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Rotate Out of Tech: 5 Top Rated Picks from the Year's Leading Sectors

Swarup Gupta

The year’s top performing sector turned headwind for burgeoning equity markets on Friday, as stocks closed mixed. Tech stocks were the worst performers for the day with the Nasdaq closing 1.8% lower. The tech-heavy index also posted its worst weekly performance for the year. All big tech names driving up the markets this year lost in excess of 3% during the trading session.

Most market watchers think that fears about soaring valuations led to the decline of tech stocks on Friday. Not everyone is on the same side, though, with many analysts pointing out that the selloff is likely to subside soon.

However, in case such a trend continues over the next few weeks, should you give up your hard-gotten gains in a hurry? It makes sense to rotate into some of the year’s other leading sectors. Picking such stocks would boost portfolio gains for you in the weeks ahead.

FAAMG Group Felled by Valuation Concerns

On Friday, Goldman Sachs issued a report regarding the top five performing tech majors of the year, which triggered off several questions about the sector’s recent gains. The report raised concerns about the exorbitant valuations and low levels of volatility for this group. It goes to the extent of saying that such stocks have developed a close correlation with such safe haven sectors like utilities and bonds.

The group in question, comprising of Facebook, Amazon, Apple, Microsoft and Alphabet has together added around $600 billion to overall market capitalization this year. Goldman Sachs points out that they account for only 13% of the S&P 500 but have contributed nearly 40% of its performance year to date.

Profitability the Key Difference from Dotcom Era

Ultimately, the report reaches a conclusion which could cause some alarm. According to Goldman Sachs, today’s tech majors are better placed in terms of cash balance, valuation and cash flow compared to the leading five tech stocks in the first quarter of 2000. However, the group lags on account of profitability, measured using total assets and gross profits. Only Microsoft made the older list which includes Lucent, Intel, Oracle and Cisco Systems.  

Of course, another section of market watchers take a completely different stance on tech stocks. They point out that business conditions for the sector remain excellent. Also, investors have been quick to react to poor earnings performance or other stock-specific worries. But Apple’s downgrade on Sunday proves that a near-term storm for tech stocks is still brewing. At this time, it’s best to look at the year’s other sector leaders to shore up your gains.

Investing in the Year’s Other Winners

Coming in right after the Technology Select Sector SPDR XLK, which is up 15.8% year to date, is the Health Care Sector SPDR XLV which has gained 12.5% up to now. Concerns related to upcoming reforms are brewing for the sector. However, biotech earnings and the solid nature of sector majors have maintained the popularity of the sector.

The Consumer Discretionary Select Sector SPDR XLY comes in next and is up 11% year to date on optimism over economic growth and tax reductions. More surprising is the success of the Utilities Select Sector SPDR ETF XLU, up 10.5% year to date. Possibly, the lure of stable dividends has buoyed this safe haven sector.

Materials have registered strong gains after Nov 8, riding on expectations that a stronger economy would boost demand. This is likely why the Materials Select Sector SPDR XLB is up 9.9% year to date. And to round off the list, consumer staples remain a favorite for risk-averse investors seeking higher yields than those available in the bond market. Consequently, the Consumer Staples Select Sector SPDR XLP is up 9.6% in 2017 till now.

Our Choices

Tech stocks are likely to remain strong performers this year, given the strong demand for the industry’s products. But losses are likely in the weeks ahead given concerns raised over valuation and excessive gains for the sector stocks.

In such a scenario it makes good sense to rotate into other sectors, at least partially, especially into those which also offer strong gains. However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM score. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lantheus Holdings, Inc. LNTH is involved in developing, manufacturing, selling and distributing diagnostic medical imaging agents and products for diagnosis of cardiovascular and other diseases.

Lantheus Holdings has a VGM Score of B. The company has expected earnings growth of 28.5% for the current year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 17.35, lower than the industry average of 17.57.  The stock has returned 86.6% year to date, outperforming the Zacks Medical sector, which has gained 9.3% over the same period.

Nutrisystem, Inc. NTRI is a leading provider of weight management products and services.

Nutrisystem has a VGM Score of B. The company has expected earnings growth of 37.4% for the current year. The stock has returned 32.8% year to date, outperforming the Zacks Consumer Discretionary sector, which has gained 10.9% over the same period.

Telecom Argentina S.A. TEO is a provider of telecom and related services in Argentina and other countries

Telecom Argentina has a VGM Score of A. The company has expected earnings growth of 10.8% for the current year. It has a P/E (F1) of 16.51x, lower than the industry average of 17.18. The stock has returned 39.9% year to date, outperforming the Zacks Utilities sector, which has gained 6.6% over the same period.

The Chemours Company CC is a provider of performance chemicals with worldwide operations.

Chemours has a VGM Score of A. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 0.8% over the last 30 days. The stock has returned 81.6% year to date, outperforming the Zacks Basic Materials sector, which has gained 5.9% over the same period.

British American Tobacco p.l.c. BTI is the holding company of a group of companies which manufacture, market and sell tobacco products.

British American Tobacco has a VGM Score of B. Its earnings estimate for the current year has improved by 2.6% over the last 30 days. The stock has returned 24.5% year to date, outperforming the Zacks Consumer Staples sector, which has gained 10.1% over the same period.

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