Three watchlist stocks to take advantage of sector rotation

These stocks allow you to take advantage of the quarterly musical chairs game

Sector rotation is a common market event based on the theory that economies move in cycles. To take advantage of these cycles, institutional investors and fund managers periodically adjust their positions. This entails divesting sectors that they believe will underperform and rotates them into sectors that are likely to outperform. – MarketBeat

One of the benefits of your MarketBeat subscription is the ability to use our screening tools to discover the sectors the ‘smart money’ buys and the sectors they avoid. In this case, you can look at the most upgraded stocks, which provides a list of stocks that are being upgraded by the analyst community.

So what are analysts saying now?

In the first half of the year, investors saw a strong rotation from the technology sector to the energy sector. Some energy stocks remain popular, but other sectors are starting to gain strength. These include healthcare, basic consumer goods and materials. Each of these sectors could be considered defensive, as demand for the underlying products and services will continue no matter how long inflation persists.

Here’s one stock from each industry that offers investors the opportunity to grow in this rotational cycle. At the time of writing, each stock has a “Moderate Buy” rating according to analysts tracked by MarketBeat.

A core stock for defensive health care

In the healthcare sector, we look to Merck (NYSE: MRK). Merck is active in the Pharmaceutical and Animal Health sectors. These are among the most defensive in the industry. Regardless of the state of the economy, individuals will continue to get their prescriptions. And the amount of money consumers are willing to spend on their furry relatives is impressive.

The company has had some setbacks with some potentially groundbreaking cancer drugs. But that has no effect on the company’s turnover and profit.

MRK stocks trade at a P/E ratio of about 16 with a future P/E of about 12. Over the next five years, analysts are forecasting single-digit growth in revenue and earnings. However, gains are expected to be at the higher end of that range. And Merck pays out a dividend with an attractive yield of 3.08%. And it’s been raising the dividend for 12 years.

From a technical standpoint, MRK stock is falling from a swing high. This will leave investors looking to see if it can find support around the 50-day moving average.

This iconic company can offer a sweet surprise

Can I interest you in a stock that is up 10% in 2022? Such is the case with Hershey’s (NYSE:HSY) proving its defensive chops. The simple fact is that candy sells. In a robust economy, the products sell themselves. And when times get tougher, it’s an affordable luxury. That speaks to the pricing power and brand recognition of this iconic company.

The company does have a somewhat pricey P/E ratio of 27x earnings. And the company is expected to have only single-digit growth in earnings and sales over the next five years. But the company does offer a solid dividend that it has increased over the past 13 consecutive years. In addition, as I wrote in June, the company has a strong cash position, which means the dividend is unlikely to be at risk.

And HSY stock is currently trading near the top of the 52-week range, which is encouraging as the S&P 500 is trading near the bottom of the range.

The future looks bright for this stock of materials

One way to think about sector rotation is that it gives investors a chance to skate where the puck moves. That’s the idea behind an investment in Albemarle (NYSE: ALB). The chemical company has three primary business units. But what we think you should focus on is the lithium business. Lithium will become one of the most valuable materials in the coming years, including electric vehicles and smartphones.

The company does look a bit pricey. However, of the three companies on this list, only Albemarle is expected to have double-digit growth in both sales and profits over the next five years. Not only is this bullish for the ALB stock price, but it should give investors confidence that the company’s dividend will continue to improve.

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