2010 winners and losers

A rising tide lifts all boats, they say. I think that’s a bad analogy. Yes, most stocks will gain in a rising market but some will perform much better than others. Here are the sectors that I believe will be the leaders during 2010.

Energy. Assuming the world continues to emerge from the recession, demand for oil is going to increase and the price will move higher. We have already seen a big rally in the energy sector, which at the time of writing was up more than 33 per cent year-to-date. But all of the major companies are still well down from their highs. For example, Suncor, which is one of my top picks for 2010, is still off almost 50 per cent from its 2009 high.

Mining. I think quality mining stocks will also perform well in 2010, for the same reason. The S&P/TSX Capped Diversified Metals & Mining Index is ahead 314 per cent so far this year (thanks, gold). Don’t expect anything like that next year, but some of the mining stocks still have upside potential.

Financials. Financial stocks have rebounded strongly from their March lows. It’s hard to believe there was a time when you couldn’t give away shares in Bank of Montreal even though they were yielding over 11 per cent. The financials index is ahead 37 per cent so far this year but here again the heavyweights are still trading below their 2008 highs.

Consumer discretionary. We should see better performance from the consumer discretionary stocks, which have been laggards this year. In this group I like Canadian Tire, Tim Hortons, and Thomson Reuters, although I must confess I don’t understand why the latter company is included in this sub-index.

Real estate. Commercial real estate is finally recovering, as the big rebound in REIT prices indicates. There have been recent media reports of major problems in the U.S. in this sector but the Canadian situation looks healthier, just as our housing sector held up better during the recession. Stocks I especially like are Brookfield Asset Management, which is on the Internet Wealth Builder Recommended List, and First Capital Realty, which has done well for readers of The Income Investor.

Selected income trusts. Some income trusts offer strong profit potential in 2010 as the date for the implementation of the new tax approaches. These include what I call “survivor trusts”, those that will be able to maintain their distributions at or near current levels after the new tax takes effect.

Sectors that I expect will lag behind next year include the following:

Forestry. It seems as though forestry stocks have been losers forever. At some point, they will rebound but I don’t see any obvious catalyst for that happening in 2010. The high loonie will continue to be a problem for this troubled sector.

Utilities. These defensive stocks almost always trail the market during bullish periods. They will continue to provide good yields for investors seeking cash flow but don’t expect much in the way of capital gains.

Telecoms. The competition has become fiercer ever since the BCE takeover collapsed. The battle for market share is taking its toll. Here again, dividends will be attractive but growth potential is weak.

Bonds. The party’s over for most bonds. The exception could be high-yield (junk) bonds which tend to perform better in an improving economy because of the lessening of credit risk.

Weak trusts. Marginal income trusts have no where to go but down, unless they become takeover targets as happened recently with Harvest Energy Trust.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, click here.

Photo ©iStockphoto.com/ Rob Friedman


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