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| The Basics | Spot the next hot sector before it lifts off
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Wish youd foreseen the energy sector boom? Heres how to catch the next big sector surge before you've missed out.
By Harry Domash
Sometimes investing success is more about picking the right industry than it is about picking the right stock. Over the past year, for example, owning a below-average energy company has been a better bet than, say, owning a great newspaper publisher.
So with this column, I'll describe a strategy for using MSNs Deluxe Screener to identify which sectors of the economy are heating up and which are cooling.
For our purposes, an industry is a group of companies in closely related businesses such as womens clothing stores, small banks, semiconductor-equipment makers or airlines.
Stocks within an industry tend to move together because companies in the same business are all affected by the same market conditions. So if business is good for one player, many of its competitors are probably also enjoying good times.
Big money
Mutual funds and other big investors track industry stock performance closely to see which industries are showing signs of life. Once a trend is identified, an industry rotates into favor as big players begin accumulating shares in the best companies. When those become fully valued, money moves into secondary stocks in the same industry.
The trick, of course, is to identify industry trends early in the game, before its too late to act.
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In a column on this topic last year, I described a strategy of getting a jump on the action by focusing on factors likely to move individual stock prices. Then, if I spotted several stocks in the same industry with these characteristics, I could assume that the entire industry was ready for a move.
Since last year's column was quite successful in spotting sectors on the rise, I'll give a quick explanation of how it worked, and then take a shot at making it even more useful.
I used two factors to detect stocks likely to move:- Big changes in the consensus of Wall Street analysts earnings forecasts.
- Recent earnings surprises (when companies beat those forecasts).
I didnt pull those out of thin air. Many professional investors pay close attention to those factors when trying to determine which way a stock is likely to move.
Meaningful changes in what analysts think a company will be earning in coming quarters almost always move stock prices in the same direction as the forecast change. Equally significant, once forecasts change, they often continue moving in the same direction. Why? Most likely, the analyst who made the first change picked up on new information that other analysts hadnt considered. When those other analysts take another look, chances are they will revise their forecasts in the same direction.
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Fund data provided by Morningstar, Inc. © 2008. All rights reserved.Quotes supplied by Interactive DataMSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
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