Investors shift focus to growth stocks

The best returns in the Standard & Poor's 500 index over the past month have been posted by technology companies. Industrial companies as well as banks and insurers are also performing better.
BY STEVE ROTHWELL Modified: May 24, 2013 at 11:45 pm •  Published: May 26, 2013
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Growth stocks are starting to get a bit of love from investors again.

The best returns in the Standard & Poor's 500 index over the past month have been posted by technology companies. Industrial companies as well as banks and insurers are also performing better.

It's a change in tone in the rally that has pushed the market to record highs this year. Investors are getting more comfortable owning riskier stocks.

The gains for stocks early this year were driven by investors looking for so-called defensive stocks: big companies in steady industries which pay large dividends and aren't as volatile as the overall market. Now, investors are favoring companies that have the best chance of increasing their profits as the economy expands.

If the economy is poised for an upturn, companies whose fortunes are more closely linked to growth should do better.

Technology stocks have gained 6.6 percent in the past month, the best performance of all the industry groups that make up the S&P 500. Utilities did the worst, falling 5.7 percent. The index as a whole rose 4.8 percent.

Here are some of the reasons behind the shift in investor sentiment:

It's the economy

Earlier this month, the government said that unemployment fell to a four-year low as hiring picked up. That was another piece of evidence pointing to better growth.

If investors believe that the economy will carry on improving, it makes sense for them to load up on the stocks of companies that will benefit most from accelerating growth.

Banks tend to perform better in a strong economy because demand for loans increases as companies borrow more to expand. Technology stocks and industrial companies also do better when other companies start to invest in new equipment. Airplane maker Boeing has gained 10.1 percent over the past month to $100.

High-dividend stocks getting pricey

Stocks that pay rich dividends have become expensive.

The price-earnings ratio, a measure used by investors to value stocks, has surged for utilities and consumer staples companies.

Investors were paying more than 19 times next year's earnings over the past twelve months for utilities stocks at the end of April, the highest ratio in at least 10 years, according to FactSet data. The ratio for consumer staples companies, such as Procter & Gamble and Wal-Mart Stores, rose as high as 18.

Those ratios compare with an average price-earnings ratio for S&P 500 companies of 15.7, slightly above the 10-year average for the index of 15.1.

While those valuations have fallen back slightly over the past month, they're still higher than for companies that will benefit if the economy picks up. Investors are currently paying just 14.2 times earnings to buy financial stocks and 14.7 times earnings for technology stocks.

“The savvy investors that are doing this looked at valuations,” says Ron Florance, managing director of investment strategy at Wells Fargo Private Bank. “How much am I paying for economic opportunity?”

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