Three Watchlist Stocks to Capitalize on Sector Rotation

These stocks let you profit from the quarterly game of musical chairs

Sector rotation is a common market event based on the theory that economies move in cycles. To profit from these cycles, institutional investors and fund managers periodically adjust their holdings. This means rotating out of sectors that they believe will underperform and rotating into sectors that are likely to outperform.

One of the benefits to your MarketBeat subscription is the ability to use our screening tools to discover the sectors that the “smart money” is buying and the sectors they’re avoiding. In this case, you can look at the Most Upgraded Stocks which provides a list of stocks that are getting upgraded from the analyst community.

So what are analysts saying now?

In the first half of the year, investors saw a strong rotation away from the tech sector and into the energy sector. Some energy stocks remain popular, but other sectors are starting to come on strong. These include healthcare, consumer staples, and materials. Each of these could be considered defensive sectors because the underlying products and services will remain in demand no matter how long inflation sticks around.

Here is one stock from each sector that offers investors an opportunity for growth in this rotation cycle. At the time of this writing, each stock has a “Moderate Buy” rating according to analysts tracked by MarketBeat.

A Core Defensive Healthcare Stock

In the healthcare sector, we’re looking at Merck (NYSE: MRK). Merck operates in the Pharmaceutical and Animal Health sectors. These are among the most defensive in the industry. No matter the state of the economy, individuals will continue to get their prescriptions. And the amount of money that consumers are willing to spend on their furry family members is impressive.

The company has had some setbacks with a couple of potentially breakthrough cancer drugs. But that isn’t having an effect on the company’s revenue and earnings.

MRK stock trades at a P/E ratio of around 16 with a forward P/E of around 12. Over the next five years, analysts project single-digit growth in revenue and earnings. However, earnings are projected to be on the higher end of that range. And Merck pays a dividend with an attractive 3.08% yield. And it’s been increasing the dividend for 12 years.

From a technical standpoint, MRK stock is coming down from a swing high. This will have investors looking to see if it can find support around its 50-day moving average.

This Iconic Company Could Offer a Sweet Surprise

Could I interest you in a stock that’s up 10% in 2022? That’s the case with Hershey’s (NYSE: HSY) which is proving its defensive chops. The simple fact is that candy sells. In a robust economy, the products sell themselves. And when times get tougher, it’s an affordable luxury. That speaks to the pricing power and brand recognition of this iconic company.

The company does have a bit of a pricey P/E ratio of 27x earnings. And the company is only projected to have single-digit growth in earnings and revenue in the next five years. But the company does offer a solid dividend which it has increased for the last 13 consecutive years. Plus as I wrote in June, the company is in a strong cash position which means the dividend is not likely to be in jeopardy.

And HSY stock is currently trading near the top of its 52-week range which is encouraging since the S&P 500 is trading at the lower end of its range.

The Future Looks Bright for This Materials Stock

One way to think about sector rotation is that it gives investors a chance to skate where the puck is moving. That’s the idea behind an investment in Albemarle (NYSE: ALB). The chemicals company has three primary business units. But the one we believe you should focus on is its lithium business. Lithium is going to be one of the most valuable materials in the coming years including electric vehicles and smartphones.

The company does look a bit pricey. However, of the three companies on this list, only Albemarle is projected to have double-digit growth in both revenue and earnings over the next five years. Not only is this bullish for the ALB stock price, but it should also give investors confidence that the company’s dividend will continue to improve.