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Deep Dive: These are the hottest stock sectors for Wall Street right now — and analysts’ favorite ways to play them

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If you were asked which stock market sector was the favorite among analysts who work for Wall Street brokerage firms, you would most likely say “tech.” And you would be right. But you might be surprised that the industrial and materials sectors are also heavily favored.

Below are lists of analysts’ favorite stocks within the sectors they like best.

Ratings from the top down

Here’s a breakdown of sentiment among analysts polled by FactSet for ratings among the 11 sectors of the S&P 500
SPX,
+0.03%

:

S&P 500 sector Share “buy” ratings Share “buy” ratings – June 30, 2020 Share “buy” ratings – Dec. 31, 2019
Information Technology 78% 76% 71%
Industrials 68% 63% 61%
Materials 60% 53% 50%
Health Care 59% 56% 53%
Financials 55% 48% 48%
Real Estate 51% 51% 49%
Energy 47% 42% 44%
Consumer Staples 47% 43% 42%
Consumer Discretionary 35% 34% 34%
Utilities 28% 36% 35%
Communication Services 25% 21% 21%
Full S&P 500 57% 53% 51%

Analysts working for brokerage firms lean positive in their ratings, and they certainly shy away from “sell” or equivalent ratings. In fact, only one company among the S&P 500 has majority “sell” ratings: Lumen Technologies Inc.
LUMN,
+1.52%
,
the former CenturyLink, which is rated a “sell” or the equivalent by seven of 16 analysts polled by FactSet.

The table, above, compares the current ratings breakdown with those from the end of June 2020 (after the S&P 500 had recovered from the worst of its pandemic decline) and the pre-pandemic ratings at the end of 2019. You can see that for the six sectors with majority current “buy” ratings, enthusiasm has increased since 2019 for all except real estate. The materials sector has had the greatest improvement in sentiment, but the improvements have been significant for the IT, industrial, health care and financial sectors as well.

Sentiment is higher even though the index’s forward price-to-earnings ratio has increased to 21.5 from 18.4 at the end of 2019. Unprecedented federal stimulus, the excitement of a new period for economic growth, the increase in the money supply springing from the Federal Reserve’s bond purchases, and negative long-term interest rates in Europe and Japan have all made the U.S. stock market an attractive home for investors’ cash.

Favorite stocks in favored sectors

Wall Street analysts set 12-month price targets. One year isn’t necessarily a long enough period for a serious, committed investor looking to gain as a company compounds earnings and cash flow.

Some companies with high percentages of “buy” ratings have share prices that are close to the price targets. One might call those “fully valued.” Then again, the 12-month price target may be too short for you. This is one of many reasons why it is important to do your own research and form your own opinion about a company’s ability to remain competitive for the next decade at least, before buying individual stocks for long-term investments.

The following are lists for the six favored sectors of the S&P 500. For each sector, the top five companies, by percentage of analysts rating the shares a “buy” or the equivalent, are listed. Or six in the event of a tie.

Information technology sector

Here are the six stocks in the S&P 500 information technology sector with the highest percentages of “buy” or equivalent ratings among analysts polled by FactSet:

(FactSet)

Microsoft Corp.
MSFT,
-0.42%

has the highest percentage of “buy” ratings in the tech sector, and the analysts see 16% upside for the shares over the next year.

The listed stock with the most upside potential over the next year, according to the analysts, is ServiceNow Inc.
NOW,
+0.37%
,
which gets the “buy” nod from 91% of analysts.

Next is Visa Inc.
V,
+0.49%
,
with 87% “buy” or equivalent ratings. Its card payment-processing rival Mastercard Inc.
MA,
+0.57%

is rated a “buy” by 84% of analysts, so it just missed the list.

Nvidia Corp.
NVDA,
-1.32%

is the highest-rated semiconductor manufacturer on the list. The next-highest-rated chip maker in the S&P 500 is Analog Devices Inc.
ADI,
+0.13%
,
with 83% “buy” ratings.

PayPal Holdings Inc.
PYPL,
+0.96%

is tied with Fiserv Inc. with 85% “buy” ratings. Square Inc.
SQ,
-1.58%
,
a rival to PayPal, isn’t a component of the S&P 500; it is rated a “buy” by 55% of analysts polled by FactSet.

Read: PayPal vs. Square — which is the better stock to own now?

Industrial sector

Here are the five S&P 500 industrials with the highest percentages of “buy” ratings:

(FactSet)

Materials sector

Here are the six stocks in the S&P 500 materials sector with the highest percentages of “buy” ratings — Freeport-McMoRan Inc.
FCX,
+0.95%

and PPG Industries Inc.
PPG,
-0.55%

are tied for fifth place:

(FactSet)

Health-care sector

The health-care sector features another tie — UnitedHealth Group Inc.
UNH,
+0.27%

and Cigna Corp.
CI,
-0.70%

both have 85% “buy” ratings.

(FactSet)

Financial sector

The financial services also has a tie, with 81% “buy” ratings for MetLife Inc.
MET,
+0.02%

and BlackRock Inc.
BLK,
+0.18%

:

(FactSet)

Real-estate sector

Here are the five real-estate-sector names with the highest percentages of “buy” ratings:

(FactSet)

Alexandria Real Estate Equities Inc.
ARE,
+0.71%

and Assurant Inc.
AIZ,
+0.63%

(in the financial sector) are the only two companies among the S&P 500 with 100% “buy” ratings.

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