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Sam Subramanian

Fidelity Select Funds: Best, Worst, and 2017 Forecast

Sam Subramanian PhD, MBA

Faring better than they did in 2015, U. S. stocks appear poised to end 2016 on a high.

Going into the homestretch, the widely followed S&P 500 index is up 13.5%.

This compares with the benchmark's 1.4% advance in 2015.

As for Fidelity sector funds, 37 of the 41 such funds are in the black in 2016.

The year 2016 has reversed the fortunes of yesteryear's winners & losers in some ways.

Energy stocks, which had clustered near the bottom of the annual performance table in 2014 and 2015 have risen to the top in 2016.

Fidelity Select Natural Gas (FSNGX) with a year-to-date gain of 50.2% now leads the pack of Fidelity sector funds for 2016 YTD performance.

Fidelity Select Energy Service (FSESX) and Fidelity Select Energy (FSENX) follow with year-to-date returns of 37.4% and 35.5%.

Democratic Presidential candidate Clinton's criticism of drug companies for their pricing practices and her proposal to reduce prescription drug costs pressured health care stocks. Their underperformance persisted even after Republican Trump won the Presidential election.

Fidelity Select Biotechnology (FBIOX), which took honors as the year's best performer for 3 straight years from 2011 through 2013, is entrenched at the bottom of the 2016 performance table with a 21.4% loss.

Fidelity Select Pharmaceuticals (FPHAX) and Fidelity Select Health Care (FSPHX) follow with losses of 16.5% and 10.5%, respectively.

Performance quotations from investors using fidelity mutual funds model portfolios
 
Fidelity Select Funds: Returns of Best and Worst Funds

U. S. electoral politics and agreement among oil producers to curtail oil production have contributed to the reversal of fortunes for the health care and energy sectors, respectively in 2016.

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Although the double-digit gain for the S&P 500 index would suggest 2016 being a relatively easy year for investors to make money, the reality is different. The United Kingdom's withdrawal from the European Union and Trump's victory in the U. S. Presidential elections took many investors by surprise.

The rapid rotation out of interest-rate sensitive sectors and into economically sensitive sectors at the end of 2016 caught many investors off-guard. Venerable Fidelity funds with stellar long-term records like Contrafund (FCNTX) and Blue Chip Growth (FBGRX) are up only 5.2% and 3.3%, respectively in 2016.

In a year when the market frequently switched between 'risk-on' and 'risk -off' modes, AlphaProfit subscribers reaped rewards with relatively low risk by investing in less volatile funds like Fidelity Select Chemicals (FSCHX), Fidelity Defense & Aerospace (FSDAX), and Fidelity Select Telecommunications (FSTCX) ... all of which are up 19% or more.

Equally important, AlphaProfit subscribers avoided losers like biotechnology and pharmaceuticals throughout 2016.

These actions have helped AlphaProfit's Capital Appreciation (Fidelity Core) and Aggressive Growth (Fidelity Focus) model portfolios to advance double-digits in 2016.

A dollar invested in AlphaProfit's Fidelity Focus and Fidelity Core model portfolios in 1994 is worth $54.19 and $28.22, respectively. This implies annualized returns of 19.0% and 15.6%, respectively. A comparable investment in the S&P 500 benchmark is worth $7.63, implying an annualized return of 9.2%.

2017 Stock Market Forecast

Broad measures of the U. S. stock market have been on a record-setting binge since the November 8 elections. The Dow Jones Industrial Average, S&P 500, and NASDAQ Composite indexes have all soared to new highs with the DJIA knocking on the 20,000 milestone.

The gains have been fueled by expectations that President-elect Trump will reduce taxes and loosen regulations to stimulate the economy.

Resumption of corporate profit growth has also supported the rally. Breaking a string of declining year-over-year per-share earnings comparisons for five straight quarters, S&P 500 members posted their first positive earnings comparison in the third quarter of 2016.

Analysts now predict S&P 500 company earnings to grow 11.4% in 2017 compared to 0.1% growth in earnings expected in 2016.

Meanwhile, stock valuation metrics have expanded to worrisome levels based on historical norms. Members of the large-cap S&P 500 index trade at 20.5X-trailing earnings compared to their 5-year average of 16.4.

In its 2016 Financial Stability Report to Congress, the U. S. Treasury Department's Office of Financial Research cautions the cyclically adjusted price-to-earnings ratio for U. S. stocks is at a level that has been reached only before the three largest equity market declines in the last century.

Stocks have to contend with two additional headwinds in rising interest rates and a stronger U. S. dollar both of which are likely to take a bit out of corporate earnings at some point.

With historically high valuation, rising interest rates, and a strong dollar threatening to derail stocks in 2017, the S&P 500 is likely to be hard-pressed in matching the 11.7% growth analysts expect in corporate earnings. More to the point, the odds of a decline in the broad benchmark in 2017 exceed 50%.

That said, specific sectors can buck the broad market and provide opportunities for investors willing to take the plunge.

Best Fidelity Select Funds: 2017 Forecast

Looking ahead to next year, AlphaProfit's multidimensional sector evaluation and selection process rates financial services, energy, and information technology among frontrunners for best performing investments. See: Fidelity Select Funds: Choose the Best Fidelity Sector Fund Consistently.

Profits of financial firms have been under pressure since 2009 from subpar loan demand, low interest rates, and high regulatory costs. Going forward, stronger economic growth can drive loan demand and interest rates higher. Trump's promise to make controls less onerous can provide relief from high regulatory costs and open profit opportunities.

Energy companies have cut costs since the second half of 2014 when the price of oil collapsed after Saudi Arabia increased production to shutout high-cost oil producers. Recently, the Organization of the Petroleum Exporting Countries (OPEC) and selected non-OPEC nations reached an agreement to collectively cut 2% of global oil supply. The signal from the OPEC cartel and other oil producers they no longer want lower oil prices should likely put a floor on oil prices and help energy company profits to recover.

As for information technology, demand for products & services from businesses as well as consumers is relatively strong. If inflation picks up, information technology firms can get a boost as both businesses & consumers look to technology to control costs.

Although the outlook for financial, energy, and technology stocks is favorable, financial and energy stocks, in particular, are overbought after the post-election rally. Since November 8, financial and energy stocks in the S&P 500 are up 19.0% and 10.2%, respectively on average compared to the 6.4% gain for the broad S&P 500 index. As such, investors face a challenge in entering these overbought groups since they can be vulnerable to a near-term pullback.

One way investors can overcome the impact of adverse timing is by dollar-cost averaging into broad sector funds like Fidelity Select Financial Services (FIDSX), Fidelity Select Energy (FSENX), and Fidelity Select Technology (FSPTX).

Another way investors can earn higher returns at lower volatility is by targeting specific industries in the financial, energy, and technology sectors.

To get timely recommendations of best Fidelity funds and AlphaProfit's Fidelity Core and Fidelity Focus model portfolios, subscribe to AlphaProfit Premium Service now.

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Related Links:
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Fidelity Mutual Funds Model Portfolios Performance

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About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.


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