High-Beta Sectors to Buy in An Up Market

If the following earnings estimates become actual - or near actual - earnings, the market and individual sectors could show a strong performance. The multiples, including the S&P 500 Index multiple, are low on a historical basis, and could support a market advance.

If the market senses that these estimated numbers could be actual earnings, the market usually anticipates the earnings gains - and we could have a strong second half in 2012.

In a recent report I wrote that Standard & Poor's has designed indexes that enable investors to invest in high beta or low volatility slices of the S&P 500 Index. The S&P 500 High Beta Index SPHB measures the performance of the 100 most volatile constituents of the S&P 500. These are the sectors that should gain the most in up markets, but could also decline the most in down markets.

Among the sectors with high beta is Consumer discretionary, which has a 14 percent higher allocation in the SPHB index than it does in the S&P 500 Index; energy, which is higher by 18 percent; financials, higher by 20 percent; and materials, higher by 6 percent.

If you think there is a market advance in the last half of 2012, which we do because of the reasons elucidated above, these are the sectors that should be heavily weighted. Following are the S&P estimated year 2013 operating earnings compared to the year 2012 estimated earnings, and the estimated multiples.

Estimated operating earnings, for the index and for its higher beta sectors.

S&P 500 Index:

Operating earnings gain year 2013 over year 2012: 13 percent

P/E ratio on estimated 2013 earnings 11.6 times

Consumer discretionary sector:

Operating earnings gain year 2013 over year 2012: 18 percent

P/E ratio on estimated 2013 earnings 13.5 times

Energy sector:

Operating earnings gain year 2013 over year 2012: 11 percent

P/E ratio on estimated 2013 earnings 9.45 times

Financials:

Operating earnings gain year 2013 over year 2012: 18 percent

P/E ratio on estimated 2013 earnings 10.2 times

Materials:

Operating earnings gain year 2013 over year 2012: 21 percent

P/E ratio on estimated 2013 earnings 11 times