U.S.

EQUITY RESEARCH
Sector Watch

January 3, 2017

Sam Stovall THE BARBELL PORTFOLIO

Chief Investment Strategist
CFRA History suggests owning last year's 10 best and 10 worst sub-Industries
Author of
The Seven Rules of Wall Street Many describe 2016 as a year of resiliency for U.S. equities. The S&P 500 suffered a more than
10% year-to-date decline through February 11, on concerns that sub-$30/bbl oil prices, a
1 New York Plaza weakening of GDP growth in China, and an expected EPS recession in the U.S. were signaling
th
34 Floor the start of a global recession. By the end of Q1, however, the “500” recouped all of its losses and
New York, NY 10004 then rose more than 10% in price for the full year, yet was surpassed by a 24.7% surge in the
(646) 517-2993 S&P SmallCap 600 and an 18.7% jump in the MidCap 400. What’s more, 10 of 11 sectors gained
sam.stovall@cfraresearch.com in price, as did 84% of all sub-industries. On a total-return basis, the S&P 500’s 12.0% advance in
2016 again reminded investors of the benefit of investing for the long term, as large-cap U.S.
equities have risen in nearly 80% of all years (57 times out of 72) since WWII.

Buy Last Year’s Winners AND Losers

For the year ahead, rather than choosing between "let your winners ride" or "buy low and sell
high” when establishing a portfolio based on prior-year sub-industry performances, history says
that investors have done better buying both last year's 10 best and 10 worst groups.

From 1991 through 2016, the S&P 500 The S&P 500 Barbell Portfolio of Stocks for 2016
recorded a compound annual growth rate
(CAGR) of 7.6%, excluding dividends BEST 10 Proxy Stocks Price Performances
Ticker Name 12/31/15 12/31/16 % Chg.
reinvested. The 10 best performing S&P 500
TAP Molson 93.92 97.31 3.6
sub-industries from the prior year, held in MAS Masco 28.30 31.62 11.7
equal proportions during the coming year, VMC Vulcan Materials 94.97 125.15 31.8
returned a CAGR of 12.4% since 1991, out STZ Constillation Brands 142.44 153.31 7.6
pacing the S&P 500 68% of the time. The 10 NKE Nike 62.50 50.83 (18.7)
worst performing sub-industries recorded a EA Electronic Arts 68.72 78.76 14.6
slightly better CAGR of 12.5%, but beat the EXPE Expedia 124.30 113.28 (8.9)
market 64% of the time. However, combining FB FaceBook 104.66 115.05 9.9
the 10 best sub-industries from the prior year VLO Valero Energy 70.71 68.32 (3.4)
with the 10 worst into a portfolio of 20 SBUX Starbucks 60.03 55.52 (7.5)
equally-weighted groups recorded a CAGR Average: 4.1%
of 13.8% over this 25+-year period, and WORST 10 Proxy Stocks Price Performances
outpaced the S&P 500 77% of the time. Ticker Name 12/31/15 12/31/16 % Chg.
AA Alcoa 9.87 28.08 184.5
WYNN Wynn 69.19 86.51 25.0
In 2016, the Barbell Portfolio outperformed
CNX CONSOL Energy 7.90 18.23 130.8
the S&P 500 on both a sub-industry and M Macy's 34.98 35.81 2.4
stock-proxy basis. These 20 sub-industries FCX Freeport-McMoran 6.77 13.19 94.8
from 2015 gained an average of 15.1% in BBBY Bed, Bath & Beyond 48.25 40.64 (15.8)
2016 versus the S&P 500’s price rise of HST Host Hotels 15.34 18.84 22.8
9.5%. Also, the 20-stocks used as a proxy for NRG NRG Energy 11.77 12.26 4.2
the best and worst groups, selected since SWN Southwest Energy 7.11 10.82 52.2
there are not ETFs that mimic all sub- KMI Kinder Morgan 14.92 20.71 38.8
industries in the S&P 500, gained 29%. Average: 54.0
Average for all 20 Stocks: 29.0%

This report is for information purposes and should not be considered a solicitation to buy or sell any security. Neither CFRA nor any
other party guarantees its accuracy or makes warranties regarding results from its usage. CFRA, the CFRA inverted pyramid logo,
and STARS are registered trademarks of CFRA. S&P GLOBAL™ is used under license. The owner of this trademarks is S&P Global
Inc. or its affiliate, which are not affiliated with CFRA Research or the author of this content. Copyright © 2017 CFRA. Redistribution,
reproduction and/or photocopying in whole or in part is prohibited without written permission. All rights reserved.
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 S&P 500 Sector % Total Returns (Dividends Included) 12/31/08-12/31/16

2009 2010 2011 2012 2013 2014 2015 2016

Best IT 61.7 RE 32.3 U 19.9 F 28.8 CD 43.1 RE 30.2 HC 9.6 E 27.4
| M 48.6 CD 27.7 CS 14.0 CD 23.9 HC 41.5 U 29.0 CD 6.8 TS 23.5
| CD 41.3 I 26.7 HC 12.7 RE 19.7 I 40.7 HC 25.3 RE 4.7 F 22.8
| RE 27.1 M 22.2 RE 11.4 TS 18.3 F 35.6 IT 20.1 TS 3.2 I 18.9
| S&P 26.5 E 20.5 TS 6.3 HC 17.9 S&P 32.4 CS 16.0 S&P 1.2 M 16.7
| I 20.9 TS 19.0 CD 6.1 S&P 16.0 IT 28.4 F 15.2 IT 0.8 U 16.3
to HC 19.7 S&P 15.1 E 4.7 I 15.3 CS 26.1 S&P 13.7 M 0.5 IT 13.8
| F 17.2 CS 14.1 IT 2.4 M 15.0 M 25.6 I 9.8 F (0.4) S&P 12.0
| CS 14.9 F 12.1 S&P 2.1 IT 14.8 E 25.1 CD 9.7 CS (0.8) CD 6.0
| E 13.8 IT 10.2 I (0.6) CS 10.8 U 13.2 M 6.9 I (3.1) CS 5.4
| U 11.9 U 5.5 M (9.8) E 4.6 TS 11.5 TS 3.0 E (4.7) RE 3.4
Worst TS 8.9 HC 2.9 F (17.1) U 1.3 RE 1.6 E (7.8) U (10.7) HC (2.7)
Source: S&P DJI. CD: Cons. Discretionary, CS: Cons. Staples, E: Energy, F: Financials, HC: Health Care, I: Industrials, IT: Info. Tech.
M: Materials, TS: Telecom Services, RE: Real Estate, U: Utilities. Source: S&P Capital IQ. Past performance is no guarantee of future results.

The table below contains the 10 best and 10 worst sub-industries from 2016, last year’s price
performances, as well as the S&P 500 stocks that serves as a proxies for the sub-industries.
Since there are very few ETFs that mimic the composition of S&P 500 sub-industries, CFRA’s
MarketScope Advisor platform was used to screen for the companies within each sub-industry to
serve as a proxy based on the highest CFRA STARS and target price differential.

So there you The S&P 500 Barbell Portfolio of Sub-Industries & Stocks for 2017
have it. History
has shown 10 BEST YTD Proxy Stock Holdings CFRA Price
that instead of Sub-Industries from 2016 % Chg. Ticker Name STARS 12/31/16
trying to Agricultural & Farm Machinery 35.1 DE Deere & Co. 3 103.04
decide if last Computer & Electronics Retail 44.1 BBY Best Buy 3 42.67
Const. Mach. & Heavy Trucks 39.9 CMI Cummins Inc. 4 136.67
year’s winners
Construction & Engineering 32.5 PWR Quanta Services Inc. 4 34.85
will maintain Construction Materials 44.2 MLM Martin Marietta Matls. 5 221.53
their “mojo,” or Food Distributors 35.0 SYY Sysco Corp. 3 55.37
if last year’s Gold 89.4 NEM Newmont Mining 4 34.07
losers will Oil & Gas Storage & Transp. 49.8 KMI Kinder Morgan 4 20.71
become this Semiconductor Equipment 47.1 LRCX Lam Research 4 105.73
year’s out- Steel 47.7 NUE Nucor Corp. 4 59.52
performers, 10 WORST YTD Proxy Stock Holdings CFRA Price
investors Sub-Industries from 2016 % Chg. Ticker Name STARS 12/31/16
should choose Biotechnology (14.4) CELG Celgene Corp. 5 115.75
both. Buying Food Retail (15.5) KR Kroger Co. 3 34.51
and holding Footwear (18.7) NKE Nike, Inc "B" 4 50.83
the prior year’s Health Care Distributors (22.1) ABC AmerisourceBergen 4 78.19
10 best and 10 Health Care Technology (21.3) CERN Cerner Corp. 3 47.37
Homefurnishing Retail (15.8) BBBY Bed, Bath & Beyond 3 40.64
worst
Office Services & Supplies (26.4) PBI Pitney Bowes 3 15.19
performing Personal Products (16.5) EL Este Lauder Co. 4 76.49
sub-industries Publishing & Printing (14.5) NWSA News Corp. Cl A 3 11.46
each delivered Specialized Consumer Svcs. (31.0) HRB H & R Block 3 22.99
substantially Source: CFRA, DJ Indices. Data as of 12/31/16.
higher CAGRs
than the market. What’s more, combining the 10 best with the 10 worst delivered the best of both
worlds: a CAGR of 13.5% -- nearly 600 basis points better than the S&P 500 each year – and
beat the benchmark more than three out of every four years. Despite the lack of a guarantee that
what worked in the past will work again in the future, one could say that the outcome of owning
the good and the bad wasn’t so ugly after all.

SECTOR WATCH 2
Glossary
★★★★★ 5-STARS (Strong Buy):
Total return is expected to outperform the total return of a relevant
benchmark, by a wide margin over the coming 12 months, with
shares rising in price on an absolute basis.
★★★★☆ 4-STARS (Buy):
Total return is expected to outperform the total return of a relevant
benchmark over the coming 12 months, with shares rising in price
on an absolute basis.
★★★☆☆ 3-STARS (Hold):
Total return is expected to closely approximate the total return of a
relevant benchmark over the coming 12 months, with shares
generally rising in price on an absolute basis.
★★☆☆☆ 2-STARS (Sell):
Total return is expected to underperform the total return of a
relevant benchmark over the coming 12 months, and the share price
not anticipated to show a gain.
★☆☆☆☆ 1-STAR (Strong Sell):
Total return is expected to underperform the total return of a
relevant benchmark by a wide margin over the coming 12 months,
with shares falling in price on an absolute basis.
CFRA Ranking Definitions:
Overweight rankings are assigned to approximately the top
quartile of the asset class.
Marketweight rankings are assigned to approximately the second
and third quartiles of the asset class.
Underweight rankings are assigned to approximately the bottom
quartile of the asset class.
S&P Capital IQ Quality Ranking
Growth and stability of earnings and dividends are deemed key
elements in establishing S&P Capital IQ earnings and dividend
rankings for common stocks, which are designed to capsulize the
nature of this record in a single symbol. It should be noted,
however, that the process also takes into consideration certain
adjustments and modifications deemed desirable in establishing
such rankings. The final score for each stock is measured against a
scoring matrix determined by analysis of the scores of a large and
representative sample of stocks. The range of scores in the array of
this sample has been aligned with the following ladder of ranking.
A+ Highest B Below Average
A High B- Lower
A- Above Average C Lowest
B+ Average D In Reorganization
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