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This stock market sector will dominate in 2023

techsm5

As 2022 draws to a close, many people have had the toughest year of investing in their lives. the S&P500 and Nasdaq Compound are both in a bear market and on course for their worst calendar year performance since 2008. And many experts expect more pain next year.

A MarketWatch survey of 18 investment banks concluded with an S&P 500 consensus target for 2023 of just 4,031, with many Wall Street banks expecting the S&P 500 to have a difficult first half and recovers in the second half. The CBOE’s put/call ratio, which provides a readout of investor sentiment, just posted its highest reading since the COVID-19 pandemic. Buying put options is a bet that this market will continue to fall, while buying call options is a way to bet that the market will go up. A high put/call ratio indicates more pessimism than optimism.

If the S&P 500 posts another year of decline in 2023, it will be the first time since 2002 that the market has recorded two consecutive years of decline.

A person holding a tablet interacts with a rendering of the world and associated icons.

Image source: Getty Images.

Inflation is showing signs of slowing down. But even if inflation declines, a continued decline in the housing market and rising unemployment could still trigger a recession. With so much uncertainty in the air, it can be daunting for investors to hit the buy button.

While the selloff has created a great buying opportunity for many industry-leading companies, the communications sector stands out as a particularly good place to invest in 2023 and beyond. Here’s why.

Breaking down the communications sector

When investors think of the communications sector, they may think of telecommunications companies like AT&T (T -0.22%), T-Mobile (TMUS 0.43%)and Verizon (VZ 0.36%) — as well as entertainment players like waltz disney (SAY -0.34%), netflix (NFLX 1.29%)and Comcast (CMCSA -0.23%).

And while these companies certainly make up a big chunk of the industry, Google’s parent company Alphabet (GOOG -0.25%) (GOOGL -0.25%) and the parent company of Facebook Metaplatforms (META 0.07%) in fact represent more than 45% of Communication Services Select an SPDR Sector Funds(XLC 0.04%) at the time of writing, which is the largest communications ETF by net worth (although many investors may think Alphabet and Meta are tech stocks).

The Communication Services Select Sector SPDR fund’s price-to-earnings (P/E) ratio is just 15.1, and the price-to-free cash flow ratio is 14.3, both well below the S&P 500 averages. of 18.4 and 17.6. The index also has a dividend yield of 1.1% – despite large holdings like Alphabet, Meta, Netflix and Disney (which do not pay dividends) – compared to an S&P 500 dividend yield of 1.5. %.

Not only is the index as a whole cheaper than the S&P 500, but it also has arguably higher growth. Trends in streaming, metaverse, social media, entertainment, advertising and other industries all run through the communications sector. The shift from linear networks and traditional advertising to new methods is a huge growth opportunity. Add to that the stability offered by value stocks with high dividend yields like Verizon, and the sector strikes a nice balance.

A terrible downward trend

One of the reasons the communications sector’s valuation looks so attractive is that many of its major holdings are down sharply from their highs. Meta, Netflix and Disney are all down more than 55% from their all-time highs. Alphabet is down just over 40%. And major telecom stocks have underperformed the market for years.

All in all, it was a brutal year for the communications industry. And believe it or not, the sector also happens to be the worst performing sector in 2022, 2021 and over the past three years, despite being the third best performing sector in 2020.

Sector

Three-year total return

2022 total return (as of 12/26/2022)

Total return 2021

Total return 2020

Energy

68%

64%

53%

(33%)

Technology

37%

(28%)

35%

44%

Health care

39%

(2%)

26%

13%

Materials

35%

(11%)

27%

20%

Basic consumption

28%

0%

17%

ten%

Industrial

25%

(5%)

21%

11%

Utilities

21%

2%

18%

1%

finance

17%

(11%)

35%

(2%)

Immovable

5%

(26%)

46%

(2%)

Consumer Discretionary

3%

(36%)

28%

30%

Communication

(11%)

(38%)

16%

27%

Data source: YCharts.

The communications industry has it all

If the past few years have taught us anything, it’s that felled sectors are usually worth buying. The three worst performing sectors of 2020 (energy, financials and real estate) were the three best performing sectors of 2021.

The communications sector is not out of the woods yet, as a full-scale recession will have a major impact on advertising revenues and will likely cause customers to reduce their discretionary spending on streaming and cable packages and wholesale travel. tickets to Disney World.

But with so many quality stocks, growth prospects and a reduced valuation relative to the S&P 500, the communications sector stands out as a compelling buy for 2023.

Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Daniel Foelber holds positions in Alphabet and has the following options: Walt Disney January 2025 $155 long calls, Meta Platforms January 2025 $240 long calls, Walt Disney January 2025 $160 short calls and January 2025 $250 shorts on Meta Platforms. The Motley Fool holds positions and recommends Alphabet, Meta Platforms, Netflix and Walt Disney. The Motley Fool recommends Comcast, T-Mobile US and Verizon Communications and recommends the following options: January 2024 Long Calls at $145 on Walt Disney and January 2024 Short Calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.

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