The recent market correction impacted 2 sectors mainly. Investors focused on particular stocks that the market deemed overvalued (Tesla and Apple):
- Consumer discretionary: Tesla Inc shares were the main reason why the sector underperformed. The company’s share value lost 17% in the past month only. The hype surrounding Tesla and the popularity of its CEO Elon Musk have pushed Tesla Inc shares to unrealistic valuation. Just recently, Michael Burry, the ‘Big Short’ investor stated that Tesla’s decision to bet on Bitcoin by purchasing $1.5B was a distraction. Musk’s motive was probably to eclipse bad news for the car maker coming from China. In addition to Tesla Inc, Amazon shares slipped 3% this past month which also led to this sector being in the red.
- Information technology: Apple Shares lost 9.50% of their value dragging down this sector. From the big 5 businesses that make up the Information Technology sector, Apple Inc was the only one to lose ground. The stock may have been unfairly punished due to a global semiconductor shortage that could squeeze margins. However, the company is well positioned to turn things around and be less impacted than its competitors.
Table 1: Performance by industry (S&P 500)
|S&P by sector||5 days||3 Month||1 Year|
|S&P 500 Energy||5.95%||26.83%||-10.58%|
|S&P 500 Financials||2.51%||18.79%||7.03%|
|S&P 500 Real Estate||1.16%||4.97%||-7.95%|
|S&P 500 Materials||1.79%||7.45%||25.23%|
|S&P 500 Industrials||1.38%||4.03%||9.77%|
|S&P 500 Consumer Staples||-0.92%||-2.24%||0.50%|
|S&P 500 Communication Services||-0.62%||12.18%||25.35%|
|S&P 500 Health Care||-1.89%||5.07%||10.23%|
|S&P 500 Utilities||-2.01%||-4.41%||-13.56%|
|S&P 500 Consumer Discretionary||-2.72%||5.75%||28.55%|
|S&P 500 Information Technology||-4.09%||10.39%||33.55%|
|S&P 500 Index||-1.30%||8.49%||16.29%|
Table 2: Largest businesses part of the S&P500 Information Technology
|Name||1M %Chg||3M %Chg||52W %Chg|
Table 3: Largest businesses part of the S&P500 Consumer Discretionary
|Name||1M %Chg||3M %Chg||52W %Chg|
Note: Opinions expressed in Wyzeinvestors.com cannot be construed as a financial advice.
Sector analysis for 2021
U.S. stocks recovered from the selloff in February and March (when the first shutdown was announced), finishing 2020 with a 16% return, as measured by the S&P 500.
Performance of the S&P by sector in the past years!
|Consumer discretionay index||33.3%|
|Communication services index||23.6%|
|S&P 500 Index||18.4%|
In aggregate, energy and real estate stocks look undervalued, while the technology sector is the most overvalued. Both Energy and Real-estate were hit hard by the effect of the pandemic. Work from home restrictions and lock down have directly impacted their revenues making these cyclical sectors lose ground in the stock market.
Many analysts attribute the performance of the S&P500 to the rush to acquire shares in Technology driven giants such as Facebook, Google, Tesla or Amazon. They believe these stocks have become overvalued at the expense of other sectors that retain little or no attention from investors. See table below for undervalued sectors:
|Sector||Undervalued segments within Sector||Stocks examples (as per Morning star analysis)|
|Basic materials||Undervalued segments within Sector: Agriculture and Chemicals industries||Compass Minerals CMP, Dupont DD, Nutrien NTR|
|Communication services||Traditional media and telecom||Fox (FOAXA), Lumen Technologies (LUMN), Omnicom Group (OMC)|
|Consumer Defensive||Consumer packaged goods sales||Coca-Cola Femsa (KOF), Kellogg (K), Pilgrims Pride (PPC)|
|Energy||Whole sector is undervalued. Focus on companies not invested in Shale Gas.||Entreprise Products Partners (EPD), Pioneer Natural Resources (PXD), Schlumberger (SLB)|