Stocks: The Next Hot Sectors

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Optimistic on Oil and Gold Stocks

Weatherford International is the fastest-growing company in the oil services industry, with projected earnings growth of 30% a year for the next five years, according to Sass. He is impressed by the Houston company's rapid expansion in overseas markets, and expects 2008 earnings to rise to $4 a share in 2008 and to $5.85 in 2009, vs. 2007's $3.33. He expects Weatherford's stock, now at 70, to vault to 100 in a year.

Transocean is the world's largest and premier offshore drilling rig contractor, with strong earnings visibility because of long-term contracts, says Sass. It is another company whose earnings are growing at a fast pace. Sass expects 2008 earnings to surge 81%, to $14.50 a share, up sharply from 2007's $8. For 2009, he projects earnings will jump to $17 a share. The stock, now at 134, is extremely cheap, says Sass. He figures the stock of the Houston firm will climb to 170 in a year.

Although commodity prices have softened in the past few weeks, some investment pros remain bullish not only on the oil sector but on gold stocks. One such bull is Stephen Leeb, president of Leeb Capital Management, who believes strongly that Schlumberger (SLB) will be among the solid gainers in the energy group. He is also a fan of Transocean. He sees Schlumberger and Transocean as "dirt cheap" plays trading at historically low p-e ratios. Schlumberger, now at 85, hit a high of 114 in October, 2007. Leeb sees the stock at 100 in 6 to 12 months.

In precious metals, Leeb is a stalwart bull on Barrick Gold (ABX) and Newmont Mining (NEM). "I like gold because the extraordinary monetary and fiscal stimulation by the Federal Reserve Board will likely raise inflationary expectations," says Leeb. Both Barrick and Newmont are the safest investments in the gold industry, he adds, and could jump more than 15% over the next three to six months. Barrick, at 45 a share, is down from its high of 54 earlier in March. Newmont, now at 46, is off from its January high of 57.

Even Financial Stocks Could Shine

Leeb doesn't confine his bullishness to oils and metals. He also believes some of the financials are a must-buy at this point. Wells Fargo (WFC) and U.S. Bancorp (USB) are well positioned, he says, to gain market share during the credit crisis. Both stocks could easily rise by more than 20% in the next three to six months, Leeb figures. Now at 30, Wells Fargo is trading not far from its 52-week high of 38 in September, 2007. And U.S. Bancorp, at 33, remains near its 52-week high of 35.

Certainly, the banks face forceful headwinds. The protracted housing slump, credit quality deterioration, and slower U.S. economic growth have burdened nearly all financial institutions. But Wells Fargo is well positioned to mitigate some of the challenges and should continue to expand its banking operations, says Frank Braden, banking industry analyst at Standard & Poor's. "We see Wells Fargo deploying more capital toward potentially faster-growing business segments and focusing on fee-income growth," he says. The bank's conservative sales culture and higher credit-quality standards, says Braden, will support its ability to achieve above-average earnings growth for the long term. There is no denying, however, that there has been some deterioration in Wells Fargo's home-equity loan portfolio because of falling housing prices. Even so, he thinks solid loan growth in Wells Fargo's other businesses will offset expected challenges.

U.S. Bancorp is one of the most profitable major banks, notes Leeb, based on its returns on equity and assets. Its diversified business model emphasizes fee-based revenue growth. However, it expects to post higher commercial real estate net charge-offs in 2008. But Leeb says the Minneapolis bank is focusing more on loan quality than loan growth. So mortgage banking revenue, he believes, will gradually increase from its currently depressed levels. And Leeb figures credit quality should remain resilient.

Regardless of whether the market hits bottom any time soon, the stock picks mentioned here hold positive fundamentals that would serve them well in up or down markets. But in a major advance, their returns would truly shine. When it comes to the next big rally, there's nothing better than being prepared.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.