Beat the Bubble With THESE Defensive (and Discounted) Sectors

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I’m sure you’ve heard this many times before…

The key to successful investing isn’t timing the market…

It’s the amount of time you spend invested in the market.

I cannot repeat this enough.

The chart below explains it all.

The S&P 500's Relentless March Higher

Over time, the S&P 500 has kept chugging upward.

Even the biggest market crashes eventually look like minor bumps along the way.

Though, having said that, I also believe right now is a time to start thinking carefully about which types of stocks we buy.

I’ve written about how certain sectors of the market have become dangerously expensive. (You can revisit some of those articles here, here and here.)

With areas of the market currently extremely expensive, I find myself reminded of the market setup that we faced at the top of the dot-com bubble that peaked in 2000.

That’s concerning because the top of the dot-com bubble was followed by a rare decade of no returns for the S&P 500.

A Lost Decade for Stocks Following the Dot-Com Peak

I hope that isn’t what the next 10 years will look like!

Fortunately, there’s another, more pleasant similarity between the market of today and that of the dot-com peak.

While expensive stocks have become very expensive…

There are overlooked sectors of the market that offer good to great value.

Today, just like in 2000, some of the more defensive areas of the market are unusually cheap relative to the overall market.

Those sectors include healthcare, utilities and consumer staples.

Discount/Premium of Defensive Value Stocks vs the S&P 500

This often happens near market peaks.

Investors leave the boring, safe sectors and chase the expensive stocks that have already had their big runs.

You will be interested to know that from 2000 through 2015, the returns from healthcare, utilities and consumer staples all doubled the total return from the S&P 500.

Total Return of the S&P 500 vs Value Stocks (2000-2015)

Coming out of the dot-com bubble, boring was beautiful!

You normally wouldn’t expect that kind of outperformance from the most defensive stocks in the market.

But valuation eventually matters.

I like all three of those sectors today, but I’m especially fond of utilities.

The opportunity in utilities is something I’ve been covering for a while.

I believe utilities will be huge beneficiaries of the move to renewable energy.

Over the next 20 years, utility companies will spend billions of dollars expanding their capacity to generate renewable power.

These companies charge customers based on a percentage of their capital investment, thereby generating steady earnings growth.

In recent years, earnings growth for the utilities sector has been in the low single digits.

In the coming years, the analyst consensus is that the sector will see steady annual earnings growth of almost 10%.

That may not sound like much, but it’s more than enough for this sector to generate years of excellent returns.

Plus, the market will also have to revalue these stocks to reflect that higher rate of growth.

And let me tell you – earnings growth plus valuation multiple expansion does wonderful things for a company’s stock price.

We have an interesting opportunity in front of us today.

Going forward, the key to beating the market is defense.

It isn’t often that you can own the safest sectors of the market and outperform, but today, I believe we can do just that.

Utilities, healthcare and consumer staples all look extremely attractive.

They are easy to own through exchange-traded funds, like the Consumer Staples Select Sector SPDR Fund (NYSE: XLP), the Utilities Select Sector SPDR Fund (NYSE: XLU) and the Health Care Select Sector SPDR Fund (NYSE: XLV).

Check them out for yourself.

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