Stock Market Sectors From Value Investor Perspective

What are the different stock market sectors?  For that matter, what is a stock market sector?  The stock market is divided up into 11 different sections that are termed ‘sectors’.  These 11 sectors show where any one stock would fall into.  If you are a value investor looking to build a portfolio, breaking down so many stocks into sectors will allow you, the value investor, the ability to categorize stocks and narrow your search.

By narrowing your search down to the different stock sectors, a value investor will be able to find true value investments a lot more readily amongst so many other stocks.

Stock Sector Baseline Performance

With this, by looking at the individual sectors, you can see trends within the sectors and that will give a prospective value investor the ability to hone in on better performing stocks versus the poorer performing stocks.

For instance, the S&P 500 has a baseline year-over-year revenue increase that is spread out over 500 different stocks.  Looking at the year-over-year increase in revenue will give you a baseline performance for comparison.

Keep in mind, however, that the 500 stocks in the S&P 500 would show you an average performance level for all 500 stocks.  Some stocks within that average are going to be high-flyers with high levels of year-over-year revenue increases. Others may have negative revenue increases.  The 500 would show you the average of these from all 500 stocks in the S&P 500.

Using Stock Market Sectors To Compare

After you have established the baseline comparison from the S&P 500 stocks, then you can compare each respective stock market sector to the S&P.  If you find a sector that is outperforming the S&P 500 then, this is a sector that you may want to focus on.

But, if you find a sector that is underperforming the S&P 500, ask yourself why and if this is consistent.  Perhaps there are macro-economic events that are preventing any one sector from performing as well as the broader economy.  But, if there is a potential future change in these macro events, this may be an opportunity for a long term investor to participate in.

The 11 Stock Market Sectors

Here are the 11 individual stock market sectors:

  • Consumer Discretionary
  • Consumer Staples
  • Communication Services
  • Energy
  • Financials
  • Information Technology
  • Industrials
  • Healthcare
  • Materials
  • Real Estate
  • Utilities

As I have mentioned in previous videos, I am putting together a stock portfolio for myself outside of the cannabis stocks I normally cover and buy.  I want a diversified portfolio.  And, looking at each of the sectors, maybe I will pick one, or more, from each sector, or maybe I will pick from a few different sectors altogether.

But, understanding the makeup of the individual sectors is one of the first key steps in building a portfolio.

S&P 500 Revenue Growth Rate versus Stock Market Sector

For Q1, 2022, the annual revenue growth rate is 12.2% year-over-year.  That is a solid revenue growth rate for the broader economy.  However, just looking at the revenue growth rate of the 500 stocks in the S&P 500 falls short of a full story.

When we break down the respective revenue sectors and look at what each of the sector.

Energy Sector Crushes It

Despite the fact that revenue growth was 12.2% for the year, if you look at the respective industries, you can see that some sectors outperformed others with significance.  Namely, the energy sector did outstanding in revenue growth.

The reason for this is that oil prices are nearly double where they were from a year ago.  If an energy company would have sold a barrel of oil last year, they may have received $65.00 for that barrel. Today, they could get $110.00 for the same barrel of oil.

But, the cost to extract that barrel of oil has not changed significantly during the same period of time.  So, a lot of the increase in oil prices are going to profits for shareholders.  One only needs to look at Chevron’s 350% increase in profits year-over-year to see that.  And, looking at Chevron’s stock price, a value investor may not want to get into that stock simply because you would be chasing after profits that have already printed and may start shrinking.

Given this, what are the future prospects of oil remaining so high?  For many reasons, the price of a barrel of oil will eventually move lower.  That means profits for energy companies are likely to move lower.  And, their respective stock prices are also likely to follow downward.

Basic Materials and Inflation

Another sector that I wonder about is the basic materials sector that is up significantly with revenue for the quarter.  Remember, there is a lot of inflation.  That begins with basic, raw materials. Then, prices increase all the way down the demand chain as these costs are absorbed by the economy.

With the Federal Reserve making moves to combat inflation, prices will likely fall.  Given the future fall in prices for raw materials, this will mean lower revenue for basic material companies as well as lower profitability.

The entire process will be a small juggling act having to navigate through future price drops and revenue potential.

Consumer Sector

There are a couple of sections that more than likely this is where I will focus my attention with my new portfolio, and those are the consumer sectors.  The consumer is the lifeblood of the economy.  The economy moves the stock market.  And, with the impending contraction in economic activity, this is likely where I will want to get involved in because it will be the consumer that drives future growth.  And, other segments, such as the basic materials, manufacturers, and energy sector that will eventually follow the consumer. This is the demand chain.  As consumers start increasing economic activity, this invigorates the cycle.

My Portfolio And Which Stock Market Sector To Choose

As I mentioned, I believe the stock market is going to take a very big hit going toward the end of summer as the consumer has entrenched themselves as much as they have.  The contraction in expenditures from the consumer will mean that revenues will decline for firms.

I am beginning building this portfolio with the idea that the consumer will eventually rebound and the economy will move forward.  Keep in mind: The economy drives the stock market.  So, I will be simultaneously lining up stocks as well as watching economic activity.  When economic activity starts to pick up I will then start acquiring the stocks I am interested in.

But, looking at the sectors above will be the start to figuring out which stocks I will be looking at in the future.

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