The 3 Hottest Sectors for 2012

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- Every few months, hedge-fund managers take a fresh look at the economy, trying to figure out key trends that will yield the best returns in the months ahead. Once they complete their analyses, they rotate some money out of sectors that no longer appeal into sectors that provide the freshest upside.

With 2011 winding down, this is a good time for individuals to anticipate where the action will be later this winter, and on into the spring and summer.

To be sure, as I've recently noted , the economic outlook for 2012 doesn't look all that different than 2011. The economy should grow at a modest pace, inflation should remain benign, and the U.S. consumer will likely get a little healthier. But you can sense a slight shift in sentiment as recession fears start to diminish and hopes that we may start to see more solid growth start to build -- at least in 2013 and beyond. This means what worked in 2011 won't necessarily work in 2012.

For example, utility stocks posted solid results this year, rising roughly 15% on average, as they represented safety in a storm. Consumer staples and health care stocks rose about 10%, according to Goldman Sachs. There's no reason to sell these kinds of stocks in 2012, but there's also little reason to expect them to lead the market once again. Instead, here's my sector-focused game plan for 2012.

1. Financials

The crisis in Europe has been especially hard on banking stocks as fears of a Lehman Bros.-like contagion began to build. A typical financial services stock fell roughly 10% this year, but many within the group fell far more sharply. We've discussed the merits of Warren Buffett's favorite bank stock, Wells Fargo ( WFC), but I remain convinced Citigroup ( C) represents the best upside in a group that is likely to rotate back into favor in 2012.

Many bank stocks -- including Citigroup, now trade well below tangible book value -- which is reason enough to expect a sector rally when the European crisis recedes. Yet Citigroup's fast-increasing exposure to Latin America and Asia still fails to get much respect on Wall Street. This is bound to change as these foreign operations generate superior returns to those seen in Europe and the United States. By 2013, Citigroup could also be talking about improving operations domestically, as the housing market gets back on its feet.

2. Industrials

This group rebounded nicely from the March 2009 levels, but many key stocks have slipped considerably after peaking this past spring. Stocks such as Deere ( DE) and Schlumberger ( SLB) have slid 25% from their peaks, even with their long-term outlooks remaining quite bright. Yet for my money, the biggest gap between investor perception and reality can be found among automakers and auto-parts suppliers. These companies emerged from the 2008/2009 economic downturn in far stronger shape, and even though they're well up off the lows seen back then, they're also well below their recent highs.

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