Home > The Fundamental Trader: Sector Performance Breakdown (XLF, XRT, GLD, XLE, XLY, XLK, SMH, XLV)
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The Fundamental Trader: Sector Performance Breakdown (XLF, XRT, GLD, XLE, XLY, XLK, SMH, XLV)

July 20th, 2011

In last week’s blog I touched on the macro and geo-political issue concerning the markets: On that front, the main issues continue to weigh down the overall sentiment in the markets. The counterweight to this has been the relative strength seen in various companies and sectors that have high cash positions (Balance Sheet) and improved margins due to cost cutting programs (Income Statement).

This tug of war has left the S&P stuck in a trading range for a few months now, from say 1260 to 1360 – until we break out or down from this range medium and longer term fundamental traders need to trade around a core position.

The high levels of cash available combined with low interest rates have allowed companies with strong balance sheets to go out on a buying spree. This is usually a sign of two things: Companies have cash on the balance sheet they are using for expansions, and companies see value in the companies they are buying. Plenty of sectors have participated, recent names in play: BJ, JCP, HK, NSM, TBL, LZ, CEPH, CLX.

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Warren Buffet has been involved, as have some activist hedge funds managers, as has Carl Icahn. The flip side of M&A activity is the impact it normally has on the employment front, as consolidation usually brings a reduction in the workforce.

As earning season kicks off, we will be getting a better insight into companies’ margins as well as CEO/CFO guidance for the balance of the year.

The easiest way to see relative strength is from a picture – as you can see YTD 2011 performance has given back some of the gains we obtained starting from the middle of last year. Worth noticing is the drop in Basic Material performance (1yr +32% vs YTD +1.8%), suffice is to say that 2011 has been a difficult start of the year for some sectors.

Another way you can look and follow sector performance is to select liquid sector ETFs, and use a watch list like the one you can create on www.finviz.com to track performance.

Three sectors stand out so far year-to-date Financials (NYSE:XLF), Retail (NYSE:XRT), and Commodities (NYSE:GLD, NYSE:XLE, etc). Financials continue to be under a great deal of pressure as the uncertainty on the regulatory front is reducing valuations and expectations.

Two pieces worth monitoring are: Capital requirements – the Basel III is asking for higher quality capital that could result in banks having to raise equity by secondary offerings or retained earnings; and the second part is the Dodd-Frank rules that have yet to be completely interpreted, for now most banks have been reducing and eliminating exposure to any division related to proprietary trading (including private equity funds), which in the past have produced up to 30% of profits.

The Retail sector has seen an improvement that can be attributed to a couple of reasons: Employed people are starting to feel somewhat more secure and are starting to spend again, a second reason is that credit cards companies have loosened up somewhat their criteria allowing credit expansion, and lastly retail companies were very aggressive during the crisis to improve margins, which is starting to pay off on the bottom line.

On the Commodity front the road has been somewhat bumpier mainly resulting from attempts to slow down some emerging market economies that are concerned on the inflation front (mainly China, India, and Brazil) (XME is only up 1% ytd yet is up 50% yoy). Gold and silver are seen as alternative currencies and as inflation protections so will continue to play an important role as the macro and geo-political issues continue to show negative headlines.

The other sectors that are benefiting similar to the retail sectors are the consumer staples (NYSE:XLP) and consumer discretionary (NYSE:XLY). The technology sector (NYSE:XLK and NYSE:SMH) has been mixed this year with a few M&A activities and some specific stories doing well but for the most part a bumpy sector. Healthcare (NYSE:XLV) is also a sector with a positive return, some of this is due to some M&A activity in the sector, as well Obama care benefits coming down the line (this is a double edge sword since possibilities of reversal of Obama care would result in a revaluation of the sector).

There are plenty of opportunities within these sectors, in the next blog I’ll look at specific names in these sectors.

By: Mario E. Carias, CFA

*DISCLOSURE: No relevant positions

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NYSE:GLD, NYSE:SMH, NYSE:XLE, NYSE:XLF, NYSE:XLK, NYSE:XLV, NYSE:XLY, NYSE:XRT


 

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