CHICAGO If the stock market rally continues, last year's laggards may be this year's winners.
Many of the sectors that could do well are late bloomers in the five-year bull run. They may not seem like obvious choices, yet are worthwhile if you're contrarian or slightly defensive.
Assuming economic fundamentals and corporate earnings remain solid, it could be a decent year for stocks overall and even better for companies that were neglected in 2013.
"I'm optimistic," said Diane Swonk, chief economist for Mesirow Financial in Chicago, who predicts three-percent GDP growth and the creation of up to three million jobs this year.
"I haven't felt bullish in a long time," Swonk said at the annual economic outlook luncheon of the Executive Club of Chicago on January 9.
REAL ESTATE REBOUND
A surge in institutional buying came in 2012 among homebuilding stocks. But last year, Wall Street moved on and real estate underperformed every sector in the S&P 500 except for basic materials, rising just 6 percent for the year through January 10, according to Morningstar.
This year could be different if the economy continues to create more jobs and spur long-term demand for all kinds of real estate, from single-family homes to commercial storage units.
The most recent Case-Shiller Home Price index report showed U.S. home prices posting their strongest annualized gain in seven years. There's still much pent-up demand for homes and commercial properties. With mortgage rates expected to remain relatively low, the real estate sector still has some promise.
Exchange-traded funds that invest in real estate investment trusts are a worthy consideration, especially if you are looking for extra yield.
Consider the iShares U.S. Real Estate ETF, which holds developers and property managers like Simon Property Group Inc, American Tower Corp and Public Storage. The fund was up only 1 percent last year, but yields nearly 4 percent. It charges 0.46 percent for annual expenses.
MATERIALS MAKE SENSE
The materials sector was the most unloved group among the Standard & Poor's industry sectors last year, gaining less than 3 percent for the year through January 10. A highly-cyclical basket of metals, chemical, mining and paper stocks, this cadre tends to do best during mature economic cycles.
But laggards can become leaders if U.S. economic growth - pegged at more than four percent in the 3rd quarter - continues.
The Materials Select Sector SPDR owns stocks like Monsanto, Dow Chemical Co and Freeport McMoRan Copper and Gold. The SPDR charges 0.18 percent for annual management expenses and outperformed the materials sector as a whole, gaining 26 percent last year.
Energy was another lackluster sector last year, returning a modest 10 percent for the year ending January 10, compared to the best-performing technology group, which gained 56 percent. Improving demand for energy globally bodes well for companies that produce oil and natural gas, though.
The Vanguard Energy ETF owns leading producers and service companies such as ExxonMobil Corp, Chevron Corp and Schlumberger NV. The fund charges 0.14 percent for annual expenses and returned 26 percent last year.
UTILITIES STILL DEFENSIVE
Companies that produce or distribute power, natural gas and water seldom light up any investor's radar screen during bull rallies. These high-dividend companies only become alluring when investors retreat from the most popular sector of the moment or there's widespread uncertainty.
Since the bull rally will fizzle at some point, it's always good to have a fallback. Utilities fit that bill. Although these companies were firmly in the bottom tier last year, they could rebound if the market runs into trouble.
Consider an ETF such as the iShares U.S. Utilities, which holds blue chips such as Duke Energy Corp, Dominion Resources and Exelon Corp. The fund returned almost 15 percent last year and yields about 3 percent with a 0.46 percent annual expense ratio.
Feeling skittish about picking a lackluster U.S. sector and hoping it rebounds? A wiser choice would be to spread your portfolio among every sector through a broad-based world stock fund such as the iShares MSCI ACWI Index ETF, which holds the biggest stocks from around the world such as Apple, Nestle SA and General Electric Co. The fund rose 22 percent last year and charges 0.34 percent for annual expenses.
(Editing by Lauren Young and Nick Zieminski)