10 sector-beating stocks in an uncertain market

by Ben Hobson from Stockopedia |

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Ben Hobson screens the stock market for the best performers across the the main sectors this year.

It’s remarkable to think that six months ago, as January was drawing to a close, the FTSE All-Share index was flirting with a 52-week high. Back then, we were only starting to feel the full extent of the Covid-19 pandemic. And today, the index is still nearly 17% down on where it was.

One of the interesting trends that unfolded as uncertainty swept through markets and economies, is how stocks in different industry sectors have performed.

In this column we regularly talk about portfolio theory and the textbook teachings on why you should spread exposure around. Conventional thinking says too much weight in just a few sectors can leave you stranded when things turn sour. But it’s perhaps only when you see those concepts play out for real that the penny really drops.

Sector diversification 101

On the map of the stock market, there are three main super-sectors: Cyclicals, Defensives and Sensitives, and divided between them are 10 ‘country-like’ sectors…

  • Cyclicals: Basic Materials, Consumer Cyclicals, Financials
  • Defensives: Healthcare, Consumer Defensives, Utilities
  • Sensitives: Industrials, Energy, Telecoms, Technology

In general, Cyclical sectors are the most sensitive to macro trends and the health of the economy. They include high street retailers and housebuilders. These industries did well in the years after the financial crisis but they’re first on the chopping block when the economy dives.

Defensives, on the other hand, tend to be less reliant on the domestic economy because they sell goods that are in constant demand. Think grocery chains, pharma companies and utilities. In stable conditions, these stocks can look dull and they don’t move fast enough for many investors.

With this in mind, here’s a view of the performances of the main sectors, relative to the overall market, over the past six months. 

Name PE Ratio Relative Price Strength (6m)
Healthcare 23.6 21.5
Basic  Materials 12.5 18.2
Technology 26.6 16.6
Utilities 14.4 15
Consumer Defensives 14.1 10
Telecoms 10.9 9.81
Financials 11.9 2.78
Industrials 11.3 -7.37
Energy 7.62 -17.4
Consumer Cyclicals 11.1 -20.5

Behind the scenes there are a few moving parts, but the clear trend here is that more defensive sectors like healthcare, tech, utilities and consumer defensives have done much better than consumer cyclicals, energy (including oil and gas) and industrials over the period. As advertised, they’ve offered at least some defence in very unsettled conditions.

You can take this further and look at the best and worst performances in the 54 industry groups that make up the 10 main sectors:

Name PE Ratio Relative Price Strength (6m)
Renewable  Energy - 153.3
Diversified Trading & Distribution 15.2 83.6
Diversified  Retail 25.8 48.6
Biotechnology & Medical Research 32.1 48.1
Uranium 15.3 45.6
Metals &  Mining 10.9 29.4
     
Hotels  & Entertainment Service 13.8 -27.9
Office  Equipment - -30.6
Aerospace  & Defense 16 -31.2
Textiles  & Apparel 10.9 -33.6
Passenger Transportation Services 5.08 -54

At the industry level, average performances are very dependent on the numbers of companies in each group and they can be skewed by outsize gains in a handful of stocks. But in terms of trends, you can see that certain retailers, biotech, and mining (particularly gold mining) have led the pack. Meanwhile, passenger transport (including bus and train firms), clothes retailers, office supplies and entertainment have suffered badly on average.

To take this one final step, here are the best performing stocks from each of the main sectors in the market on a six-month relative price strength basis (and with a minimum market cap of £100 million). In these challenging times, the big winners at the individual stock level have been small-cap biotech and mining companies, although most sectors have had some exceptional leading performers in a falling market.

Name Mkt Cap £m Relative Price Strength (6m) Sector
Synairgen (LSE:SNG) 322.8 2,671 Healthcare
Eurasia Mining (LSE:EUA) 482.3 493.9 Basic   Materials
PowerHouse Energy (LSE:PHE) 122.7 465.7 Energy
BATM Advanced Communications (LSE:BVC) 605.4 278.7 Technology
Premier Foods (LSE:PFD) 729.5 179.9 Consumer   Defensives
CMC Markets (LSE:CMCX) 942.5 147.8 Financials
Gear4music Holdings* (LSE:G4M) 106.8 128.7 Consumer   Cyclicals
Proton Motor Power Systems (LSE:PPS) 471.9 112 Industrials
ContourGlobal (LSE:GLO) 1,386 30.6 Utilities
Gamma Communications (LSE:GAMA) 1,438 29.8 Telecoms

Stockopedia. Based on six-month relative strength to 28 July 2020

*The leading Consumer Cyclicals performer was Best of the Best plc (+337.5%), which is currently subject to a takeover

Overall, trends over the past six months have been a stark illustration of how the market quickly recalibrates its view of different sectors when the economic conditions change. And if a portfolio is too heavily concentrated in what turn out to be bad sector bets, then the outcome can be painful. It’s a reminder that predicting the future is futile and one of the best hedges against the unknown is diversification.

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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