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Investors have certainly fallen out of love with stocks during the course of this financial crisis and recession.
But with most companies so beaten down, it may be time to show a select few our love.
Today I’m going to focus on five sectors that are currently out of favor. Within each sector, I offer up a number of stocks that could be worth courting.
It may take time to repair the damage, but our portfolios should be rewarded for showing these companies the love.
It sure beats the hate that so many investors seem to have today. As the Beetles said, “All you need is love.”
Here are five sectors to love again…
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Sector #1: Mining
The collapse of the global growth story crushed the mining sector.
Hedge funds were the key drivers in this sector helping to push stocks in the group to record levels. What goes up, though, must come down, and these stocks came down hard as the global recession deepened.
Gold, silver and copper prices have all fallen since reaching peaks last year. With the collapse, the value of companies that mine for these basic materials and precious metals collapsed as well.
Freeport McMoRan Copper & Gold (FCX), which mines gold, silver and copper, saw its shares fall from more than $100 to less than $16 in less than six months’ time last year. Much of the loss in value came about from hedge funds liquidating due to margin calls or fund redemptions.
With any economic recovery, demand for materials will increase. Such a state will make mining companies attractive again.
In addition to FCX, investors may want to send some love to Newmont Mining (NEM), Southern Copper (PCU) and Pan American Silver (PAAS).
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Sector #2: Homebuilders
Talk about not feeling the love — the homebuilding sector has been pegged as the root of all evil.
Shares in the group have fallen significantly since peaking in mid-2005. It’s been a long time in the doghouse for these stocks, so is it finally time to bring them back into our good graces? I think so.
For years now, stocks in the sector have written down assets and retooled business to accurately reflect demand. In fact, one might argue that demand is artificially low given the huge amounts of inventory created by home foreclosures and the fact that the government is doing everything in its power to resolve the credit crisis.
It may take some time, but builders are poised for a recovery.
Most stocks in the group are trading for well below book value. Even though it is hard to imagine homebuilders making money for investors today, investing a little love might go a long way to realizing gains in your portfolio down the road.
A few names to consider include Toll Brothers (TOL), D.R. Horton (DHI) and Hovnanian Enterprises (HOV).
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Sector #3: Shippers
If you look at the stocks of those companies that ship goods overseas you would think that world trade has completely evaporated. Obviously that is not the case. Goods are still being transported from port to port, even with the collapse of the global economy.
Yes, the dry bulk index, which is the rates used to ship goods, has collapsed, but there is no indication that current levels will be permanent. However, it appears that the market thinks global trade is over just like a broken relationship.
I think the shippers are in need of some love here. These stocks have been beaten down to extreme levels. Today they may merit reasonable speculation.
Yes, the recession is deep and painful, but eventually we will recover. Third World companies that are experiencing rapid growth do not have the resources internally to support such growth and need to ship in goods to sustain it.
I would bet on a recovery in these stocks. A company like DryShips (DRYS) is priced like a stock heading for bankruptcy. In May of last year, this stock traded above $100. Even if you think half that value is more reasonable, showing the love at around $5 per share may make sense.
Other names in the shipping space include Frontline (FRO) and Teekay Corporation (TK).
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Sector #4: Banks
Is there another sector currently so loathed? I don’t think so. America is scorning the bankers and Wall Street fat cats that supposedly got us into this mess.
Before this credit crisis, nobody cared that firms were highly levered and operating a secret financial market using derivative securities. Credit-default swaps and mortgage derivatives put huge bonuses in the pockets of the bankers, and now they’re coming to the government asking for a trillion-dollar bailout. Man, talk about a tough group to love.
But we cannot have a strong economy without a strong financial system. The new administration announced its plans to help banks heal. Under these plans, common equity appears to be preserved. That line in the sand is good enough for me.
A handful of banks are going to survive this mess. Those names include Wells Fargo (WFC), Bank of America (BAC) and Citigroup (C).
If you absolutely cannot support this industry, take a shot at some regional names like TCF Financial (TCB), Frontier Financial (FTBK) or SunTrust Banks (STI).
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Sector #5: Oil Refiners
I used to be so in love with oil refiners. One of the best recommendations of my career was to buy oil refiner Tesoro (TSO) when shares traded for $1 per share in late 2002. Then subsequently shot to more than $100 on a split-adjusted basis in the five years after.
But that all changed in 2008. Oil price volatility shot through the roof. That volatility made it nearly impossible for oil refiners to make money. The industry operates on very slim margins to begin with, and when you add in the volatility, poof, gone are the profits.
Shares of TSO and other refiners were sold heavily in 2008. At the bottom, TSO was fetching a mere $6 and change per share. That was a far cry from the heady days.
The problem, of course, is the volatility. Unregulated speculation in the oil pits created a volatile mix that resulted in huge price increases. Even though such prices were unsustainable and ultimately collapsed, the quickness of those events were disastrous for the refiners.
But today is another day, and volatility in oil prices has subsided. We have traded in a narrow range for the last several months. There is still volatility, but that volatility is much less than the levels seen in 2008.
I think investors ought to look at the space with a loving eye. Along with Tesoro, investors may want to consider Valero Energy (VLO) and Marathon Oil (MRO).
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