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3 red-hot investment opportunities

There's still money to be made in this market, if you look for it.

  • By Jeff Reeves,
  • MarketWatch
  • – 04/03/2014
  • Energy Sector
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We have officially closed the books on the first quarter of the year, and while the S&P (.SPX) is hovering around new all-time highs, the raw performance hasn't been much to write home about in the last three months. But that doesn't mean there aren't places to still make money.

The S&P closed at 1,848 on Dec. 31, and closed at 1872 on March 31. That equals a measly 24-point gain that's good for 1.3% returns across the first three months of 2014.

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Undoubtedly, any gain is better than a loss. And annualized we are pacing a return of more than 5%, which would top seven out of the last 14 years since 2000.

But after a 30% up year in 2013, it's hard to get too excited about 1% gains for the broader market in the first quarter — especially if you're sitting on some underperformers that are deep in the red.

It's worth remembering, however, the tired old adage that it is "a market of stocks, not a stock market." Because while the S&P 500 may not be burning down the house, there remain pockets of big opportunity right now for investors who know where to look.

Based on outperformance in the first quarter, here are three red-hot investing opportunities to watch for the rest of the year:

On-land energy drilling

Limiting your investments to energy drilling and service stocks seems a very myopic way to invest. Not only is it a small segment of the energy space, it also is one that has been hard hit by soft commodity prices and the tough competition between drilling stocks as they fight to keep service contracts in place.

But those who have focused on the sliver of stocks that drill on terra firma in the continental U.S. have made a pretty penny in 2014, and have the wind at their back going forward.

Consider that the second-best performer in the entire S&P 500 since Jan. 1 is Nabors Industries (NBR), a land-drilling contractor and well-service company that works mainly in the U.S. and Canada. In February, Nabors reported strong earnings that impressed across the board, prompting the CEO to state that "2013 will represent the low point in Nabors's protracted five-year trough" and sparking a wave of optimism across the entire sector.

Nabors stock gapped up over 20% in a few days, and is up over 40% year-to-date (YTD) as a result. Other highfliers include Newfield Exploration (NFX), which is up over 26% YTD in 2014 and Helmerich & Payne (HP) which is up over 28%.

True, weak commodity prices could continue to be a drag on the sector and continued concern over a slowdown in China manufacturing may be bad for global energy demand going forward. Furthermore, just because Nabors's CEO said 2013 is the bottom doesn't mean that it's true; given the stock's crash from almost $50 a share at its 2008 peak to about half that now even after the recent run, it's fair to be skeptical of his comments as just wishful thinking.

However, the U.S. continues to emerge as an energy production powerhouse, and the advances of drilling technology, including fracking and portable " walking rigs " have the potential to unlock big potential profits in the years ahead.

A big surge in natural gas prices this winter thanks to the cold snap in the U.S. doesn't hurt the short-term outlook, either.

Investors have already started to pile into Nabors and others on the hope of a domestic-drilling rebound. Given recent earnings performance and buying pressure, the future continues to look bright.

Utilities

Another segment of the energy market that has seen buying pressure are utility stocks.

Utilities underperformed in 2013, with the Utilities Select Sector SPDR (XLU) adding just 8% on the year vs. about 30% for the broader S&P 500. However, the sector-focused fund has added another 8% in the first quarter of 2014 to dramatically outpace the broader stock market and make it the best-performing group among the S&P's 10 core sectors.

So what gives?

Well, some of it is utilities catching back up with the market from a valuation perspective. While these stocks are historically low beta, delivering only one third of the profits of the S&P is still a bit low even for the sleepy sector.

A lot of it is also income investors looking for bond-like alternatives to mitigate interest-rate risk now that the Federal Reserve is tightening its monetary policy. Chairwoman Janet Yellen basically telegraphed a rate hike would be in order sometime early next year, and rising rates means declining principle value for investors holding long-term bond funds; moving out of bond funds and into low-risk, high-yield stocks seems prudent to some income investors right now before that seemingly inevitable increase to key interests rates.

Then, of course, there's the general choppiness on Wall Street that seems to be signaling the return of "risk off" investing. From Amazon (AMZN) to Netflix (NFLX) to Lululemon (LULU), a lot of high-growth momentum stocks have taken it on the chin, and investors are looking to protect themselves after a big up year in 2013.

It has all added up to gains for utilities so far, and seems to support continued buying pressure going forward. Even if you believe valuations on utility stocks are fair once again, interest-rate risk and the look for stable investments in a frothy market should continue to support the sector.

Health care

Sure, there's a lot of talk out there about a biotech bubble after this corner of the health-care market crumbled lately. After surging across the last two years or so, the iShares Nasdaq Biotechnology ETF (IBB) is off about 9% in the last month and the SPDR S&P Biotech ETF (XBI) is down 11%.

But if you can look beyond some of the froth in these smaller biotech stocks that are the high-growth, high-risk way to play health care, there is a lot of strength in the sector broadly.

Take megacaps Johnson & Johnson (JNJ) and Novartis (NVS), both worth over $200 billion apiece and the number one and two companies in the world by pharmaceutical revenue. These are hardly the kind of stocks that jump around like crazy ... but in 2014, J&J is up 7% and Novartis is up 5%. JNJ stock has benefitted from a healthy bottom line on cost-cutting efforts and expansion abroad, and Novartis has just gotten a big win with FDA approval for a treatment for the most common type of lung cancer.

Other big pharma stocks have rallied, too, led by Merck (MRK), which has tacked on 12% YTD.

Looking beyond just drugmakers, health insurers WellPoint (WLP) and United HealthGroup (UNH) continue to rally strongly thanks to big bumps to the top line over the last few quarters and optimism about new "customers" from the Obamacare rollout.

I have been a long-term bull on health-care stocks for a long time. The sector is mostly recession-proof, and the aging baby-boomer population is a huge demographic tailwind.

There is undoubtedly volatility right now in smaller biotech stocks, but before you write off all of health care just because the IBB is jumping around, I'd take a closer look at the stable mega caps in the sector.

Most are up strongly in 2014, and pay a healthy dividend to boot.

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