The Great Rotation: 3 Stocks in Lagging Sectors That Could Move Higher

After the huge rise in technology stocks which led the NASDAQ index to all-time highs, many investors are looking to other sectors in the market for opportunities. Finding lagging industries that haven’t really participated in the rally over the last few months is a smart way to find value. Sector rotation occurs when investors start moving money from one industry to another in an attempt to capitalize on the next stages of the economic cycle. The stock market tends to operate with a herd mentality, which means if you can identify lagging sectors that have started to see recent buying you could be on your way to nice returns.

It seems that some rotation out of tech stocks has already begun, even though there is still a lot of uncertainty about where we currently stand with the economy. If the recession ends up being one of the shortest in U.S. history, these stocks in lagging sectors could really pay off. The benefit of investing in lagging sectors is that the risk/reward ratios are a lot more favorable for investors. Let’s take a look at 3 stocks in lagging sectors that could rise higher in the coming months as a result of sector rotation.

JP Morgan Chase & Co. (NYSE: JPM)

An example of a lagging sector that has already seen some rotation is the financial sector, and JP Morgan is perhaps the best stock to own in that area. Value stocks like this one could pay off nicely in the long-term due to the fact that economic slowdowns and pessimistic investors have potentially priced them too low. In fact, all of the bank stocks have been beaten up this year, but JP Morgan appears to be on the rebound thanks to a huge beat on its Q2 earnings and optimism about the economic recovery.

The great thing about this big bank is that it has a well-diversified stream of earnings that should be able to offset any loan and credit losses that could occur in the coming quarters. Trading revenues surged 79% in Q2 which has helped this bank build a strong capital position to deal with the impact of the pandemic. It also appears that it’s $0.90 per common share dividend is not at risk of being cut, with CEO Jamie Dimon confirming that the current dividend is “completely sustainable”. This can’t be said for some of the bank’s competitors like Wells Fargo. Although the impact of COVID-19 on the bank’s earnings will be negative in the near-term, this company is well-positioned to rebound when the economy starts to recover and offers a solid 3.61% dividend yield at this time.

Waste Management (NYSE: WM)

Another lagging sector to consider is the utility sector, and Waste Management is a company in that sector that looks like a stellar buy at this time. Although the idea of adding shares of the leading trash-hauling business might not sound luxurious, the company is a great defensive stock that should hold up very well regardless of how long the recession lasts. The company states that it has “recession-resilient revenues” and offers investors a strong track record of cash flow generation over the years.

Seventeen years of consecutive dividend increases and a 2% dividend yield should attract investors looking for some extra income, while the company was able to grow revenues to $15.4 billion in 2019 which was a 3.6% year-over-year increase. Catalysts for the stock like industrial activity picking up again or higher infrastructure spending occurring will benefit the company greatly.

Caterpillar Inc. (NYSE: CAT)

In the first half of 2020, Caterpillar had a rough going, to say the least. The stock fell over 15% during that time as construction growth slowed dramatically due to the global pandemic. However, it’s one of the first stocks you should be looking at should the industrial economy show signs of bouncing back strong. We already have evidence of a rotation into industrials as the stock is up about 10% in July so far.

Although retail sales growth has been abysmal for the construction machinery company, energy prices have recovered and the company’s balance sheet is strong with over $7.1 billion in cash on hand at the end of Q1. It doesn’t seem like the company’s dividend will get cut anytime soon thanks to steady free cash flow generation. Although the company faces an uncertain near-term future, its history of surviving recessions, strong balance sheet, and nice dividend yield make it worth a look should the rotation continue.

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High Potential Comes with Risk

Investor sentiment has shifted towards value and cyclical exposure for now, but keep in mind that it is still hard to tell if this is just a short-term trade or if the trend is here to stay. Timing the shift from growth stocks to value stocks can be difficult, but buying quality companies like the three mentioned above will work out more times than not. Just keep in mind that there is always the risk of a prolonged economic recovery that could stop the sector rotation in its tracks.