Smoke Signals
Industrial stocks, along with financials and healthcare, are the market's hot spots
Another attractive sector is energy, argues James Stack, editor of the InvesTech Market Analyst newsletter. Given the low valuations of natural gas companies, Stack picks firms like EnCana, a Calgary-based natural gas exploration company whose shares trade at just eight times earnings.
A strong economy and an accommodative Fed should benefit the financial services industry. This is particularly true for big banks, which stand to gain from both an increase in commercial loan demand and a decrease in loan defaults. Payden & Rygel's Orndorff favors big, diversified banks like Citigroup, which trades at a modest P/E ratio of less than 17 and sports a 2.2 percent dividend yield. Still, there are pitfalls in this sector. Keep away from banks with big mortgage portfolios, as rates are on the rise and refinancing activity is shrinking.
Finally, there's healthcare. Though the sector rose 13 percent in 2003, healthcare stocks were among the laggards of last year's bull run. Concerns about the dearth of new drugs hit big pharmaceutical stocks such as Merck hard. But with merger and acquisition activity expected to pick up this year, even Big Pharma is getting another look.
Stack favors companies that are trading at reasonable prices based on their cash flows, such as Pfizer and Bristol-Myers Squibb. For his part, Orndorff likes beaten-down Johnson & Johnson. As one of the few Dow components that lost ground in 2003, J&J now trades at below-market multiples. But Orndorff thinks the company can post earnings growth of 15 percent next year. "This could be a real opportunity," he says.
That's what investors hope to say about 2004 when all is said and done.
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