The stock market’s rally since the fall has been led by companies in sectors that investors see as most tied to the health of the broader economy: cyclicals, in other words. When the economy is growing and people and businesses are spending more, companies in industrials, financials, or energy tend to see a positive impact on their sales and earnings.
Energy Select Sector SPDR ETF
(ticker: XLE), which tracks the
‘s energy sector, has roared 71% higher since the start of November.
Financial Select Sector SPDR ETF
(XLF) ETF is up 39% and the
Industrial Select Sector SPDR ETF
(XLI) is up 23%.
The recent outperformance of cyclicals is a shift from the market leaders from most of 2020. Those were companies whose businesses are stable no matter what happens in the world around them—think defensives like utilities or healthcare—or those whose growth trajectory doesn’t depend on the direction of the broader economy, such as technology stocks. The
Utilities Select Sector SPDR ETF
(XLU) is down 4% since November, and the
Health Care Select Sector SPDR ETF
(XLV) is up 12%. The
Technology Select Sector SPDR ETF
(XLK) has climbed 21%—certainly not a shabby return for just four months, although still behind cyclical groups in the same period.
Companies whose cart is hitched to the U.S. GDP-growth horse should see faster earnings growth in 2021 than those market darlings of the past decade that can deliver double-digit growth year after year practically no matter what the economy does. That means more of
General Motors (GM),
for example, and perhaps less
(V). It doesn’t mean tech stocks need to crash in 2021, just that there appear to be faster growth opportunities outside of the classic growth sector, especially when compared to a depressed 2020 for cyclical firms.
But while technology stocks overall might be categorized as more growth than cyclical, there are certainly subsectors that are tied to economic performance, namely semiconductors and technology hardware. In a report on Sunday, a team of
analysts and strategists pointed to the two groups as beneficiaries of the unfolding economic recovery.
“Technology Hardware and Semis as industry groups are cyclically levered and tend to benefit in times of improving macro conditions,” the Morgan Stanley analysts wrote. “On average, Semis and Tech Hardware outperform the top 1500 by market cap when the ISM Manufacturing PMI is accelerating. Further, they outperform many other cyclical areas of the market.”
The February manufacturing PMI came in at a whopping 60 on Monday, and has been in the high 50s for several months. That indicates strong growth in activity.
The Morgan Stanley analysts also pointed out that tech hardware stocks—although expensive in absolute terms compared with their own history, like the market more broadly—trade at large discounts to their historical average relative valuations versus both the overall tech sector and the S&P 500.
Barron’s screened for companies in the technology hardware and semiconductor subsectors of the
that have lagged behind the index’s 24.4% return since November. They must also trade for a discount to the index, which goes for 24.2 times this year’s estimated earnings. The screen yielded 13 names.
Source: Bloomberg, FactSet
(If you cannot view the table above, please click here.)
(LITE) are all designers or makers of semiconductors and related components that go into a variety of electronics for consumers and businesses.
(GLW), a recent Barron’s pick, makes the glass for your smartphone screen and for fiber-optic cable.
(MSI) are a bit farther down the supply chain, assembling and selling finished communications or other hardware. Small-caps CMC Materials (CCMP),
(TTMI) also made the list.
Like any screen, this list is just a starting point. But it points to several high-profile companies that are in the right industries to benefit from 2021’s economic recovery. Based on their valuations and recent performance, these stocks might not be fully pricing that in.
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