a different reason - materials recovery.  In the short run they are fine, in the long run the future is much more fuzzy than energy.  New deposits for naturally occurring materials (gold, silver, copper, rare earths, etc.) are tough to find.  However, materials that are manufactured have a great future ahead.  Due to the cross-section the demotion is earned.  Examples: DOW, DD, BBL, etc.
REITs - These are the younger siblings of finance.  Some are super cool, some are total recluses that everyone avoids.  The field also has a massive variety, from those focused on industrial and commercial land, to those focused on purely healthcare places.  There is a general merit to the involvement with real estate, but it is important to find excellent management.  Examples: O, WPC, HCP, DLR, etc.
Healthcare - Here is a strange one.  On one hand they have a huge aging population to work with and a world in constant need of service.  Yet, they have an aging population, so will their market remain forever as strong?  I tend to think it will.  It is also a field dependent like Materials, Energy, and Industrials on science.  Sciences is never straightforward, direct, or easy to predict making a poor choice here a costly one.  If any sector in my mind has a chance to upgrade, its right here.  Examples: JNJ, BAX, BDX, PFE, etc.

Tier 3: Special Teams

Utilities - Depending on what they serve, they could be a bombshell.  Otherwise it might be a bumpy and dangerous ride.  As of right now, electric utility seems to be feeling the most heat due to renewables, but thinking they are the only ones who may feel pressure could be a future mistake.  Still I would be bullish on a few choice players and water / gas utilities.  Examples: SO, D, OGS, AWR, etc.
Telecommunications - Do they power your phone or internet?  Then they are probably found here, though there are many choices, there are few good ones.  Many smaller options have either been hammered or swallowed by the big players - making a near oligopoly.  Examples: T, VZ, etc.
Information Technology - This is an interesting sector.  Parts of Telecom could fit in here in the future, and it appears to be loaded with growth.  However, this is a very very speculative field filled with boom or bust.  A word of caution should be attached to a lot of stocks here, but there are some potential beasts patrolling the arena.  This sector has the most potential to be upgraded.  Examples: AAPL, MSFT, etc.

Important side note: this post was first drafted as I was doing research for my next post.  My next post is related to a taste test across NY State IPAs.  Though to be fair, I only had 2 during this post writing!

- Gremlin

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