At the halfway point of 2014, most equity investments are doing reasonably well, with the S&P 500 up 6.1% and the Dow up 1.5% for the year. However, some areas are strongly outperforming other investments so far this year, including these highfliers:
- Utilities and Energy – These sectors have surprised some experts by enjoying a second straight year of significant growth. The energy equipment and services sector is up 22.76% year-to-date (YTD), and gas utilities are up 22.52% YTD. Many utility stocks are up by double digits, and that is on top of double-digit growth throughout most of the sector in 2013.
One lesser-known example is Williams (NYSE:WMB). Specialists in oil and gas infrastructure such as pipelines and processing facilities, they have experienced a 51% YTD return in 2014. The natural gas boom and loosening of oil export restrictions makes their gains likely to continue – and that does not even count the Keystone pipeline, which is in their Canadian/Midwestern U.S. operating area.
Another highflier is Pepco Holdings (NYSE:POM), a D.C. area utility that is up 44% YTD, propelled even further by a recent buyout bid from the major utility corporation Exelon (NYSE:EXC).
- Airlines – Speaking of highfliers, the airline sector is up 35.9% for the year so far. Part of the issue is consolidation from the joining of American and US Airways, as well as the closing of less profitable routes. Both of these moves have reduced competition and led to fewer empty seats and higher prices.
Within the airline sector, Southwest (NYSE:LUV) is doing better than the field, up 43% YTD. Their fee policies and generally higher customer service ratings tend to keep Southwest near the top of airline investments.
- Real Estate – Real Estate Investment Trusts (REITs) are normally a solid long-term investment performer, and they are doing pretty well in 2014 as well. REITs are up 14.06% YTD. However, REITs are currently being outpaced by the Real Estate Management and Development Sector, which is up 21.59% YTD.
- Gold ETFs – Gold prices have gone up around 8-9% this year, but the real growth is in the gold equities so far. Several gold ETF’s are doing well, led by Global X Gold Explorers (NYSEARCA:GLDX), up 48.55% YTD. Equities in gold are awfully volatile – up approximately 28% compared to a 49% loss last year – so take ride on this rollercoaster at your own risk.
- India Small Caps – There is a lot of potential to be unleashed in India, and the surprising election of Prime Minister Narendra Modi is expected to bring in a more business friendly-environment. Cash inflow and ETF performance suggest this is likely to continue. India Small Cap ETF funds are growing particularly well, with the best of them Market Vectors India Small Cap ETF (NYSEARCA:SCIF) gaining 53.00% YTD.
- Others – The Health Care sector is still in double-digit territory but down from much higher gains in 2013, and the Technology Hardware, Electronic Equipment, and Semiconductor sectors are also seeing double-digit gains.
Should you sell any of these? Normally to diversify, you will want to change over some percentage of high performers to promising undervalued stocks – but which ones do you get rid of?
The key element to evaluate any of the stocks in this situation is valuation – has optimism been built into the current price? In other words, is the price based more on historical performance, future expectations, or a combination of the two – and are the future expectations more short-term or long-term?
Also, what are the chances of success? For example, the India small caps are increasing on a massive wave of optimism – but Prime Minister Nodi has a large challenge to overcome in reforming entrenched systems. He may succeed, but results are likely to lag expectations. REITs, on the other hand, are typically one of the best long-term investments and are almost always worth picking up at a good price.
As always, the important aspects are to do your homework on your holdings, and diversify within your plan. If you do not have a long-term plan, start there before worrying about your high-flying stocks.