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What different sectors say about an investor’s stock type preferences

What different sectors say about an investor’s stock type preferences

Beginner

1st September, 10:14
Updated: 23rd September, 07:20

Now that we have got the broad introduction to the different stock types out of the way, it’s time to start drilling down into more detail.

Let’s narrow down our search parameters a bit by focusing on stocks that are constituents of different sectors. 

What are the different types of sectors that separate different stock types?

We’ve identified nine broad sectors that serve as differentiators between stock types and which can help you when categorising the different types of stocks available. Those sectors are:

  • Technology
  • Energy
  • Healthcare
  • Financial
  • Utilities
  • Retail
  • Telecommunications
  • Industrial
  • Materials

In future lessons we will get even more specific by breaking down each sector into individual industries. For example, ‘technology stocks’ can be further differentiated into semiconductors, software, internet service providers, and many others. For now, though, we will stick to looking at what each sector says about your specific investing goals. 

Why do different sectors convey information about investors’ stock type preferences?

In general each sector contains specific types of companies, and companies in different sectors tend not to share much in common. This means that each bunch of stocks tend to behave very differently than those found in other sectors, and investors tend to have a preference for certain sectors over others depending on their investment goals.

Is your goal to invest in the most innovative, fastest-growing companies of the future? Do you prefer security and guaranteed cash flow when you invest? Do you want your investments to follow the direction of the broader economy? These are just some of the questions you need to ask yourself as you consider which sectors you want to invest in.

1) Technology Stocks

Technology stocks encompass a wide range of companies that do business in the tech sector, including – but not limited to – semiconductor makers and software companies. Tech stocks have flexed their muscle in 2020, with their rate of dominance accelerating during the global COVID-19 pandemic. 

These stocks often rely on breakthrough innovations, making them growth stocks with significant potential for healthy profits and big price gains. The five most heavily-weighted stocks in the S&P 500 (Apple, Amazon, Microsoft, Facebook, and Alphabet) have collectively racked up huge gains over the past six months, while the other 495 stocks in the benchmark stock index are collectively in the red over that same period of time. 

2) Energy Stocks

Energy stocks comprise shares of companies that engage in the production and sale of various forms of energy. Those parameters include a wide range of different types of energy, and different types of services. For instance, both oil drilling companies and oil refinery operators hail from the energy sector, but so too do solar power producers and coal mining companies.

Though there’s no one hard and fast rule for how to invest in energy stocks, one good strategy is to monitor the prices of underlying commodities, as well as broader societal trends. For instance, demand for petroleum-related products has fallen sharply with the sharp decrease in traffic caused by the global lockdown induced by the COVID-19 pandemic. 

3) Healthcare Stocks

No matter what’s going on in the world, there will always be demand for healthcare products and services. This is because human beings’ health and wellness is an essential factor that governs our daily lives. Healthcare stocks serve a basic need, and this is what makes them so enticing to investors. 

The current coronavirus crisis has made vaccine developers some of the most closely watched stocks in the sector, but the industry is far broader than this. Healthcare stocks can also include for-profit insurance companies, medical device makers, as well as medical technology companies grouped under the heading of healthcare rather than tech. While many stocks in this sector can be considered growth stocks, there are plenty of older, venerable healthcare stocks that offer significant dividend yields as well as bargain prices to entice value investors.

4) Financial Stocks

Financial stocks cover many different types of companies that do business in the world of finance. These include banks, financial technology companies, and lending companies of all kinds. The financial sector is usually a reliable barometer of the overall global economy, so it’s no surprise that financial stocks have fared poorly relative to many other sectors given the coronavirus-induced economic contraction that’s occurred in 2020. 

Still, the stock market always looks ahead, so if the global economy does rally, the companies that provide the capital necessary for businesses to expand have the potential to stage a major rebound.

5) Utilities Stocks

Utilities stocks comprise shares of companies that provide basic services to homes, offices, and other buildings. These services include water, electricity, and natural gas. Utilities companies are heavily regulated by their region’s government and operate on a local basis. 

The revenue growth and earnings growth of utilities stocks rarely fluctuate, since they provide essential services that customers use in both good times and bad. This means they are generally regarded as defensive stocks that investors often turn to during economic downturns and bear markets.

6) Retail Stocks

Retail stocks refer to the various types of companies that operate in the retail sector. Some examples of retail stocks are clothing store chains, electronics store chains, pharmacies, restaurants, and many others. Think of retailers as the opposite side of the coin to utilities stocks: while utilities stocks come into favour during downtimes, retail stocks are cyclical and their success hinges largely on the strength of the economy, and by extension the strength of consumer spending. 

Retail companies tend to operate with thinner profit margins than leading tech and healthcare innovators, but can supercharge their corresponding stocks with accelerating revenue growth and expansion of their core brands.

7) Telecommunications Stocks

Telecom stocks hail from the telecommunications sector, and include companies offering phone, Internet, and television services – as well as a variety of products related to communications. There’s some overlap between telecom and technology stocks, in that both sectors are committed to building innovative new products that can change lives (think of the smartphone as a Venn diagram of both these sectors). 

Much like tech stocks, the top-performing telecom stocks will often sport impressive earnings growth, fueling significant price gains. Though the telecom market has become somewhat saturated in some of the world’s richest countries, emerging markets represent a significant opportunity for future growth.

8) Industrial Stocks

Industrial stocks encompass companies that produce machinery, equipment, supplies, and services for the manufacturing and construction industries. They also have some crossover into other industries such as aerospace and air freight. As you might imagine, these stocks are also highly sensitive to underlying economic conditions, since manufacturing and construction tends to slow down when consumer demand slows and companies and governments pump the brakes on expansion and infrastructure buildout. 

These companies typically grow at a slower pace than leaders in fields such as technology, but partly make up for that slower growth by often offering sizable dividends to investors. Industrial stocks are generally regarded as steady earners during bull markets.

9) Materials Stocks

The materials sector includes companies that find and process raw materials to produce a wide variety of finished goods. The sector includes concrete producers for construction projects, metal refining companies, fertilizer makers, plastic producers, and more. Though not as sexy as a healthcare company that breaks through with a world-changing vaccine, top materials stocks can deliver steady profits, and often share those profits with investors via dividends. 

Though many of these materials are staples of everyday life, materials stocks can be somewhat sensitive to overall economic conditions too. This is because they’re related to companies that do business in economically sensitive industries such as manufacturing and construction.

Here are some examples

1) Technology Stocks

Softcat (SCT) is a UK-based IT infrastructure service provider that’s been around for nearly 30 years. The stock has ramped up 42% from its March 2020 low and fits into the mid-cap category of technology stocks with a market capitalisation of about £2.5 billion.

2) Energy Stock

Williams Companies (WMB) is an American company that specialises in natural gas processing and transportation. The stock has been one of the top performers in the energy industry this year, more than doubling in price from its March low and cranking out an eye-popping dividend yield of nearly 8%. 

3) Healthcare Stock

Moderna (MRNA) is a biotech company that focuses on drug and vaccine development. The company is currently enrolling participants in a COVID-19 vaccine trial, with the hope of bringing a successful vaccine to market some time in the coming months. Speculative investors already bid up the stock to dizzying new highs this summer, and Moderna has since pulled back about 35%.

4) Financial Stock

BlackRock (BLK) is one of the largest investment management companies in the world, with $7.4 trillion in assets under management as of the end of 2019. Like Williams, BlackRock has delivered both lofty price appreciation (up 72% in the past six months) and a healthy dividend yield (2.6%) to investors.

5) Utilities Stock

Sempra Energy (SRA) is a California-based company that focuses on building electricity and natural gas infrastructure. Sempra employs more than 20,000 people and generates about $12 billion in annual revenue. It’s also priced intriguingly for value investors, with a low price-to-earnings ratio of about 8-to-1.

6) Retail Stock

Few sectors have been hit harder by the global coronavirus pandemic than the retail sector. Yet Ulta Beauty (ULTA) has shown remarkable resilience. After crashing in price in February and early March as COVID-19 triggered store closures, Ulta’s stock has nearly doubled in price, fueled by a consistent run of beating quarterly earnings estimates even amid flagging revenue streams.

7) Telecommunications Stock

American telecommunications and mass media giant Charter Communications (CHTR) has shown remarkable levels of growth. The stock not only shook off the March market swoon caused by COVID-19, it surpassed all expectations to surge to an all-time high. Charter’s market cap of $124 billion makes it one of the largest communications stocks in the world.

8) Industrial Stock

Industrial supplies company Fastenal (FAST) distributes fasteners such as screws and nuts to a wide array of construction and manufacturing customers. It’s another stock that’s overpowered the negative effects of the coronavirus-induced global economic slowdown, powering to an all-time high as of early September. 

9) Materials Stock

Albemarle (ALB) produces numerous forms of specialty chemicals, and has also become a leading producer of lithium salts in recent years – a lucrative market given increasing demand for lithium-ion batteries and other lithium-related products. Albemarle’s stock price has nearly doubled in the past six months.

How do I find stock types broken down by sector?

You can find everything you need right here. On this site you’ll find regular updates, lists, and news reports on all major stock market sectors, with analysis of prevailing trends for each of them.

This breakdown of different sectors and their relevance to investment choices should have given you a firmer understanding of the range of stocks available for you to invest in, and which sectors might appeal most to you specifically. Next, we’ll take you through the different types of stocks as defined by their earnings potential, starting with growth stocks.

By Jonah Keri
Jonah Keri is a trader and analyst who spent 11 years at Investor's Business Daily covering the markets. He now writes about stocks, cryptocurrencies, and other investments for Invezz and about emerging technologies for private clients.
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