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3 key sectors to watch in 2006
By James Altucher 12/30/2005
2006 will offer a fresh start for our portfolios and a chance to drop some bad habits. Here are the things I'm going to try to stay disciplined about in 2006, and I think most investors should as well:
Leave macroeconomics to the economists
Interest rates, inflation and unemployment numbers give people cocktail party chatter and a chance to prove how smart they are, but none of these items has anything to do with making money in the stock market.
How come?
Nobody really knows what's going to happen. We can sit here all day arguing about how unemployment is going to be 10% in June 2006, but we don't know. Nobody knows.
Even if we did know what interest rates were going to be, or what unemployment was going to be, what would we do? It turns out that knowing the direction of interest rates doesn't have much to do with knowing the direction of the market. If interest rates go up (like in mid-1999 or all of 2004 and 2005), stocks might go up, or if interest rates go down (like all of 2003), stocks might go up.
Don't be a closet economist. Pick good stocks.
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Ignore historical P/E ratios
All statements about historical averages of marketwide price-to-earnings ratios are completely irrelevant. There were three times when market bottoms started with P/E ratios in the single digits: 1974, 1950 and 1933. Don't be fooled into thinking we need those conditions to exist in order to go long. You would've missed out on the 1990s and most of the 1980s. You would've missed out on 2003. Furthermore, you would've missed out on the great bull markets for value stocks that occurred in 2000 and 2001.
Don't be a sucker. Shut the TV off when they start talking about historical P/E ratios.
Furthermore, let's say you are smarter than 99 out of 100 people and you think you have a reasonable edge on which way the market is going to go. So what? The S&P 500 ($INX) is probably going to return 5% to 10% a year over time. Maybe more, maybe less. I think most RealMoney readers want to pick stocks that return many multiples of that. I know I do.
Sectors to watch
Here's a couple of themes that will be important in the coming year.
Real estate: Oh, you might say, I thought it was common knowledge that real estate is about to go bust. This might, in fact, be true. Who knows? What we do know is that for the past five years, real estate has been going up more than 20% a year in most sectors and in most parts of the country. But stocks haven't.
Many companies have large real-estate holdings on the balance sheet. They do not mark these holdings at what they are assessed at right now; they tend to mark them at what prices they bought the real estate for in the past five to 20 years. Eddie Lampert had great success unlocking the real estate values in Sears (SHLD, news, msgs). And funds like Pershing are trying to do the same for McDonald's (MCD, news, msgs). But there are at least 20 companies I can think of that have real-estate holdings worth more than their market caps.
Awareness of the connection between real-estate holdings and the stock market has not occurred across all companies. We're going to see a lot more "unlocking of value" this year on balance sheets.
Alternative energy: I am so sick of hearing about oil prices and their effect on the market. The biggest benefit of rising oil prices is that money is being thrown hand-over-fist at alternatives. The companies producing those alternatives are going to see their stocks go up 10 times.
The Internet: Let's face it -- as hot as the growth has been for Internet companies, it's only been a line item on corporate budgets. That's changing now. We're going to see corporate advertising on the Internet go from an experiment to being central to their marketing efforts. Online commerce is going to go from 3% of people's shopping budgets to 50% (when factoring in the research and comparison shopping that occurs online).
In 2000-02, the Internet went through a depression rivaling what many industries went through in the early 1930s. OK, the extra capacity got flushed out. But the industry is still in catch-up mode and will be for a long time before it sees another year like 2001.
So don't think too much about the overall economy. There are many cheap stocks out there that are in growing sectors that will do well regardless of where the S&P 500 is. Regardless of the world economic situation and the volatility that can be expected even in an economy as stable as that of the U.S., focus on the companies with unlocked balance sheets in growing sectors (alternative energy, Internet) and make money.
By James Altucher, TheStreet.com
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of "Trade Like a Hedge Fund" and "Trade Like Warren Buffett." At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.
© 2006 TheStreet.com, All Rights Reserved.
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