Utilities

Want to know where NOT to invest in 2006? Among the less-than-attractive sectors are utilities. I know, I know - you can never get hurt with a utility stock, right? Wrong. These stocks got whacked in 2001/2002 like everything else did. They also got whacked in 93 and 94, when the rest of the market was doing ok. While it's good to have a sector that can move independently of the market, that doesn't make things any better right now for this group. Since the end of January, the S&P Utilities Index (UTIS) is down 3.1 percent. That's not catastrophic, but adding in the fact that this index is also right where it ended June of last year, what you get is anything but bullish. For the sake of comparison, the S&P 500 is up 2.1 percent since the end of January. Since June, the S&P 500 is up by 9.8 percent. See why I'm not thrilled with utilities? And I don't think it's going to get better any time soon.

That said, not all the utility stocks are in dire straits. Public Service Enterprise (PEG) and Exelon (EXC) seem to be surviving. So does Duke Energy (DUKE) and Kinder Morgan (KMI). It's just that the majority of these stocks are headed lower.....enough to make you think twice about buying them indiscriminately. And if you do happen to have one of the ones that hasn't been voted off the island yet, be sure to keep it on a tight leash.

S&P Utilities Index (UTIS) - Monthly http://bluegrassportfolio.com/images/031706utis.gif

Consumer Discretionary

The consumer discretionary stocks are my other least favorite group right now. It's a bit surprising really, as the economy has been pretty strong, employment has been improving, and consumer spending is as good as it's ever been (not that it ever really slows down). Yet, the S&P Consumer Discretionary Index (CODI) is just not getting any traction. In fact, this sector has been in trouble for more than a year. Since the end of 2004, this index has pulled back by 6.0 percent, and is still itching to go lower. How bad is that in the bigger picture? The S&P 500 gained 7.9 percent during that time.

But like the utilities stocks, it might pay to be selective among these stocks. We have seen - and are seeing - many of the industries within this sector thrive, even though the sector itself is not. The casinos and gaming stocks like Wynn Resorts (WYNN) and Isle of Capris (ISLE) have done pretty well, as have the department stores. Shares of Federated (FD) and Saks (SKS) have both put up decent (albeit volatile) numbers. So clearly, this sector isn't a lost cause in terms of individual names. But in terms of the broad view, there are a handful of problems. Some of the main culprits are the auto manufacturers and film companies. Time Warner (TWX) and Regal Entertainment (RGC) have been nothing but trouble. The same goes for Ford (F) and General Motors (GM). However, I have to confess that I have the auto-makers back on my watchlist. This just might be they year they get their transmission stuck out of reverse, so to speak.

S&P Consumer Discretionary Index (CODI) - Monthly http://bluegrassportfolio.com/images/031706codi.gif

Consumer Staples

The list of sectors worth a closer look still includes telecom, financials, and healthcare. None have been great lately, but not much of anything has. One of the other sectors I'm starting to warm up to is the consumer staples group. The S&P Consumer Staples Index (CSTP) is about even for the year, and up by about 9.6 percent over the last twelve months. That trails the market's twelve-month performance slightly (+10.8%), but I'd gladly give up a little bit of return for the stability that the consumer goods stocks are providing. Plus, I think the underlying improvement in the fundamentals here could accelerate the entire sector. The average P/E here is 21.41 (Hemscott), and dividends are decent. But when industry leaders Procter & Gamble (PG) and Campbell Soup (CPB) are discovered by investors again, I think they could lead the way for the whole group......and end up as market leaders.

S&P Consumer Staples Index (CSTP) - Monthly http://bluegrassportfolio.com/images/031706cstp.gif