Over my many years of investing, I’ve generally advised investing in at least a half dozen of Standard & Poor’s 11 sectors, and I maintain that stance today. Right now, I find the following seven sectors (in alphabetical order) very attractive in the current market environment:
Consumer Discretionary
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunications
While the overall stock market remains healthy even as stock prices are high, some market segments are worrisome.
Most stocks in the Consumer Staples, Real Estate and Utilities sectors have been overpriced for quite some time and remain overvalued today with limited prospects for future growth.
And the oil segment in the Energy sector and the auto segment in the Consumer Discretionary sector concern me more than other segments.
Of Concern: Oil Stocks
Oil prices have fallen to $46.46 per barrel and could fall further. OPEC (Organization of the Petroleum Exporting Countries) nations seem to be curtailing production, but U.S. oil producers are drilling with a vengeance. According to Baker Hughes, the U.S. oil drilling rig count has increased to 870 rigs from 420 a year ago. Drilling rigs in Canada have jumped to 85 from 37, whereas the international rig count has fallen to 943 rigs from 985 a year ago.
The rapid increase in North American drilling has outpaced demand for oil by a wide margin. The oversupply is increasing inventory, which is causing oil prices to fall. Oil prices are likely to fall further during the next several quarters, with $35 to $40 prices possible within six months. Lower oil prices will benefit consumers as gasoline prices decline during the summer months. However, lower oil prices could send oil stock prices lower during the remainder of 2017.
Hold SLB, EQM, SEP and ARLP
However, I continue to like our four holdings in the Energy sector. Schlumberger (SLB) is a high-class company which has made several smart acquisitions during the past couple of years. EQT Mainstream (EQM) and Spectra Energy (SEP) provide pipelines and offer high dividend yields, and Alliance Resource (ARLP) is in coal and will benefit from deregulation.
Of Concern: Automotive Stocks
In the Consumer Discretionary sector, the automotive industry is showing signs of faltering. I wrote about the problems in the automotive industry in my Wall Street’s Best Daily on May 9, which you can access on the cabotwealth.com website.
In a nutshell, the auto industry is encountering numerous problems. Auto sales have declined in each of the first four months of 2017, and the declines are growing larger. Even large discounts averaging $4,000 per vehicle, and attractive financing and leasing deals are failing to stop the downtrend. Car inventories on dealer lots and used-car lots are at record levels. GM, for example, has one million cars sitting on dealer lots.
Banks and auto lenders are pulling back sharply from auto loans because of loan defaults and because lenders are over-extended in the auto loan sector. Wells Fargo, one of the largest U.S. auto lenders, reported a 29% drop in its auto loan originations for the first quarter from a year earlier. Other banks reported similar declines.
Car sales are expected to pick up during the summer season, though, and gasoline prices should fall further. Lower gas prices will put more money in consumer pockets and enable drivers to use their cars more.
My conclusion is to advise you to limit your investments in the auto industry. Owning one auto manufacturer is enough. If you own General Motors (GM), continue to hold the stock, or if you own Nissan (NSANY), continue to hold it. But if you own both companies or other auto makers, whittle your holdings down to one, preferably GM.
Auto parts makers are being adversely affected by the beginning of the decline in auto sales. I have been recommending several auto parts manufacturers that have expanded their businesses while the auto sales were rising. Now is a good time to take some profits. I advise holding one or two companies in the auto parts space. LKQ Corp. (LKQ) is my favorite auto parts supplier because the company provides used parts for used cars. LKQ has grown steadily (and rapidly) regardless of the ups and downs of the auto industry.
Sell LEA and PAG
Lear (LEA), Magna International (MGA) and car-dealer Penske (PAG) are worthwhile holdings, but I advise holding only one of the three. Therefore, I advise selling Lear and Penske. To cast off any of these fine companies is difficult, but too many holdings in the industry is unwise.
Will declining oil prices and weak car sales cause the stock market to tumble? No, I believe President Trump will be able to achieve a modicum of success implementing his plan to add jobs and boost the U.S. economy. Growth in China is questionable, but other international economies are slowly improving.
Therefore, the U.S. stock market will likely grind higher during the next six to 12 months. There will be bumps along the way, but I advise staying 100% invested in conservative, undervalued stocks with predictable growth prospects.