Stocks: The Next Hot Sectors

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Investors should not wait for economic data to improve before buying into the market, Kleintop advises: "Markets historically have bottomed well before the economy began to rebound—especially during recessions." As an example, employment usually continues to fall for 12 months after the markets begin to rally. Since World War II, stocks have rebounded before the end of every recession. The S&P 500's gain from a recession's low point until the end of the recession has been 25% on average, Kleintop says.

Overlooked Tech and Industrials

With globalization now a big factor, stocks with interlocking interests in markets around the world appeal the most to the pros because they are likely to dominate the next advance. "We remain focused on companies building, supplying, or financing productive capacity globally," says Divine Capital's Charest. To him, this suggests shares of technology and industrial enterprises will lead the next advance, driven by global demand for infrastructure and real productive assets.

Most investment managers favor the widely held large-cap stocks in these sectors. Not Charest. He doesn't go for the usual coterie of popular stocks that most institutions snap up. Topping his technology picks is Corning (GLW), a major maker of glass substrates used by the electronics industry. It is also a producer of fiber-optic equipment used by the telecom industry. Now trading at 24 a share, Corning is off only slightly from its 52-week high of 27.22 in July, 2007.

Another of his tech picks is Diodes (DIOD), which makes discrete semiconductor products for the communications, computing, industrial, electronics, and automotive markets. The stock, now at 23, is down from its 52-week high of 35 in October.

Among industrials, Charest again shuns the institutional favorites. Instead, he favors Itron (ITRI), the global leader in advanced meter-reading equipment for collecting and analyzing data on electricity, natural gas, and water use in residential, commercial, and industrial locations; Joy Global (JOYG), a Milwaukee-based maker of high-productivity mining equipment for the extraction of coal and other minerals and ores; and Fuel Tech (FTEK), which develops air pollution-control technologies and provides engineering services.

These industrials were highfliers in the past, but are now down from their highs. Itron shares zoomed from 65 on Apr. 3, 2007, to 112 on Oct. 30, but they're now trading at 93. Joy Global shot up from 42 in March, 2007, to 72 a year later; the stock is now at 65. Fuel Tech has fallen to 19 from a high of 38 in June, 2007.

Bottom in Financials?

How about the beleaguered financial stocks? Charest believes they deserve some attention as well. "The charts suggest a bottom in financials is close, led by the regional banks," he says. But Charest is steering clear of the major commercial and investment banks. Instead, he favors shares of HSBC Holdings (HBC), part of Britain's HSBC Group that provides a variety of international banking and financial services. It is one of the few financial institutions whose stock hasn't been severely battered. It is trading at 81, down from a high of 99 reached on Oct. 31, 2007.

Charest also favors Old Republic International (ORI), a Chicago-based insurance company that offers property and liability, mortgage guaranty, title, and disability protection. Now at 12, the stock is down from 22 in April, 2007. Old Republic has an attractive long-term total-return profile, notes Charest.

Chicago Bridge & Iron (CBI), Weatherford International (WFT), and Transocean (RIG) top the choices of Martin Sass, who heads investment management firm M.D. Sass. He says the rapidly expanding global projects on infrastructure and construction are boosting sales and earnings at Chicago Bridge, a major engineering and construction company primarily serving the energy industry. Sass says the fast-growing liquefied natural gas infrastructure work at energy companies represents about 50% of CBI's 2007 revenue. The company has a yearend backlog of $7.7 billion worth of work. So Sass projects 2008 earnings will jump 59%, to $3 a share, and by 30% in 2009, to $3.90. Now trading at 39, Chicago Bridge should hit 68 in a year, Sass figures.