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Stack’s Top Sectors and Picks for 2012

04/10/2012 11:30 am EST


James Stack

President, Stack Financial Management

InvesTech Research’s Jim Stack shares his outlook for where we are in the economic cycle, and which sectors he thinks will perform best in 2012.

Jim, things are changing, aren’t they? I mean this time last year, we were looking at really different sectors than we are this year.

Yes, we really are, but at the same time we went through a very healthy correction last year that eased some of the pressures that were developing in early 2011.

Remember, we had oil over $115 a barrel, and commodity prices were sky-rocketing upward. Commodities have corrected down 20%, oil has pulled back, and those are positive developments for the economy.

It is important to keep in mind where we are on this Wall Street road map. We are two and a half years into this economic recovery, and most economic recoveries, if you look at the past century, most of them last between two and five years.

So this recovery is no spring chicken. But on the other side of the coin, the fact that we eased some of those early pressures last year means that we could likely go out to four or five years in this recovery.

I’m sorry, but do you think that’s because of what we have been through with all the volatility, especially with what has been happening in Europe and the sovereign debt issue? Do you think that we might extend this cycle even a little bit further just because it hasn’t been a typical, let’s go down, let’s go up, and now we are going to go down again?

Never underestimate the length of an economic cycle, or really the resilience of the US consumer. For example, if you go back to the 1980s, coming out of the bad recession in 1982 everyone thought that would be one of the shortest economic expansions in history. It turned out to be the second longest at the time.

So again today, if we look at what’s happening in Europe, that is a concern. In fact, the International Monetary Fund and the World Bank in January said that they expect the Eurozone growth to turn negative, to dip into possible recession status this year.

What investors have to keep in mind is that the majority of Eurozone recessions over the past 60 years—that is, if you look at all of those 13 recessions—the majority of the US market continued climbing right through the recession. So that should not determine your outlook for the US markets.

Right. Well it is good to know that someone thinks we are not tied at the hip to Europe. But, now in terms of sectors, you know general economic expansions go from small caps look really good at the beginning, and then they sort of go into the mid cap, and then to the large-cap blue chips. Are you seeing a transition to a different cycle now?

We are seeing a transition both in the size of capitalization of companies as well as sectors.

You don’t want to be invested necessarily in the early sectors of the bull market. I would tend to avoid the financials because of the systemic debt problems. They may be great performers, but they also carry the highest risk.

Some of the best values out there I think are in the blue chips, and that is one reason why the Dow is one of the leading performing indexes this year. It is actually doing better than the Russell 2000 in recouping its losses from last year’s sell-off.

What particular sectors do you think look very favorable right now?

You have to look at that both from two standpoints: where we are in the economic cycle, as well as the fact that it is a political election year. Historically, the top three sectors in a presidential election year are energy, industrials, and then normally financials…but again, I am skeptical about that.

Another sector that I think will be near the top, and remain near the top, is technology. Part of the reason is because corporations and businesses have put off a lot of their technology upgrades over the last two years because of all the fearful headlines of a double-dip recession.

And they have a lot of cash.

Yeah, they have a lot of cash. As those fears of a double-dip recession subside, we are seeing that upgrade cycle and technology companies are a prime beneficiary.

OK, that sounds like a good strategy for someone. Can you just give us one stock symbol of a company you really like today?

Well, if you want to buy a good oil company, a domestic oil company that is a good hedge against geopolitical turmoil in the Middle East, buy Marathon Oil (MRO). If you want to buy one of the best-value technology companies, you know Apple (AAPL) is a good value technically speaking, but it is kind of priced to perfection.

I know!
I can’t recommend Apple, just because it is really priced perfectly.

And Microsoft (MSFT). People don’t realize, Microsoft is still growing at close to a double-digit annual rate. And if you take the cash on its balance sheet and factor that out, it is selling at a single digit price-to-earnings ratio. Who could imagine you could pick up a gold-plated blue chip like that at that kind of a valuation today?

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