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THE INTELLIGENT INVESTOR: A Sector Roadmap to Best - and Worst - Stocks and Funds (report)

After a harrowing 2011, markets and investors are a little jittery. No one expects the super high correlations between stocks to persist. At some point, good old fashioned stock-picking and the rigorous research that drives it will be back in favor.

For those investors interested in rigorous research now, I offer my roadmap to the best and worst stocks and funds in the market by sector for 1Q12. The full sector roadmap report is here .

The sectors with the most Attractive-or-better-rated stocks are Consumer Staples and Information Technology. Per Figure 1, these sectors get an Attractive rating while the sectors with the least Attractive-or-better-rated stocks, Financials and Telecom, get a Dangerous rating. Sector ratings are based on aggregation of my ratings for each of the stocks in the sector. This is the same methodology behind my ETF and mutual fund ratings.

Details on exactly how much of each sector is allocated to Attractive and Dangerous-rated stocks are in Figures 4 through 13.

Some of my favorite stocks in the Technology sector are Intel [s: INTC], Google [s: GOOG] and Oracle [s: ORCL]. All of these stocks get an attractive-or-better rating as do my favorite Consumer Staples stocks: Walgreens [s: WAG], Lorillard [s: LO] and WalMart [s: WMT].

I like INTC because it is one of the safest options with compelling upside. Per my previous article , INTC’s strong ROIC, high dividend and large cash reserve under­scores the strength of Intel's busi­ness and the abil­ity of its man­age­ment team to allo­cate cap­i­tal intel­li­gently. Wal-Mart does not have as high an ROIC as INTC but it generates enormous economic earnings. At the same time, the stock is cheap with a current valuation (based on 1/23/12 closing price of $60.91) that implies the company’s profits will permanently decline by nearly 15%. More details in this article .

Some of my least favorite Financials and Telecom stocks are: Citigroup [s: C], American Express [s: AXP], Allstate [s: ALL], JP Morgan [s: JPM], Sprint [s: S] and Crown Castle Int’l [s: CCI]. All of these stocks have a Dangerous-or-worse rating.

Though Citigroup’s stock has dropped 32% since being added to my Most Dangerous Stocks list on April 1, 2011, I think it has farther to go. As detailed in this article , Citi’s management is not above monkeying with the company’s accounting to overstate earnings. The same is true for JP Morgan, which recently exploited SFAS No. 159 , a new account­ing rule that enables banks to arti­fi­cially boost earnings. Specifically, the company real­ized a $1.9 bil­lion (pre-tax) “adjust­ment” for an extra $0.29 per share in the 3rd Quarter from the decline in the value of its own debt. This loop­hole is just one in a long line of tricks that have enabled some of the major banks to mis­lead investors. More details are here .

Figures 2 and 3 present my favorite and least favorite funds in each sector as of January 19, 2012. For a full list of all funds in each sector ranked from best to worst (updated daily), see our free fund screener .

Note that there are about 825 sector ETFs and mutual funds. Analyzing that many funds is a daunting challenge unless you are willing to settle for backward-looking research. I think investors deserve research on funds that is as good as the research on stocks. That means researching every fund holding to assess the overall quality of the fund’s portfolio management. I call that a portfolio management rating , which, along with the total annual cost rating , drives my predictive ratings on funds.

Over the next couple of weeks, I will write an in-depth review of the best and worst funds in each sector and category.



Figure 4 presents a mapping of Very Attractive stocks by sector. The chart shows the percentage of the value of each sector made up of Very Attractive stocks, as well as the total number of Very Attractive stocks in each sector.

58 Very Attractive stocks make up 41% of the Information Technology sector’s value and represents 10% of the companies in the sector. The Information Technology sector as a whole has an Attractive rating, but the prevalence of Very Attractive stocks in the sector means that individual Info Tech ETFs can be rated Very Attractive by overweighting those stocks.

Very Attractive stocks make up 20% or more of the value of the Information Technology, Health Care, and Materials sectors, putting them meaningfully above other sectors in terms of value invested in Very Attractive stocks.


Figure 5 presents the data charted in Figure 4.


Figure 6 presents a mapping of Attractive stocks by sector. The chart shows the percentage of the value of each sector made up of Attractive stocks, as well as the total number of Attractive stocks in each sector.

80 companies in the Information Technology sector have an Attractive rating and make up 33% of the sector’s value. The sector has a Attractive rating overall due to its Attractive-or-better-rated holdings.

Figure 7 presents the data charted in Figure 6.


Figure 8 presents a mapping of Neutral stocks by sector. The chart shows the percentage of the value of each sector made up of Neutral stocks, as well as the total number of Neutral stocks in each sector.


Figure 9 presents the data charted in Figure 8.


Figure 10 presents a mapping of Dangerous stocks by sector. The chart shows the percentage of the value of each sector made up of Dangerous stocks, as well as the total number of Dangerous stocks in each sector.

Every sector except the Consumer Discretionary, Health Care, Information Technology, and Consumer Staples sectors has over 20% of its value invested in Dangerous-rated stocks.


Figure 11 presents the data charted in Figure 10.


Figure 12 presents a mapping of Very Dangerous stocks by sector. The chart shows the percentage of the value of each sector made up of Very Dangerous stocks, as well as the total number of Very Dangerous stocks in each sector.

The Financials sector has 24% of its value invested in stocks with Very Dangerous ratings.


Figure 13 presents the data charted in Figure 12.


Dis­clo­sure: David Trainer owns GOOG, LO, INTC, ORCL, and WAG. He receives no com­pen­sa­tion to write about any spe­cific stock, sec­tor or theme.

David Trainer is an investment strategist and corporate finance expert. He is CEO of New Constructs, a research firm. He specializes in analyzing stocks and markets based on the true economics of business performance rather than misleading accounting data. He is author of the chapter “Modern Tools for Valuation” in The Valuation Handbook (Wiley Finance 2010).

To read more from David Trainer, The Intelligent Investor click here.

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