Think tech: stock ideas for 2015 (ZT)

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Sector scorecard: Q1 2015
Technology is still tops, according to our latest sector-by-sector analysis

Our latest Quarterly Sector Update reveals that technology stocks continue to appear best-positioned among the 10 sectors. Click through the slides or watch the video (see right) to find out why.What is Fidelity’s Quarterly Sector Update? The Quarterly Sector Update, including the Sector Scorecard, represents input from three discrete Fidelity investment teams—each with its own unique insights about sector investing—to present a comprehensive view of the relative performance potential among the 10 major equity market sectors over a range of investment horizons. The Sector Scorecard’s proprietary methodology measures the relative attractiveness of each sector against five key factors: business cycle, fundamentals, relative valuations, momentum, and relative strength.

Scorecard: Information technology signals remain positive
Broad U.S. stock market performance was positive in 2014, with utilities, health care, information technology, consumer staples, and financials generating double-digit returns. However, energy fell sharply as crude oil prices plummeted. Technology continues to show positive signals across the board, while energy, materials, and utilities appear relatively weak.



Business cycle: Mid cycle supports technology, industrials
The U.S. economy remains in a mid-cycle expansion, bolstered by an improving real income outlook for the U.S. consumer. Corporate fundamentals remain strong, and forward-looking indicators for manufacturing and capital spending remain in a solid uptrend, which should bode well for the information technology and industrials sectors.


Fundamentals: Industrials, IT strong on earnings, cash flow
Industrials and information technology have benefited from strong fundamentals over the past 12 months, including earnings growth and free-cash-flow margin. (Telecom earnings, while also higher, have been lifted by an industry accounting change.) Energy fundamentals have weakened from a sharp crude oil price drop, with more significant impact to come in 2015 results.



Relative valuations: Energy, technology appear cheap
Energy, which underperformed significantly in late 2014, appears cheap based on valuation metrics, although deteriorating fundamentals will likely further pressure these metrics. Technology also appears undervalued. Telecom has strong forward earnings, but accounting changes have affected projections



Momentum: Continued rotation into defensive sectors
Signs continue to suggest a rotation into defensive sectors, with health care and utilities among the momentum leaders over the past 12 months. Meanwhile, energy has decelerated sharply, as plunging oil prices weighed on earnings and unnerved investors. Telecom and materials also have lagged, from a momentum standpoint.



Relative strength: Health care, technology, staples strong
Defensive sectors including health care, consumer staples, and utilities were among the strongest performers over the past six months, along with information technology. Also among the top performers was consumer discretionary, a sector that often benefits from lower gas prices. Energy was the weakest sector, as oil prices plunged over the six-month period.



REITs: Valuations still supportive, fundamentals solid
Real estate investment trusts (REITs) were among the top industry performers in 2014. Real estate is a component in the financials sector. Although valuations rose, they remain in line with long-term averages (left). Still-depressed commercial construction activity (right), along with higher occupancy and rents, have created a supply/demand dynamic that enhances property owners’ ability to boost dividend growth.



Energy: Excess of supply vs. demand pressures oil prices
The continued surge in crude oil production from North America, combined with further slowing in new demand from cyclically challenged importers such as China and other emerging markets, resulted in significant oversupply in 2014. Prices may stabilize going forward, however, as lower prices restrain supply additions and potentially spur renewed demand.



Sizable energy sector decline suggests defensive rotation
Historically, when energy has underperformed the broader U.S. equity market by more than 15%, it has had clear implications for forward performance among the other 10 sectors. Markets often turn defensive when energy underperforms significantly, which can benefit sectors such as consumer staples, telecommunication services, health care, and utilities.

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