I guess there are several possible advantages in targeting a sector, or sectors, where there's demand, strong positive business activity, etc...
For one thing, those well run businesses, that may have shown a decline in their price through "no fault of their own", may now start benefiting from a better sector performance.
In addition, it may be a good place for those who are not well inclined to interrogate companies, from a fundamental point of view, to still be able to invest reasonably profitably in the market via an ETF or sector-specific Mutual Fund.
With regard to "sector rotations" I thought I'd direct you to the following web site, in case you hadn't seen it before, and maybe you'd find it of interest. Someone brought it to my attention a while back. I tried posting the actual web page link but it didn't seem to work.
So here are the "directions" .....
Stockcharts.com --> CHART SCHOOL --> Trading Strategies --> Sector Rotation Based on Performance
To get back to your question ... "What are your thoughts on sector rotations?"
If "sector rotation" implies investing in a specific sector Mutual Fund or ETF then I'd say that an investor would be better off if he/she rather targeted fewer companies that may be in that sector and interrogated those companies from the standpoint of specific and relevant financial fundamentals.
If we consider an ETF, it contains a large number of stocks and a certain percentage of them would generally be doing well, while, simultaneously, a certain percentage of them would be doing poorly. So the end result is that the poor performers pull down the contributions of the better performers and one ends up with just the average of all concerned.
On the other hand, if one followed the lead of someone such as Warren Buffett and interrogated, for example, the Income Statement of a company based on the criteria that he targets, as in .....
Message 27443100
... then it’s very likely that one would be looking at a well run and often profitable company.
Of course, several of those percentage targets are set fairly high. But one could temper them slightly and still be OK. Because, IMO, if a company can Simultaneously meet or beat all those criteria then it’s most likely to be doing well in its business.
I can’t imagine that it would often be the case that a company with a Simultaneous 30% to 40% Gross Margin, a 15%, or greater, EBITDA Margin, a zero or negligible Interest Expense, a Pretax Return on Cap. Employed in excess of 25% and a Net Profit greater than 15% to 20%, would not be doing well in its business performance, provided that it’s not too adversely affected by “external forces” beyond its control.
Therefore I’d say that if one takes note of a sector that is showing strong relative performance and then searches (using some of the excellent and free search facilities available on the Internet) within that sector for companies that meet the financial criteria, such as those recommended by Buffett, one could certainly do very well with that sort of smaller portfolio, and very likely better than the average one would get from an ETF or Mutual Fund. |
