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Top and Flop Sectors of Q1 and Their Wining & Losing Stocks

Sanghamitra Saha
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Wall Street apparently stuttered to start 2018 with key equity gauges like the S&P 500 losing about 2.6%, Dow Jones shedding 3.5% and the Nasdaq composite adding barely 0.7% in the first quarter (as of Mar 28, 2018).

In any case, the first quarter is mostly downbeat every year with freezing cold locking people inside and economic productivity slacking. This year, GDP for Q1 is expected to be around 1.8% from 2.9% registered in Q4 of 2017.

Still, worries that especially stumped investors in Q 1 were increased inflationary expectations, chances of faster Fed rate hikes and the resultant uptick in the Treasury bond yields, Trump’s announcement of import tariffs and the associated possibilities of trade war, and a rout in tech stocks. However, the long-avoided and most-discussed commodity oil behaved nicely in the quarter.

Against such a faltering backdrop, we would likely to note which sectors stood tall in Q1 and which ones failed. We have also picked two stock winners and losers from each sector.

Winners

Biotech

The biotech sector stayed steady in the quarteron expectations of an increase in M&A activity. Ebbing tensions over the price gouging issue, hopes of easing regulation, positive clinical trials, FDA approvals of drugs and success in the immune-oncology field also spurred the rally. Biotech fund Loncar Cancer Immunotherapy ETF CNCR added 20% in the last three months (as of Mar 28, 2018).

Geron Corporation GERN – Up 184.5% -- Zacks Rank #3 (Hold)

Pfenex Inc. PFNX –Up 127.1% -- Zacks Rank #2 (Buy)

Information Technology

The technology sector has been through peaks and troughs in Q1. The sector, which started off 2018 on solid note helped by emerging technologies, tumbled in March on a host of issues like Facebook’s data breaches, massacre with Nvidia’s self-driving car tests and short selling pressure in Twitter. Still, PowerShares NASDAQ Internet ETF PNQI advanced 7.3% in the quarter.

ACM Research Inc. ACMR – Up 129.4% -- Zacks Rank #3

Mulesoft Inc. MULE – Up 85.0% -- Zacks Rank #3

Aerospace & Defense

The sector is benefiting from higher commercial demand, geopolitical risks, rise in defense spending in other countries, lower energy prices and a Trump bump. In March, lawmakers revealed a massive $1.3 trillion spending bill, which includes the most substantial hike in defense funding in the past 15 years. Nearly $80 billion increase was announced in the latest defense spending, which helped defense stocks in the quarter. PowerShares Aerospace & Defense ETF PPA was up 3.4% in Q1 (as of Mar 28, 2018).

Wesco Aircraft Holdings Inc. WAIR – Up 37.33% -- Zacks Rank #2

Heico Corporation HEI – Up 17.5% -- Zacks Rank #3

Losers

Energy

Though oil prices gained ground in Q1 as evident from 8.9% gains in United States Oil USO, the broader energy sector, marked by Energy Select Sector SPDR ETF XLE, continued to see a decline. XLE was down about 8.3% in Q1.

W2 Energy Inc. AEPT – Down 79.33% -- Zacks Rank #3

Petroquest Energy Inc PQ – Down 59.27% -- Zacks Rank #4 (Sell)

Consumer Staples

Due to rising rate concerns, the apparently safe sector could not stand out in Q1 despite the market selloff. Plus, subdued wage growth as evident from the latest job report and inflationary pressure may have weighed on this consumer-driven sector. Consumer Staples Select Sector SPDR ETF XLP retreated about 7.6% in the first quarter.

Blue Apron Holdings Inc. APRN – Down 51.8% -- Zacks Rank #2

Calyxt Inc. CLXT – Down 40.9% -- Zacks Rank #3

Real Estate

The sector underperforms in a rising rate environment. Yield-hungry investors normally have a large appetite for REIT stocks as the U.S. law requires these companies to distribute 90% of their annual taxable income in the form of dividends. As a result, in a rising rate environment, the appeal for this yield gets quelled. Plus, dependence of REITs on debt for their operations makes these a losing proposition in an era when the Fed is deemed to hike rates faster. Vanguard Real Estate ETF VNQ dropped about 8% in the first quarter.

NorthStar Asset Management Group, Inc. CLNS – Down 50.6% -- Zacks Rank #5 (Strong Sell)

Five Oaks Investment Corp. OAKS – Down 27.1% -- Zacks Rank #3

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