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Aug. 16, 2016, 2:57 p.m. EDT

Money manager says it’s time to move away from this year’s hot stock sectors

Valuations for utility stocks and others with lower volatility have just gotten too high, says Mariann Montagne of Gradient Investments.

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By Philip van Doorn, MarketWatch


Ken Wolter / Shutterstock.com
Adobe Systems is among five higher-volatility stocks Mariann Montagne of Gradient Investments likes right now.

If you follow the stock market, this year’s story is familiar: Real-estate investment trusts, utilities and other stocks with attractive dividend yields have been very rewarding. But if you are looking for growth in your portfolio, this may be the right time to switch directions, according to Mariann Montagne, senior investment analyst and portfolio manager at Gradient Investments.

Looking at the 27 REITs included in the S&P 500 /zigman2/quotes/210599714/realtime SPX +1.13% , 14 have returned at least 12%, with dividends reinvested, this year through Aug. 11. Meanwhile, the telecommunications sector, dominated by high dividend payers AT&T Inc. /zigman2/quotes/203165245/composite T +0.42% (returning 31% so far this year) and Verizon Inc. /zigman2/quotes/204980236/composite VZ +0.28%  (with a total return of 20%), is up 20%, while the utilities sector has had a 17% return.

If I am going to get a 4% yield from a utility, is that really all I want for exposing myself to market risk?

Mariann Montagne, senior investment analyst and portfolio manager, Gradient Investments

“We’ve had an outsize position in REITs and we have taken a few of those off the roll, yet we have still found some REITs that look attractive to us,” Montagne said, during an interview on Aug. 11.

Gradient Investments is a third-party asset manager, based in Arden Hills, Minn. The firm manages about $1 billion in assets through its investment-adviser clients.

Montagne said the firm’s portfolio — managed for both income and growth — had a dividend yield of 3.86% at the beginning of the year. Following the rise in share prices and with moves away from utilities and other income-oriented stocks with low volatility, the portfolio yield has fallen to about 3.4%.

While Montagne said she thought the flight to yield by investors might continue, she added that valuations have become too high for many of the low-volatility names to be attractive. “If I am going to get a 4% yield from a utility, is that really all I want for exposing myself to market risk? Utilities don’t usually go up in value, especially when at 20-year highs for P/E,” she said.

The S&P 500 utilities sector now trades for 20.3 times trailing earnings. The sector’s trailing price-to-earnings ratio has never been this high since the beginning of 2000, which is as far back as this FactSet chart can go:


FactSet

Looking ahead, Montagne likes higher-volatility stocks, and she named these five companies as good growth investments to consider right now:

Company Ticker Industry Price/ consensus 2017 EPS estimate Growth of sales per share - past 12 months Total return - 2016 through Aug. 11
Pinnacle Financial Partners Inc. /zigman2/quotes/206544847/composite PNFP Regional Banks 15.3 23% 5%
PNC Financial Services Group Inc. /zigman2/quotes/203416310/composite PNC Major Banks 11.5 1% -9%
Adobe Systems Inc. /zigman2/quotes/200389143/composite ADBE Packaged Software 20.7 24% 8%
Skyworks Solutions Inc. /zigman2/quotes/201417573/composite SWKS Semiconductors 11.0 8% -11%
Bunge Ltd. /zigman2/quotes/208554679/composite BG Agricultural Commodities/ Milling 10.8 -14% -3%
Source: FactSet

We included sales-per-share growth in the table, rather than revenue growth, since the per-share figures bake in any issuance of shares to fund acquisitions or other purposes, while also reflecting any buybacks of stock.

Pinnacle Financial Partners

Pinnacle Financial Partners Inc. /zigman2/quotes/206544847/composite PNFP +3.60%  is a bank holding company based in Nashville, Tenn., with $9.7 billion in total assets as of June 30. The company completed the acquisition of Avenue Financial Holdings in July, bringing the combined bank’s assets to about $10.5 billion, with branches in 14 Tennessee counties.

/zigman2/quotes/210599714/realtime
US : S&P US
3,662.45
+40.82 +1.13%
Volume: 2.64B
Dec. 1, 2020 5:19p
loading...
/zigman2/quotes/203165245/composite
US : U.S.: NYSE
$ 28.87
+0.12 +0.42%
Volume: 42.06M
Dec. 1, 2020 4:02p
P/E Ratio
19.01
Dividend Yield
7.20%
Market Cap
$204.87 billion
Rev. per Employee
$736,850
loading...
/zigman2/quotes/204980236/composite
US : U.S.: NYSE
$ 60.58
+0.17 +0.28%
Volume: 14.28M
Dec. 1, 2020 4:00p
P/E Ratio
13.70
Dividend Yield
4.14%
Market Cap
$249.98 billion
Rev. per Employee
$976,800
loading...
/zigman2/quotes/206544847/composite
US : U.S.: Nasdaq
$ 56.11
+1.95 +3.60%
Volume: 390,607
Dec. 1, 2020 4:00p
P/E Ratio
14.47
Dividend Yield
1.14%
Market Cap
$4.11 billion
Rev. per Employee
N/A
loading...
/zigman2/quotes/203416310/composite
US : U.S.: NYSE
$ 140.72
+2.65 +1.92%
Volume: 3.13M
Dec. 1, 2020 4:00p
P/E Ratio
8.40
Dividend Yield
3.27%
Market Cap
$58.50 billion
Rev. per Employee
$414,538
loading...
/zigman2/quotes/200389143/composite
US : U.S.: Nasdaq
$ 479.15
+0.68 +0.14%
Volume: 2.53M
Dec. 1, 2020 4:00p
P/E Ratio
60.37
Dividend Yield
N/A
Market Cap
$229.53 billion
Rev. per Employee
$491,801
loading...
/zigman2/quotes/201417573/composite
US : U.S.: Nasdaq
$ 144.00
+2.83 +2.00%
Volume: 2.62M
Dec. 1, 2020 4:00p
P/E Ratio
30.05
Dividend Yield
1.39%
Market Cap
$23.45 billion
Rev. per Employee
$335,570
loading...
/zigman2/quotes/208554679/composite
US : U.S.: NYSE
$ 59.47
+0.58 +0.98%
Volume: 1.31M
Dec. 1, 2020 4:00p
P/E Ratio
17.62
Dividend Yield
3.36%
Market Cap
$8.22 billion
Rev. per Employee
$1.71M
loading...
/zigman2/quotes/206544847/composite
US : U.S.: Nasdaq
$ 56.11
+1.95 +3.60%
Volume: 390,607
Dec. 1, 2020 4:00p
P/E Ratio
14.47
Dividend Yield
1.14%
Market Cap
$4.11 billion
Rev. per Employee
N/A
loading...
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