The S&P 500 Index has become synonymous with “the stock market.” As I have explained in this space over the past few years, that over-simplification is perhaps the biggest potential danger to a generation of retirees and pre-retirees.After all, the “market” is a busy metropolis of opportunities and risks, not just the town square. Now, in a market like this one, with everyone from Wall Street pundits to the POTUS bragging about how much money people are making in “the stock market,” this is an excellent time to peel back the onion. I promise to bring some cheer instead of tears when I do.
The S&P 500 is made up of 11 sectors. Technology, Healthcare, Financial and Communications stocks, just 4 of those 11, current comprise 60% of the index. This is certainly not the first time the market has been that crowded into a small number of sectors. However, it does lead contrarians like me (and you?) to see what’s going on at the bottom of the sector weightings.As it turns out, on a relative basis, there are some intriguing reasons to look at the 4 worst-performing sectors of the S&P 500: (U)tilities, (B)asic Materials, (E)nergy and (R)eal Estate (REITs). Or, as I will refer to them from here forward, the UBER sectors. They currently make up just 13% of the S&P 500, combined. Tech, Financials and Healthcare each comprise more of the index than that.
In this table, note that I have included both the current ETF that tracks REITs within the S&P 500 (XLRE) as well as one of the leading REIT ETFs (IYR) that has been around much longer. REITs used to be part of the Financials sector, and when they were broken out from that sector recently, XLRE was created.Also note that XLC, which tracks the Communications sector, has a limited history. That is because this sector was created by S&P recently, as a way to separate those types of businesses from Technology and other overlapping companies.Over the past 1 and 3-year periods, UBER sectors have been toward the bottom of the performance rankings. Even more importantly for my conclusions, they have been the 4 worst performers over the past 10-year bull market. Energy and Basic Materials were particularly weak.
Since the S&P 500 Index rewards stronger past performers (as stocks are weighted based on their current size, not their forward-looking attractiveness), this makes sense. The weakest sectors over time will be less significant to the S&P 500’s performance. And THIS is where the long-term opportunity could be with these sectors.You see, this situation is one of the most common I have seen in 34 years in the investment management business. Nearly everything on Wall Street is cyclical. There are no “buy and hold forever” situations. Back in the late 1990s, people felt the way they do now about Tech stocks and some of the other higher-weighted, recent top performers within the S&P 500 sectors. But stock groups tend to rise further and fall further than anyone thinks possible.So, when I look at this data, I see 4 sectors that at this point in time are less popular, have lagged other sectors’ performance during a long bull market, and have high yields relative to the S&P 500’s puny 1.75% yield today. And, when you put them together, they spell UBER! Kinda cool.
These sectors are not without headwinds. Some Energy companies are heavy in debt. Real Estate could suffer another crash. Utilities are more competitive with each other than in the past. And Basic Materials companies have been waiting for a return of inflation for a long time.That’s why I think of this as a longer-term transition. We may be looking at this 5 years from now as a role-reversal. That is, UBER sectors may be the hottest ones around. If that turns out to be the case, I will need to remember to point out to you that the other sectors are probably worth a look.
Finally, as with all investing, the devil (and profits) are in the details. These laggard UBER sectors give us a hint that there may be some undervalued, well-positioned businesses for the forward-thinking investor.But, that does not mean that the entire sector is long-term attractive. Do your homework. And know that contrarian investing history is on your side.