BOSTON (TheStreet) — Professional money managers are likely to continue to bet on the industrial materials and energy sectors this year, given the strong performance of those stocks last quarter.
In the case of mutual funds, sector allocations are influenced by a fund’s style category, as well as its managers’ outlook. Trying to draw conclusions from their allocations, which can include data more than 3 months old, is fruitless.
Indicative of the portfolio mix that diverse funds hold, Morningstar says the average fund in the large growth category has sector weightings of 13% to computer hardware, 12.6% to health care, 11.5% to industrial materials, 10.3% to financial services, and 7.7% to energy. At the other end of the spectrum, small-cap value funds are on average: 25% financial services, 16.8% industrial materials, 8.6% consumer goods, 8% energy and 5% utilities.
But sector investment returns late in the year could be used as a proxy for what investors are betting on in 2011 and serve as a starting point for go-with-the-flow investors.
In that case, it’s clear that the industrial materials and energy stock sectors are where the action is, as they showed the most appreciation out of the 12 industries tracked by Morningstar over both the fourth quarter and December.
Industrial materials stocks, which include stocks of companies involved in the production of chemicals, industrial gases and fertiliser, gained 16.4% in the fourth quarter, including 8.8% in December, resulting in a 31% jump for the year, the best of all sectors, according to Morningstar data. That sector has also been the top performer over the past three-year and five-year periods.
In contrast, the Standard & Poor’s 500 Index returned 13% in 2010.
Energy stocks also closed out the year with a bang, benefiting from rising international demand and oil supply concerns. The sector closed out 2010 with a 15.5% fourth-quarter gain, about half that coming in December. Energy stocks were up an average of 13.8% in 2010.
The consumer services sector, which includes retailing, restaurants, auto resellers and vacation companies, was the third-best performing sector in 2010 and in the fourth quarter with a 12.8% return in the period. The media sector, which includes print, broadcast and Internet services companies, was the second-best performer in 2010 with a 29% return, including 11% in the fourth quarter.
The computer software and hardware sectors, which are tracked separately, each closed out 2010 with roughly 23% returns.
What follows is a look at some prominent names money managers may be looking at in 2011.
One of the top returners in the industrial materials category is Eaton (ETN ), a supplier of components for power management, truck transmissions and fluid power systems, is lumped into the industrial materials category.
Eaton is one of those companies that is hard for investors to get their arms around because its product line is so diverse and esoteric. But investors should recognise the momentum in its stock price as the shares jumped 59.6% in 2010, with roughly half of that coming in the fourth quarter, after gaining 32% in 2009.
The company is seen as benefiting from a rebounding economy as demand for industrial products, everything from small compressors used in construction to hydraulic components used in truck-braking systems or in aircraft, picks up. It sells to original equipment as well as aftermarket customers, and generates over 50% of its sales outside the United States.
Eaton’s earnings are on a roll, up 38% in the third quarter on a per share basis. For fiscal year 2011, analysts estimate profits will grow 27% to $7.09. Institutional investors, as a group, raised their stake by 10% in the third quarter, to 31% of outstanding shares.
In November, Goldman Sachs upped its rating to buy from neutral and put a $117 price target on it, which is a 13% premium to its current price. Per FactSet, analysts give the company seven “buy” ratings, two “outperform” and 12 “holds.”
Although it started out as strictly an oil sands development company, Suncor has transformed itself over the past 18 months through a merger and joint-venture deals, giving it the potential for tremendous growth but also introducing high execution risk.
Suncor merged with Petro-Canada in August 2009 to create one of the largest, integrated oil and gas producers in Canada and yet its market capitalisation is still relatively tiny for its industry at $59 billion.
Three weeks ago the company announced plans to increase daily production by almost 75% over the next 10 years, to 1 million barrels a day, in concert with a partnership agreement with international oil giant Total S.A. (TOT).
In addition to its exploration and production from oil sands in Western Canada, Suncor owns nine oil refineries in the U.S. and Canada. For 2010, analysts estimate that it will earn $1.56 per share, and that will grow by 43% to $2.23 in 2011. Shares were up 8.4% in 2010. Analysts that follow the company give it three “buy” ratings, nine “buy/holds,” and eight “holds, according to Standard & Poor’s.
Sirius XM Radio
A leader in the media sector’s strong showing in 2010 was Sirius XM Radio (SIRI), with a return of 172%. It closed out the year with a 31% rise in its shares in the fourth quarter, although that rally only brought the stock price up to $1.67.
Sirius provides a subscription-based digital radio service whose broadcast signals originate from orbiting satellites. Its primary means of distributing satellite radios is through the sale and lease of new vehicles. Sirius has agreements to offer its hardware with automakers and car dealers. It merged with XM Satellite Radio in July 2008 and flirted with bankruptcy at one point.
Helping its outlook lately is the announcement that shock jock Howard Stern, who has a loyal audience base, agreed to a new, five-year contract in early December. He is coming off a five-year, $500 million contract.
As is true for Stern listeners, Sirius is for the faint of heart. For one thing, most radio listeners opt for free, over-the-air AM-FM radio, rather than paying to subscribe to satellite radio. Second, media content is evolving rapidly and listeners can increasingly get their news and entertainment over an Internet resource, from smartphones or via other new forms of wireless that will be available in cars in the near future.
And finally the company still has outstanding debt of $3.6 billion and has never generated positive net income. On the upside, subscribers to satellite radio grew to 20 million as of October 2010 vs. 2 million in 2003. There was huge stock buying in the third quarter from institutional investors, led by Capital World Investors, which initiated a position by buying 75.8 million or almost 2% of outstanding shares.
Indicative of the upheaval in the media sector, Sirius now has a market capitalisation of $6.5 billion, while The New York Times Co. (NYT), publisher of the eponymous newspaper and owner of the The International Herald Tribune, the Boston Globe, and 15 other daily newspapers in the U.S. along with several websites, has a market capitalisation of only $1.5 billion after its shares tumbled 20.7% last year.
Computer hardware sector stocks gained 12.4% in the fourth quarter, lifted by semiconductor stocks’ strong performance. In particular, Wall Street fell in love with Fairchild Semiconductor (FCS) late in 2010, resulting in a 76% surge in its share price in the fourth quarter. The stock ended 2010 with a 56% gain.
The company, one of the founders of the semiconductor industry, now makes chips that are used to manage the flow of power in electronic devices. They are used in a wide variety of applications, including computing, consumer electronics, and industrial products. It is in a highly competitive and cyclical industry, so when the headwinds are against Fairchild, it really suffers.
Optimistic investors are betting that the company can expand its chips uses in the growing array of handheld devices. For fiscal year 2010, analysts estimate the company will post earnings of $1.45 per share but that that will decline 6%, to $1.36, in 2011.
Analysts give it three “buy” ratings, four “buy/hold,” three “hold,” and two “weak hold” ratings, according to Standard & Poor’s. Dimensional Fund Advisors was a buyer in the third quarter, and now owns 5.6% of its shares. Fidelity is a close second with 5.2%.
Royal Caribbean Cruises
Returns in the consumer services sector, up 12.8% in the fourth quarter and 7.7% in December alone, were dominated by Royal Caribbean Cruises (RCL), the world’s second largest cruise-ship company.
The stock turned into the love boat for investors in 2010, as a 54% fourth-quarter closing rush brought returns to 86% in 2010. The recovering economy has resulted in more consumer discretionary spending. That trend and the anticipated boom in the population of senior citizens as baby boomers join their ranks are seen as long-term industry positives.
The company saw strong third-quarter revenue growth of 17%. Analysts currently project revenue has risen 15% in 2010 and that the company will tack on another 12% in 2011. For fiscal year 2010, Wall Street is expecting earnings per share of $2.07 followed by growth of 57% to $3.26 per share in 2011.
That outlook is reflected in the bullish outlook analysts have on the stock as 12 rate its shares “buy,” five give “buy/hold” ratings, seven “hold” ratings, and one “weak hold,” according to a Standard & Poor’s summary. American Century Investments bought 1.3 million shares in the third quarter but AllianceBernstein is the largest investor with 8.7% of the company’s shares.