Investors are about to get picky.
After a nearly 10-month rally across the stock market, investors are starting to look for specific stocks to bet on in the new year.
And analysts say large-cap companies, which include household names like Kraft Foods Inc., IBM Corp. and AT&T Inc., may see greater demand in the coming months as investors look for relatively safe stocks.
A shift into big, well-established companies is a natural progression in the rally, market analysts say.
Investors spent much of 2009 buying shares of companies whose stocks had suffered the biggest losses during the financial crisis.
Market players are now expected to become more cautious and deliberate in their stock picking, and are likely to revisit blue chips that have lagged the broader market.
"It's typical after market selloffs and when coming out of a recessionary environment that the beaten down names rally and do well," said Mark Eibel, director of client investment strategies at Russell Investments. "What tends to happen six to nine months later is higher quality names start to take over the leadership."
Record-low interest rates made it easy for investors to borrow money cheaply and take chances on more risky stocks and commodities this year. Among the stocks that led the market were financial companies that benefited from the government's stimulus programs.
Bank of America Corp., for example, has risen about 309 percent since the rally began March 10, while Citigroup Inc., which plunged below $1 earlier this year, has gained 218 percent. Insurance company Genworth Financial Inc., one of the best performing stocks on the Standard & Poor's 500 index this year, has soared 1,208 percent.
The shares of many big, financially sound companies haven't done as well. Half the 30 stocks that make up the Dow Jones industrial average have not seen gains as big as the S&P 500's 66.5 percent advance.
These stocks are likely to look more inviting as investors try to get a sense of what will happen in the economy. They're trying to predict when the Federal Reserve will start raising interest rates. They're also uncertain about the dollar's direction. And, when or whether consumers will start spending freely again.
In order to be prepared for any number of possible economic turns, analysts advise investors to seek out large multinational companies because of their stable earnings, efficient cost structures and broad exposure to international and emerging economies.
"You can invest in very high-quality companies, many of which are leaders in their field, at pretty attractive valuations," said Karl Mills, president and chief investment officer of Jurika Mills & Keifer in Oakland, Calif.
Among the industries that have some appeal to investors looking for bigger gains during the coming months:
— Major drug companies. Many investors shied away from health care stocks this year because of uncertainty surrounding President Barack Obama's proposed overhaul of the health care system. With both the House and Senate recently approving measures to extend health insurance to more than 30 million Americans, some of that uncertainty has diminished.
"If we've got broader health care coverage, more people will be getting prescriptions filled," said Jeffrey Kleintop, chief market strategist at LPL Financial. "Volume is the key, not pricing."
— Tech giants. Many companies put off upgrades of their technology systems during the recession to keep costs down. As the economy improves, technology is one of the areas where companies will put their money first, analysts said.
— Companies that cater to a more frugal consumer. Retail and consumer goods companies are still a bit risky, since it's likely consumers will continue to keep their spending in check in 2010. However, companies that focus on low-cost goods should be able to attract a steady stream of customers.
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