Sector Weighting Comes Before Stock Picking

Past week, with the Saudi cutback of a million barrels of production, oil stocks jumped over 5% while Tesla dropped 7% overnight. I’m triple-weighted in oil stocks which like Exxon Mobil sell at 10 times earnings and yield 5%. Tesla’s price-earnings ratio remains in the clouds, earnings too tough to model.

But, the critical variable, weighting is unsung. Energy is 5% in the S&P 500 while tech ranges into mid-twenties. Energy falls into the value segment of the market which nobody seems to care about. Meanwhile, analysts scurry around trying to project earnings for Tesla, Meta Platforms, Amazon and Alphabet. Hardly ever does the consensus click on their numbers.

When I dialed back to check changes in sector concentration, over 50 years or so, I was amazed how wrong-footed the players could be. Lemme start with current sector structure: Technology weighting at 25% of the market is double any other sector, such as financials, industrials, healthcare, and consumer discretionary names like Coca-Cola.

All other sectors come in around 5% or less. Staples, utilities, communication, real estate, and basic materials altogether amount to just 15% of the market.

My point is how the mighty have fallen! Decade to decade, how overstretched or totally ignored, individual sectors waxed. Cycle-to-cycle, aggressive money managers look for ignored sectors,likely to recycle.

Axiomatically, what works is selling, heavily weighted sectors, and buying what’s ignored and possibly selling under $10 a share. Couple of years ago, I bought industrials like Halliburton, Alcoa, US Steel, Freeport-McMoran and they doubled, some tripled. Then, ragamuffins topped out a year ago and gave up plenty, but not all their upside.

Current Sector Concentration

Technology 26%

Energy 5%

Financials 11%

Industrials 13%

Real Estate 3%

Utilities 3.1%

Telecommunications 2.9%

Healthcare 14%

Consumer 13.5%

Consumer Staples 6%

Basic Materials 2%

My quick read here is tech stands overplayed along with financials and industrials. On the low end, disregarded, I’d probe basic materials, utilities, energy, and telecommunications. For instance, I’m triple weighted in energy, half weighted in technology.

This stance, alone, will determine my performance for 2023. Looking at the chart on large capitalizations, Technology’s history suggests full valuation at 2 times the market belonging at 1.5 times.

Looking back 30 years, you find violent sector swings. In 1990 energy was around 3 times market weighting of technology. Financials were unstable , utilities shrunk, and industrials went nowhere. So in 1990 you had to buy banks while ridding yourself of utilities and energy to avoid under performance.

The next table points out tremendous volatility in tech house performance and absence of staying power. The only major property that maintained its primacy was Microsoft. Properties like Intel and WorldCom faded badly.

Disparity in performance among stock groups is enormous as this graph below suggests. In a year when healthcare and utilities outstripped all others, running up over 25% while energy for the year stood in negative ground. If nothing else, this chart amazed me with its level of violent disparity.

My conclusion is simplistic. Best sector valuation today is in energy. You can sleep well with Exxon Mobil, Occidental Petroleum and Enterprise Products Partners which just bumped their payout and now yields over 7%. I am triple weighted in energy. A worldwide recession would bruise me, but that’s not my call.

I want to go to the moon with a sector, not just one piece of paper.