These picks are among the best stocks in each sector.
2021 has been a year marked by shifting investment themes. Investors have gone into special-purpose acquisition companies, or SPACs, electric vehicle stocks, economic reopening plays, cryptocurrencies and more. That’s all well and good, but this move to chase the latest new thing sometimes loses sight of the bigger picture. Ideally, an investor should build a diversified portfolio with exposure across a wide variety of industries and assets. While there will always be a hot trade, it’s important to hold a solid core portfolio that can withstand all sorts of economic conditions. Analysts tend to divide up the market into 11 unique sectors. Here is a leading pick for each of these sectors that will make any portfolio more diversified and resistant to market shocks.
Communications Services: Facebook (ticker: FB)
On the surface, Facebook may seem like a tech company — but it’s quietly become the king of communications. Facebook Messenger and WhatsApp have supplanted a huge portion of Verizon (VZ) and AT&T’s (T) text message businesses. Instagram has become a leading media platform. And Facebook’s digital advertising unit is second only to Alphabet (GOOG, GOOGL) worldwide. Facebook is becoming every bit as much of a digital communications monopoly as AT&T ever was with telephones back in the day. As if that weren’t enough, Facebook has a huge upside option in virtual and augmented reality as well. Yet, the stock remains reasonably cheap at just 22 times forward earnings. Investors are overly preoccupied about potential declines in the legacy Facebook platform. That’s beside the point, however, as Facebook has assembled a media empire that goes far beyond its initial website.
Consumer Discretionary: Home Depot (HD)
The U.S. housing market has been in an all-out boom in 2021. People have used the pandemic to rethink their living situations and a lot of folks decided to upgrade. That, plus low interest rates and aggressive government stimulus, has kicked off a historic surge in housing. This has a great knock-on effect for Home Depot, as people are fixing up homes before putting them on the market. Or after purchasing a home, the buyers need to make additions and modifications. During the quarantines, many people took up hobbies such as gardening that boosted sales for Home Depot as well. Home Depot trades for just 21 times forward earnings and has grown earnings at 17% per year over the past five years. Those earnings should continue to rise given current economic conditions. That offers a most favorable outlook for Home Depot stock for the rest of 2021.
Consumer Staples: Clorox Co. (CLX)
On the flip side of the reopening trade, there’s Clorox. Shares of the cleaning products giant were among 2020’s biggest winners last spring. At the peak of the pandemic, Clorox’s quarterly revenues leapt 22% year over year as everyone rushed to get places as hygienic as possible. Now comes the other side of that. Clorox’s business has lost some operating momentum this year as its sales lap last year’s otherworldly results. The weird thing is that Clorox is getting no benefit at all for its record profits. The stock has slumped from $240 to about $175 as the economy has reopened. In fact, Clorox is back to where it was right as the outbreak started. It seems investors are punishing Clorox for the inevitable earnings slowdown this year. That creates a chance to buy the stock at 22 times earnings for a solid blue chip with a great track record for consistent earnings and dividend growth.
Energy: Canadian Natural Resources (CNQ)
Over the past year, there has been a sea change in the energy industry. Oil and gas are out, green is in. ExxonMobil Corp. (XOM) lost a proxy fight to a scrappy activist hedge fund that will force it to reduce production. Royal Dutch Shell (RDS.A) is considering selling off American oil fields. Other European oil and gas companies such as Total are rebranding and becoming renewable energy firms. The stage is set for a huge recovery in the oil market as so many large operators exit the industry and reduce supply. This creates a huge opportunity for Canadian Natural Resources. It’s heavily concentrated in the Canadian oil sands, and its fields are set to last until the 2050s or beyond. The company has focused on making itself a net zero emitter. And since its projects are already in production, it should face less environmental opposition than you’d see on yet-to-be-built oil projects. As other suppliers of oil start to taper off, survivors like Canadian Natural will be set to reap the rewards; the company is already hugely profitable.
Financials: Wells Fargo & Co. (WFC)
Wells Fargo used to be Warren Buffett‘s biggest banking investment. Then Wells Fargo shocked the world with its account fraud scandal. Buffett sold his position in Wells Fargo, the bank sacked its management team and the stock plunged. The bank has been stuck in a holding pattern for years as it has paid billions in legal expenses while fending off regulatory problems. That said, the tide is turning. Wells Fargo brought in a rock star CEO, Charlie Scharf. The bank’s profits are back on the upswing, and the stock price has moved from around $21 to $45 since late last year. Even so, Wells Fargo is selling for just 12 times earnings. And those earnings remain far from peak levels due to elevated legal and compliance costs. Over the next few years, Wells Fargo should get its profitability in line with other too-big-to-fail banks. This would add roughly $2 per share to Wells’ annual earnings. At that point, it would earn $5.50 per share. With a 15 times earnings valuation, it would be worth $82 per share. Wells Fargo’s comeback is well under way, and there’s a lot more room left to run.
Health Care: Johnson & Johnson (JNJ)
Johnson & Johnson is a triple play in the health care industry. The company sells medical devices, pharmaceutical drugs and consumer products. J&J’s stock has been volatile this year due to uncertainty around its COVID-19 vaccine. And, admittedly, that matters for traders trying to predict how the stock will move with each quarterly earnings report. However, long-term investors can profit from the noise locking in one of the country’s most consistent blue-chip stocks at a fine price. JNJ stock is selling for just 16 times forward earnings now and pays a 2.57% dividend yield. The dividend is particularly attractive as Johnson & Johnson is a dividend aristocrat — a company in the S&P 500 that has consistently raised its dividend each year for at least 25 years — and has increased its payout 59 years in a row.
Industrials: Emerson Electric Co. (EMR)
Emerson Electric is a compelling technology play disguised as a sleepy industrial company. Emerson historically is known for refrigeration and air conditioning products, tools, and other industrial goods. In recent years, however, the company has gone on an acquisition spree, buying up several companies in the industrial automation firm. Now, Emerson has made a big push into the industrial Internet of Things and process automation fields. In other words, the company offers software and measuring equipment that allow clients to get more efficiency and yield out of their manufacturing and refining processes. In a world focused on reducing energy usage and carbon emissions, this sort of technology is pivotal. Emerson sells for just 22 times forward earnings, which is a steal for a solid industrial company with a little-known software and automation kicker.
Information Technology: Intel Corp. (INTC)
Intel is the world’s largest chipmaker. Despite that, the company faces a barrage of criticism. Its personal computing business is stagnant. Nvidia Corp. (NVDA) and Advanced Micro Devices (AMD) may be surpassing it technologically. Intel’s leadership hasn’t kept up with an evolving industry. At least, that’s what the skeptics say — but that negativity creates opportunity. Intel has nearly doubled its earnings per share in recent years despite all the supposed headwinds. Even with the surge in profitability, Intel is trading for just 13 times earnings. It pays a solid dividend of 2.39%. And its investments in next-generation technology such as autonomous driving give it a major upside option on new product lines. Ignore the bears, as Intel is still the king of semiconductors.
Materials: Sherwin-Williams Co. (SHW)
When people think of materials, they tend to think of mining. That’s a tough game in terms of profitability. With an iron or gold miner, there’s usually a boom and bust cycle that doesn’t always turn out well for investors. Sherwin-Williams gives investors exposure to materials without the nasty volatility. Paint may not be glamorous, but it sure is profitable. Sherwin-Williams has built a great business model as well. It has a huge network of retail locations, and it pairs that with strong partnerships with local painting contractors. Sherwin-Williams can charge attractive prices for its paint because its professional customers know they’ll get a reliable product and excellent customer service. Business is currently on an upswing, thanks to the surging housing market. Regardless, Sherwin-Williams’ stock has gone up tenfold over the past decade, as its business tends to prosper in all weather.
Real Estate: Public Storage (PSA)
Americans love to collect stuff. Oftentimes, that runs into full-on hoarding. Investors can profit from that tendency by investing in self-storage facilities through Public Storage. It’s the largest and most well-known real estate investment trust, or REIT, in the storage space. It also stands out because it holds an “A” credit rating, making it only one of a handful of a REITs with such a high credit rating. Public Storage avoided taking on much debt; instead, it issued a ton of preferred stock. This was a costly move for Public Storage in a zero interest rate environment. That said, Public Storage will profit greatly due to its unusual funding choice if interest rates continue to rise. Meanwhile, the housing boom and surging economy should boost demand for storage spaces. This company is positioned perfectly for inflationary conditions. In addition to that, activist investors have recently targeted Public Storage, and some of the resulting changes should juice returns going forward.
Utilities: Consolidated Edison (ED)
Consolidated Edison is the big electricity utility for New York City and the metro area. The company has a long history, having been one of the nation’s first utilities. It’s also an income investor’s best friend. ED has increased its dividend for 47 years in a row and currently pays a 4% dividend yield. Consolidated Edison’s stock has been flat over the past five years as well, making it a rare value pick in a frothy market. There’s a growth angle to Consolidated Edison, too. It’s the second-largest utility operator of large-scale photovoltaic solar in the U.S. By aggressively pivoting to renewables before others, Consolidated Edison has positioned itself well for the new era of environmentally responsible investing.
Best stocks to buy in each sector:
— Communications Services: Facebook (FB)
— Consumer Discretionary: Home Depot (HD)
— Consumer Staples: Clorox Co. (CLX)
— Energy: Canadian Natural Resources (CNQ)
— Financials: Wells Fargo & Co. (WFC)
— Healthcare: Johnson & Johnson (JNJ)
— Industrials: Emerson Electric Co. (EMR)
— Information Technology: Intel Corp. (INTC)
— Materials: Sherwin-Williams Co. (SHW)
— Real Estate: Public Storage (PSA)
— Utilities: Consolidated Edison (ED)
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Update 06/15/21: This story was published at an earlier date and has been updated with new information.