6 Picks for a Recovery That Won't Quit

04/13/2011 2:46 pm EST

Focus: FUNDS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Suppliers of energy services, staples, and capital equipment are showing good momentum alongside gold, coal, and timber, writes Jim Lowell of Fidelity Investor .

The first quarter of 2011 was remarkable in terms of the flood of natural and man-made disasters that threatened to swamp both the economic and market recoveries…even more remarkable was that both markets at home and abroad climbed the slopes.

It was the best first quarter for the Dow in a decade, and the worst first quarter for Treasuries since 2009. Also remarkable: the Russell 2000 Small Cap benchmark is back to a pre-crash high, and the S&P 400 Mid Cap index is at an all-time high.

I remain steadfast in my focus on the fundamental evidence of recovery: despite the convergence of the worst of geopolitical times, the economic realities on the various grounds didn’t succumb, and the markets trended toward clearly climbing each wall of worry.

As with the first green shoots of spring, it’s early days to forecast robust growth. Unexpected blights can ruin even the healthiest looking shoots, but there’s little reason to assume that no growth will supplant slow and gaining growth.

Why eBay Is Bidding High
What gives me confidence, despite all the sudden and escalating event-driven issues—and despite the fact that confidence reports reflect increasing doubts about the near term?

We continue to see consumers spend ahead of both income and savings, a bullish action that speaks louder than the confidence reports.

Mergers and acquisitions continue apace. eBay’s (EBAY) interest in GSI Commerce (GSIC) was good news on the typical M&A theme: businesses looking to get more competitive tend to think the time is right for doing so, and that they will find enough increased commerce to be rewarded for doing so.

My current momentum indicators are signaling strong sector buys among consumer staples, industrial materials, agricultural commodities, coal, timber, and gold—the goods and services that trend toward rising when confidence, civilization, and construction have all been razed.

Momentum Picks to Click
I like the PowerShares DB Agriculture (DBA) basket of soft commodities (cattle, corn, cocoa, soy, sugar, wheat, and more), which pairs well with Fidelity’s no-load Select Consumer Staples Fund (FDFAX). Proctor & Gamble (PG), British American Tobacco (BTI), Unilever (UN), and Johnson & Johnson (JNJ) are in the fund’s Top Ten holdings.

With nuclear energy under renewed scrutiny and global energy demands rising, coal is the most easily mined and transported source for keeping the lights on. Market Vectors Coal ETF (KOL) is my preferred vertical bet here.

More broadly, I like the no-load Fidelity Select Energy Services Fund (FSESX) as a play on the need for more equipment, transport, processing, and manufacturing in the oil and natural-gas fields. It’s my Levi Strauss approach to a wildly volatile sector; selling the miners the picks and shovels and making a profit whether or not they strike black gold.

Reconstruction plays abound in Japan and down the road in the Middle East (reconstruction in the Middle East won’t be so much infrastructure in general as pipeline in particular, making Select Energy Services a likely standout there).

One such Japan play that is more overlooked than, steel, water, or aluminum is timber. Guggenheim Timber (CUT) owns companies that own or manage forested land. Harvested timber is a key source of any rebuilding effort.

Fidelity Select Industrial Equipment Fund (FSCGX) invests in companies engaged in the manufacture, distribution, or service of products and equipment for the industrial sector, including integrated producers of capital equipment (such as general industrial machinery, farm equipment, and computers), parts suppliers, and subcontractors. General Electric (GE), Caterpillar (CAT), Cummins (CMI), and General Dynamics (GD) are among the Top Ten holdings.

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