Scouting report: Potential winning sectors

With the NCAA Tournament in full swing, we wanted to review the top four sectors that we believe are in contention for the big “W” this year. While we invest for the long term, we also know each year comes with winners and losers. Our picks for this year? Technology, Communications, Industrials and Healthcare. While we see a lot of promise in these sectors, we know there are some potential hurdles that could disrupt their chances of outperforming this year. Check out our scouting report for each sector below:

Technology

Pros: There are exciting developments coming out of the tech market, including Artificial Intelligence (AI), the cloud, network security and data mining. Plus, it looks like the future of business is gravitating toward these innovations. With slowing global growth, companies need to spend more efficiently. We’ll likely see more spending on tech to cut costs and streamline operations. A large capital expense for any company is payroll, so automating via technology and building processes can allow technology companies to improve margins. In addition, we see generally strong balance sheets and low debt with large cash positions, which are all good signs for an increase in mergers and acquisitions.

Cons: An increase in global competition can produce a strain on margins. Additionally, issues may crop up with intellectual property between the U.S. and China. Domestically, increased regulations from the government over data security may also have a negative impact as we have already seen with Facebook and Google.

Communications

Pros: We’re seeing more communication and devices going wireless –leading us to focus on the connectivity of devices to different networks. The rollout of 5G will benefit the U.S. and international markets. Companies will be better connected and able to react quicker, as the sharing of information will be nearly instantaneous. In addition, larger communication companies buying up smaller entities broadens the product line, which offers a nice opportunity.

Cons: While 5G is going to be a huge development for the sector, it will also come at a cost in infrastructure spending. New 5G wireless devices have to be connected where current 4G devices are. Delivering on the speed of service could be a drain on the bottom line for these companies. Another factor is keeping data secure with wireless connectivity, as hacking becomes more of a widespread problem.

Industrials

Pros: This sector led the stock market rebound through the first couple months of 2019, having its best start in years. Automation and AI are having a huge impact on the manufacturing sector, as factories are experiencing increases in production and efficiency. The tech influence is moving this sector forward as well. In addition, aerospace and defense are benefiting from tech developments and enjoying newfound relevance given social and political uncertainty. With China’s economy declining lately, they’ve induced a huge stimulus that is being spent on infrastructure. The hope is that spending on building materials and jobs will level out the overall economy.

Cons: With the U.S.-China trade war still ongoing, any new tariffs would increase the cost of raw materials and make imports more expensive. This would impact airplane manufacturing and a variety of construction projects, negatively affecting investors if a resolution isn’t reached soon. Also, it’s important to keep inflation in mind – if the costs of materials continue to rise, those companies’ margins will likely decline in the future.

Healthcare

Pros: We like the long-term trend of increased demand for medical services. As the population ages, this trend will only become more prominent. Medical devices are a good subsector of the industry. These companies have solid balance sheets and attractive dividend yields. Especially when volatility hits, healthcare is a good defensive play for the market.

Cons: Large drug makers are being pressured by Congress to bring down the price of pharmaceuticals and any new drug-pricing regulation could negatively impact many companies. Competition among biosimilars and generic drugs coming to market can force biopharmaceutical companies to drastically reduce the price of their mainline drugs, cutting directly into profit margins. Corporate outlook on returns could be diminished unless there are patent-protected meds in the pipeline.

What sector do you think will outlast them all this year?