MARKETWATCH VIEW: 2010 Investment Ideas That Hit--And Missed

12th Jul 2010 13:30

By Jonathan Burton The old market adage to "sell in May and go away" sure has a nice ring to it nowadays, with U.S. stocks posting double-digit losses since their late April peak. Six months ago it seemed that stock and bond markets would continue their powerful rally, and the 10 investment ideas for 2010 that MarketWatch highlighted in early January mostly reflected that outlook. The optimism was true for stocks, for a while. But the European sovereign debt crisis sparked a worldwide flight to quality, with investors tossing most stocks overboard in the second quarter and rushing to embrace bonds, the U.S. dollar and gold. U.S. stocks this week saw their biggest rally in a year, but most investors still aren't in a buying mood. Bullish stock sentiment fell to 21% in the latest American Association of Individual Investors sentiment survey. The proportion of individual investors who expect stocks to rise over the next six months is at its lowest point since March 5, 2009. The historical average is 39%. Meanwhile, 57% of investors polled expect stock prices to slide over the next six months--the survey's most bearish reading since March 2009. "There's been a huge shift in sentiment," said Matthew Rubin, director of investment strategy at investment manager Neuberger Berman. "We've gotten into a market that is being driven more by macro concerns than company fundamentals. It has made it a very difficult market for many investors." "Investors have to be selective and buy into the panic selling, because there's going to be a lot of volatility," added Alan Lancz, an investment adviser in Toledo, Ohio. "It's going to be that type of market possibly for several years." You might read the market's dour mood as a contrarian indicator, or the bearish barometer could still rise. But with the year half over, it's time for a checkup on the 10 themes, and to see what changes, if any, investors should make. 1. Stocks with a global footprint Shareholders of many U.S.-based multinationals got socked in the first half of 2010. The euro-zone debt crisis and concerns about global economic growth derailed expectations even for companies with solid product lines and an understanding of how to sell worldwide. For example, the benchmark Standard & Poor's 500-stock index, whose constituents derive almost half of their revenues from outside of the U.S., has lost about 12% since its April 23 peak, and is down about 4% so far in 2010. Meanwhile, Rydex Russell Top 50 (XLG), an exchange-traded fund covering the 50 largest U.S. stocks, is off almost 6% for the year. What to do: Global growth and the integration of world economies is a long-term process. Companies with strong business and financial managers have seen less damage from the downturn and will be the first to emerge from it. Moreover, profit margins on international operations are higher, said David Bianco, U.S. equities strategist at Bank of America Merrill Lynch. His generally upbeat outlook favors what he calls "BIG" companies--as in "big-cap, international growth"--namely among technology, consumer staples, industrials, media and apparel stocks. Following that theme, Morris Mark, a New York-based investment manager, includes Coca-Cola Co. (KO) and Google Inc. (GOOG) in his clients' portfolios. Some big-cap U.S. stock ETFs with a global slant include Vanguard Large Cap ETF (VV), PowerShares Active Mega Cap (PMA) and iShares Russell Top 200 Index (IWL) 2. Stock dividends as bond substitute Corporations have several clear ways to spend their cash: invest in the business, make acquisitions, buy back shares or pay shareholders a dividend. Lately, with bond yields so low and market volatility high, dividend-paying companies are getting plenty of attention. Dividend-centric portfolios have held their own as well. Equity-income mutual funds have a bias towards dividends; the category lost 2.3% on average for the year through July 8, about one percentage point better than S&P 500 index funds, according to fund-tracker Lipper Inc. What to do: Dividend income can cushion market shocks, and many well-known stocks now offer payouts of more than 3%--better than a 10-year Treasury. Your focus should be on companies with a lengthy history of increasing dividends, reflecting a sound business, rather than on stocks with the highest absolute yield, which could spell trouble. "As we expect the stock market performance to continue to exhibit heightened volatility for the rest of 2010, we favor dividend growers and high dividend payers," Brian Belski, chief investment strategist at Oppenheimer Asset Management, wrote in a recent research report. One attractive list of seven dividend growers comes from Gerald Appel, editor of the Systems & Forecasts newsletter. It includes Intel Corp. (INTC), Kraft Foods Inc. (KFT), McDonald's Corp. (MCD), Exxon Mobil Corp. (XOM), Procter & Gamble Co. (PG), Johnson & Johnson (JNJ) and Coca-Cola. Each of these stocks yields above 3%, and Kraft offers 4%. "If these companies continue to grow their dividends in the future at even half the rate they did from 2001 to 2010, holding this portfolio of stocks would provide a stream of income that would grow faster than the historical average inflation rate," Appel wrote. For greater diversification, consider a mutual fund or ETF. Many fund companies offer dividend-focused products, while others, like the Jensen Portfolio (JENSX), use dividends as a cornerstone of their investment strategy. ETFs to consider include Vanguard Dividend Appreciation ETF (VIG), SPDR S&P Dividend (SDY), iShares Dow Jones Select Dividend Index (DVY), WisdomTree LargeCap Dividend (DLN) and PowerShares International Dividend Achievers (PID). 3. Larger-cap index funds With large-cap stocks shouldering the brunt of the downturn, the sector didn't give investors much to stand on. Large-cap growth funds, for example, lost 5.2% on average for the year through July 8, while their large-cap value counterparts did better, in keeping with other value-oriented strategies, down 3.6%. What to do: If you believe Standard & Poor's strategists, the S&P 500 will end the year at around 1110, or just shy of 3% higher than its July 9 close of 1078. While that doesn't seem so great, the forecast is based on expectations for at least a 20% decline from the benchmark's April 23 peak of 1217 before the end of September, followed by a year-end rally. Such a cautionary outlook should give investors pause about the timing of buying large-cap stocks, particularly if the U.S. economy, along with the rest of the world, weakens and shareholders unload the most liquid, visible securities. 4. Technology stocks Technology stocks have short-circuited so far this year. The tech-heavy Nasdaq Composite Index is off about 13% since its April peak, and is down more than 3% in 2010. Technology funds, meanwhile, had lost about 4% on average through July 8, according to investment researcher Morningstar Inc. What to do: Technology shares have lost investors money this year, after being the best performing U.S. market sector of 2009, but they haven't yet lost their magic. "With strong balance sheets, cash levels that rank among the highest in the S&P 500, and generally higher-quality earnings power, tech companies offer superior fundamentals versus most of their cyclical peers," wrote RBC Capital markets analysts in a late June research report. The firm's top picks include EMC Corp. (EMC), Intel, Cisco Systems Inc. (CSCO), NetApp Inc. (NTAP) and International Business Machines (IBM). "The secular drivers in technology are pretty overwhelming and the multiples are still fairly reasonable versus the growth rates," said Noah Blackstein, manager of Dynamic US Growth Fund (DWUGX), which has almost half of its portfolio invested in technology companies including Apple Inc. (AAPL), NetApp and VMware Inc. (VMW). 5. Energy stocks The energy sector has tanked this year. Concern about waning demand from China and other emerging-market engines threw the sector into reverse. The oil patch was hit especially hard, in no small part due to the implosion of BP PLC (BP, BP.LN). An ETF proxy for the sector, Energy Select Sector SPDR (XLE), was down 7.4% in the year through July 8. The average energy-sector mutual fund, meanwhile, lost 10.2% What to do: The poor sentiment surrounding the energy sector is drawing the interest of value-minded buyers. "I love energy stocks," said Don Wordell, manager of RidgeWorth Mid-Cap Value Equity Fund (SAMVX), which recently had about 15% of its portfolio in the sector. "The marginal cost of oil is going to be higher in the future," he said. "I see decent production growth and strong demand globally for energy. We're dependent upon oil, and oil is expensive to find and produce." Among his favorites are well-known companies in the exploration and production business, including Noble Energy Inc. (NBL), Chesapeake Energy Corp. (CHK) and Talisman Energy Inc. (TLM). Investors in large-cap funds and ETFs will likely get exposure to energy stocks through ExxonMobil, the biggest U.S. company by market value. One actively traded ETF focused on oil is SPDR S&P Oil & Gas Exploration & Production (XOP). 6. Industrials The industrials sector has given investors a strong foundation so far this year. The group includes aerospace and defense firms, railroads, electrical equipment makers and construction and engineering firms. The average industrials sector fund is flat on the year, with a benchmark ETF, Industrial Select Sector SPDR (XLI), gaining almost 3%, while Vanguard Industrials ETF (VIS) is up 1.6%. (MORE TO FOLLOW) Dow Jones Newswires July 12, 2010 08:30 ET (12:30 GMT)