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11/24/16 05:00:41 PM
FUND STRATEGIES

FIVE SECTOR WEIGHTING CHANGES

To accommodate the new political and market landscape, CFRA advises five sector weighting changes, upgrading the materials and industrials sectors to overweight from marketweight, downgrading health care to marketweight from overweight, and downgrading consumer staples and real estate to underweight from marketweight.

"We expect investors to gravitate toward cyclical sectors as a result of a projected increase in defense and infrastructure spending under the new Republican administration," says Sam Stovall, CFRA's chief investment strategist.

CFRA now has overweight recommendations on materials, industrials, and consumer discretionary; marketweight recommendations on health care, financial services, information technology, and telecommunication services; and underweight recommendations on consumer staples, real estate, energy, and utilities.

Year-to-date through November 21, 2016, the S&P 500 Industrials Index, which represented 10.4% of the S&P 500 Index, was up 14.5% in price, compared with a 7.5% gain for the S&P 500. In 2015, this sector index fell 4.7%, versus a price decline of 0.7% for the 500.

The cap-weighted average of this sector's component company CFRA STARS (STock Appreciation Ranking System) is 3.6, as compared with a cap-weighted average of 3.7 for the S&P 500. However, the total return potential for the group is relatively favorable, as CFRA equity analysts have positive investment recommendations on an above-average percentage of component companies. The sub-industries within this sector that currently show the highest average STARS are Aerospace & Defense, Air Freight & Logistics, Airlines, Building Products, Construction & Engineering and Marine, while those with the lowest average STARS are Agricultural & Farm Machinery, Construction Machinery, Diversified Support Services and Industrial Machinery. According to S&P Capital IQ, the sector is projected to record a 2.0% year-over-year increase in operating earnings per share in 2016, as compared with the S&P 500's flat estimated EPS change. During 2015, this sector posted a 3.5% increase in EPS, versus a decline of 0.6% for the S&P 500. The sector's price-to-earnings ratio of 18.2X, based on consensus 2016 operating EPS estimates, is slightly below the S&P 500's forward P/E of 18.8X. Capital IQ also reports that the consensus long-term EPS growth estimate for this sector is 10.0% versus the S&P 500's 10.8%, giving the sector a P/E-to-projected EPS growth rate (PEG) ratio of 1.8X, which is slightly above the broader market's PEG of 1.6X. Finally, this sector pays a dividend yield of 2.2%, as compared with the yield of 2.1% for the S&P 500.

The S&P 500 industrials sector is tracked by an exchange-traded fund (ETF), Industrials Select Sector SPDR (XLI 62 Overweight). Our proprietary technical indicator for the ETF currently shows a positive reading. Top-10 holdings in the ETF include General Electric (GE 31 ****), United Technologies (UTX 107 ****), and Boeing (BA 149 ****).

Year-to-date through November 21, 2016, the S&P 500 Materials Index, which represented 2.8% of the S&P 500 Index, was up 11.9% in price. According to S&P Capital IQ, the sector is projected to record a 0.1% year-over-year gain in operating earnings per share in 2016, as compared with the S&P 500's flat estimated EPS change. During 2015, this sector posted a 5.6% decline in EPS, versus a decline of 0.6% for the S&P 500. The sector's price-to-earnings ratio is 19.2X, based on consensus 2016 operating EPS estimates, slightly above the S&P 500's forward P/E of 18.8X. Capital IQ also reports that the consensus long-term EPS growth estimate for this sector is 9.4% versus the S&P 500's 10.8%, giving the sector a P/E-to-projected EPS growth rate (PEG) ratio of 1.7X, which is well above the broader market's PEG of 1.6X. Finally, this sector pays a dividend yield of 2.2%, slightly higher than the yield of 2.1% for the S&P 500.

Materials Select Sector SPDR ETF (XLB 49 Overweight) tracks the sector's performance, and our proprietary technical indicator currently shows a positive reading. Top-10 holdings in the ETF include DuPont (DD 70 ****), Dow Chemical (DOW 54 ****), and Monsanto (MON 102 ****).

CFRA is also lowering the S&P 500 Health Care sector to marketweight from overweight because we project this defensive sector to record below-market EPS growth in 2017. In addition, we expect investors to gravitate toward more cyclical sectors as a result of a projected increase in defense and infrastructure spending under the new Republican administration. The total return potential for the group is neutral, as CFRA equity analysts have positive investment recommendations on a market-average percentage of component companies. Also, CFRA's proprietary technical indicator for the Health Care Select Sector SPDR Fund (XLV 70 Overweight), which tracks the sector's performance, currently shows a neutral reading. Top-10 holdings in the ETF include Johnson & Johnson (JNJ 112 ****), Pfizer (PFE 31 ***), and Merck (MRK 61 ***).

Year-to-date through November 21, 2016, the S&P 500 Real Estate Index, which represented 2.8% of the S&P 500 Index, was down 4.7% in price. CFRA's proprietary technical indicator for this sector currently shows a negative reading. The sector is tracked by Real Estate Select Sector SPDR ETF (XLRE 30 UW), which has top-10 holdings in Simon Property Group (SPG 181 ***), American Tower (AMT 107 ****), and Public Storage (PSA 203 ***).

CFRA is lowering the S&P 500 consumer staples sector to underweight from marketweight. We project this interest-sensitive sector to record below-market EPS growth in 2017. Also, CFRA's proprietary technical indicator for the Consumer Staples Select Sector SPDR Fund (XLP 51 OW), which tracks the performance of the sector, currently shows a negative reading. Top-10 holdings in the ETF include Philip Morris International (PM 90 ***), CVS Health (CVS 74 ***), and Costco (COST 152 **).

CFRA's ETF ranking methodology is based on a variety of performance, risk and cost factors and is derived independently of our top-down sector weightings.

 

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