Friday, September 23, 2005


Hot sectors for 2006

It was a tough week for smallcaps. The Russell 2000 fell 2.5 percent, underperforming the NASDAQ (down 2 percent) and the big cap S&P 500 (down 1.8 percent). My portfolio, which is exclusively smallcap (indeed, microcap) was not spared, falling $5,142 (0.9 percent) to $554,581.

As the fourth quarter draws closer, I have been thinking about what sectors will lead the market in the months ahead. Like many of you, my exposure to energy was relatively small over the last few years. Too bad since many energy stocks have risen tenfold in that time span. Although I think it's possible that energy will continue its run (I added a bit more to my position in AE today), I don't want to increase my exposure to energy stocks too much.

I believe that to generate consistently positive returns you have to buy stocks with little downside risk. I don't know what will happen to oil prices but if they were to fall, it is certain that energy stocks will fall as well. And as we've seen with housing stocks, the resulting downdraft can be swifter and uglier than most had suspected.

With that in mind, I am turning to you, my readers, to suggest what sectors will lead the markets in the months and years ahead. I've already mentioned on this blog that I think voice over internet (VOIP) could generate some investor excitement, which is why I have carved out nice positions in stocks like CALL, MNDO, VTEK, BOSC, and PCTI.

Another possibility is 'clean stocks' that cater to alternative energy. I personally don't own any of them since past experience has shown that most of those companies will fail. Please leave a comment with your ideas (you can also email me but I would prefer that you keep your ideas public by posting a comment so that all the readers of this blog can benefit).

I agree totally with you on energy stocks. The play is over (I think) but even if it isn't over the risk involved at buying a cyclical near the top is not worth the return. The time to buy energ was when the utilities dropped like a rock on the deregulation mess. The time to buy the oil stocks was when we elected an oil man from Texas. As far as predicting what sectors will be hot is next to impossible to predict but possible if one has a good understanding of macroeconomics and good with hunches. Personally, I like to look at individual co.s, whose price is beaten down because its in an industry that is unfavorable with wall st.. However, I will wait until the price flattens out before I buy and then I enter it slowly in hopes of catching a lower price. I try not to restrain myself with trying to make a prediction on what industries will be hot and try to find good businesses at a fair price. Of course you know this and I keep track of every holding you have because you have great speculative hunches. However, I trust that most of your'e returns are generated on buying value like COBRA and I think that you should continue overweighting your'e portfolio with value even though its not as fun as speculating. Now, to answer your'e question as to what sector is going to be hot, I've overwieghted my portfolio with stocks that benefit from the growth of financial markets. China is growing as fast as the industrial revolution. India, Asia(continent) and many other countries are experiencing tremendous growth and all need financial services and I believe that we still lead the world in certain financial markets. That is why I owm CME (since it went public), MHP,MCO,FII, IDC. All these co.s have great businesses, with returns on invested capitol in excess of 50%. All have an economic moat in one way or another. The other area I like is dominant software plays. I own ADBE, DRIV(not software), ANSS, and SYMC. I have owned all these co.'s for at least 3 yrs. and probably won't sell them for a long while. I really believe that some really good money to be made on dominant mid-cap co.s that are based on technology and have barriers to entry.Well, I know that what I have said is not a micro cap, but the money I am investing is my 401K and I can't take a chance at losing it. I hope that your'e website is open to comments from someone who is a long term investor who focuses more on great businesses. If not I will only comment on micro-cap stocks in the future. Occasionally, I will be a microcap if it has a solid business and is a value. I just bought Cohesant Technology's (COHT)and this fits my critieria in a micro.,solid steady free cash flow, healthy balance sheet, sales growth and an exciting technology they just bought that fits right in with there business. Big O.
Although my knowledge of economics is close to zero, I think that consumer is close to exhausted and the government will try to make up for 'it'.

Richard Russell makes the very good point that the Fed IS inflation, with M3 up about 7% in 12 months and up almost 10% annualized in the past three months. What the weasels say and what they do is different.

I'm favoring stocks that the goverment will be paying for: the Halliburton 'analogs' going forward. Whether New Orleans should be rebuilt in its prior form should be a matter of public debate, dialogue, and a judicious cost-benefit analysis.

We need NOLA as a deep water port. Whether an 'underwater' city (city in a soup bowl) should be reconstructed during a possible cyclical climate change is highly debatable. Of course, the politicians' lifeblood is graft, fraud, corruption, and favors, which is why there is no discussion.

The future belongs to water-related stocks, energy (after some pullback), metals (gold hasn't done ANYTHING yet), and homeland security stocks. Can you trust the dollar when the government prints them like crazy?
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