11 best stocks to invest in by sector

The S&P 500 is divided into 11 sectors. Here's a list of one top stock in each.

  • By Matt Whittaker,
  • U.S. News & World Report
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As of a 2018 reorganization, companies in the S&P 500 (.SPX) fall into 11 different sectors – communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, real estate and utilities. The sectors help investors identify companies with similar businesses and guide the creation of funds that invest in groups of companies. If you're an investor looking to build a diversified portfolio, it's not a bad strategy to select the best players across the market. Here's a look at a top stock pick within each of the 11 different sectors.

Communications: Alphabet

Brent Lium, portfolio manager with Crossmark Global Investments, likes Alphabet's (GOOG, GOOGL) stellar balance sheet – including its cash stockpile – and dominant global positions in search, with Google; video, with YouTube; advertising, with both of those services and mobile, with Android. Alphabet has been growing its Google Cloud services to compete with Amazon Web Services and Microsoft's (MSFT) Azure. Alphabet is able use the cash cow that is its search business to fund other prospective high-growth projects, Lium says. Alphabet's shares are enjoying increasing passive investing in market-cap-weighted index products, he adds.

Consumer Discretionary: Amazon.com

Amazon (AMZN) is another company that has been hiring aggressively despite widespread layoffs in other parts of the economy thrashed by the health crisis. The company has hired more than 100,000 new employees, as Amazon Prime and Amazon Web Services has become, according to Lium, "the go-to resources for a huge swath of the U.S. population during this pandemic." Still, Amazon is a huge company involved in much of modern life, and it has drawn its share of critics. The hiring spree helps ease, but not eliminate, many of the privacy and antitrust regulatory risks the company faces, Lium says. Beyond the hiring, AWS is the leading public cloud provider and is growing much faster than Amazon's retail business, he adds. "Few companies in any sector have been as utterly disruptive as Amazon," says Ryan Giannotto, director of research with GraniteShares. Giannotto likes that the company allocates more resources to research and development than some others.

Consumer Staples: Walmart

Walmart (WMT) is one of the few companies that can withstand the e-commerce threat from Amazon, says Will Reese, director of equity research with UMB Bank. The company has been getting into the online sales market itself. "Walmart is extremely well-positioned to offer both digital and physical sales offerings that can compete against Amazon," Reese says. Walmart's investments in grocery pickup and delivery have served it well during the pandemic and may continue doing so after the outbreak passes if people continue some of their lockdown shopping habits. Reese notes that the company's grocery sales also promote traffic into the stores, giving the chain known for its low prices an edge during an economic downturn when consumers rein in their spending. With strong demand, Walmart has been hiring aggressively, and Reese thinks that's "a fantastic indicator of future sales."

Energy: Chevron Corp.

The energy sector has been devastated as the pandemic has reduced travel and economic activity, helping cause oil prices to crater this year. But Chevron (CVX) stands to weather the storm better than some others in the sector. Reese says production can snap back quickly, and Chevron's strong balance sheet allows the company to acquire depressed assets. "CVX has a strong balance sheet that will allow them to take advantage of low-cost resource plays that come (on) sale in the current weak oil price environment," he says. He thinks the company's dividend yield of more than 5% is safe. That makes the stock attractive for income investors who aren't able to get much from the ultra-low yields in the Treasury market.

Financials: CME Group

Historically, low interest rates may make banks a relatively unattractive investment at the moment, but CME Group (CME) offers something different in the sector. The company owns leading exchanges for trading commodities futures and other financial instruments. Because these are marketplaces in which buyers and sellers get together, CME can make money whether commodities prices are going up or down. In fact, the more volatility, the better for the company. "The historic volatility in interest rates, oil and equities so far in 2020 will help fuel CME's financial results," Reese says. It's worth keeping in mind that revenue from trading activity, which makes up the bulk of CME's sales, can be volatile – as it can go down when markets are calm.

Health Care: Johnson & Johnson

The health care sector has been a bit of a mixed bag during the pandemic. On the one hand, drugmakers making progress toward a vaccine have seen their shares jump. But with many elective and nonemergency medical services delayed, some companies have suffered. Reese's top pick in the sector is Johnson & Johnson (JNJ), which he says is a leader in multiple health care industries and provides earnings stability in a volatile economic environment. The company has a diversified revenue base, extraordinary free cash flow generation and a strong dividend track record. Its diversified base of sales has helped the company as the pandemic has negatively impacted the firm's medical device segment. Reese sees that as a short-term problem, as he expects nonvirus-related medical procedures to recover later this year.

Industrials: Waste Management

The industrials sector is often referred to as cyclical because it tends to benefit when the economy is doing well and pull back in harder times. Waste Management (WM) offers an exception. "Trash must be collected and disposed of even in a recession, therefore WM offers earnings stability," Reese says. In the garbage disposal business, scale is important, giving Waste Management an edge as the largest solid waste company in North America. Its revenue is nearly 50% larger than its biggest competitor, and its customer base is highly diverse, Reese adds. Because there aren't a lot of competitors in the business, the company can consistently push through price increases while maintaining stringent cost controls, he adds. Population growth and the resulting waste are boons for the company, Lium says. On the downside, Waste Management's business is capital intensive. But that's offset by the visibility of revenue growth, a disciplined management team and high margins, Lium notes.

Information Technology: Mastercard

With a strong brand and a capital-light, fee-based business model, Mastercard (MA) is well-positioned to benefit from the ongoing shift from cash-to-card-based payments, especially in international markets, Reese says. Over the shorter term, consumer discretionary purchases will be significantly lower amid the economic downturn, negatively affecting credit card transactions. But once the health crisis risks diminish, Reese expects pent-up demand to help. "We think consumers and businesses will once again swipe their credit cards when the economy returns to normal, benefiting volumes," he says. Lium likes the company's visible revenue growth, strong financial model and conservative balance sheet. "(The virus) will have a short-term negative impact as consumer spending and international travel gets hit, but consumers will likely accelerate the cashless trends as they avoid cash," he says.

Materials: Ecolab

This cleaning and sanitation company expects the largest sales impact from the pandemic to come in the second quarter because of the closure of restaurants and hotels. But restaurants, for example, still need the company's products even if they're only open for carryout and delivery, Reese says. "As some of Ecolab's (ECL) largest end markets begin to open up for business, we think demand will recover significantly," he says, adding that Ecolab's shares could hit $250 – about 18% more than their current value as of yesterday's close. Lium notes that Ecolab has a very diversified customer base. "We think (the virus) will have a net positive impact as the increased focus on cleanliness offsets the loss of some customers due to closures," he says.

Real Estate: American Tower Corp.

Real estate is one of those sectors that hasn't done particularly well this year, down 2.8% in the year through the beginning of June. That said, American Tower's (AMT) shares have managed to climb about 15% year-to-date. The company owns cellphone towers across the globe. As people use more data on their phones and the industry shifts to 5G technology, there is a demand for more equipment on cell towers as well as more towers themselves. That means paying more rent to companies like American Tower, Lium says. The increased number of people staying at home during the pandemic has been accelerating the shift to mobile data, boosting a trend that was already helping the company. "The additional rent … comes with very little incremental cost, meaning margins should go up over time," he says.

Utilities: NextEra Energy

Wind- and solar-focused utility NextEra Energy (NEE) offers a "fantastic" way to play the emerging trend of environmental, social and governance investing, which represents a significant source of investing flows in the coming years, Reese says. The company's dominance in the renewable energy industry makes it a top holding in environmental, social and governance funds, also known as ESG funds. He says NextEra is a best-in-class renewable energy firm with strong earnings and dividend growth. "NextEra clearly has a differentiated growth in the utility sector, which deserves a premium valuation multiple," he adds. As of this writing, the company pays a dividend of more than 2%.

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