2015 Sector Disruptors: Winners and Losers

"Disruptors" have played a major role in 2014. Indeed, the use of the word disruptor has supplanted the more traditional descriptor "transformational." In that spirit, the Global Markets Intelligence (GMI) fundamental equity research team was asked to name the one thing, across each of the 10 S&P 500 sectors, which will have the biggest impact on existing business models in 2015. This is what they came up.

Learn about the winners and losers of each sector in more detail below:

Consumer Discretionary Disruptor: Digitalization

The increasing use of mobile apps (via both smartphone and tablets) and Internet services will likely have a profound disruption on the consumer discretionary sector, including the media, retail/restaurant, and automobile industry groups, as consumers change the way they consume media and how they place orders and receive goods.

Winners: Time Warner Cable, Disney, CBS, Gap, Best Buy, Starbucks, Netflix, Amazon, DISH Network, Verizon, Sony, Macy's, Nordstrom, Target, and Chipotle could potentially emerge as winners as corporations rush to catch up to the increasingly fast-paced world of Internet and mobile connectivity.

Losers: Potential losers may include multi-channel video programming distributors, such as Cablevision, Charter, and DIRECTV that fail to formulate appropriate strategies to counter the evolving threat posed by OTT streaming. On the retail front, Fred's, an owner of general merchandise stores, will likely lag behind its larger peers.

Tuna Amobi, CFA, and Efraim Levy, CFA, S&P Capital IQ Equity Analysts

Consumer Staples Disruptor: Shifting Demographics

As the baby boomers age, they - along with many Generation X members and Millennials - are driving increased demand for products that focus on improving health and wellness. At the same time, strong demand from immigrants or first-generation Americans for specialty products is turning some niche businesses into national brands.

Winners: Companys that benefit will include food retailers like Kroger, Sprouts Farmers Market, and Walmart; drug retailers CVS and Walgreens; and packaged-food manufacturers Hain Celestial, Tyson Foods, and Hormel Foods.

Losers: In addition to niche food retailers such as Whole Foods Market, potential losers may include large packaged-food manufactures such as Campbell Soup, Kellogg, and General Mills; soda companies Coca Cola and Pepsi, and tobacco firms Altria and Reynolds American.

- Joseph Agnese, S&P Capital IQ Equity Analyst

Energy Disruptor: U.S. Oil Exports

There is a reasonable chance that U.S. legislators will repeal the 40-year-old ban on exports of U.S. crude oil. The U.S. is in the midst of an unprecedented surge in crude oil production. In 2013, the U.S. produced just shy of 8 million barrels per day (mmb/d). Bentek projects that by 2019, U.S. production will grow to 12.0 mmb/d. Virtually all of the increased production is of the "light-sweet" variety, a relatively high-quality crude oil.

Winners: U.S. crude oil producers will likely be the big winners. The oil and gas exploration and production industry, which includes companies such as EOG Resources, Devon Energy, and ConocoPhillips, would likely benefit from exporting their products overseas. Derivative winners would be the tanker companies, such as Teekay and Ship Finance International Ltd., which would discover a new source of demand for VLCC (Very Large Crude Carriers) tankers to move crude out of the U.S.

Losers: The biggest loser would be the U.S. refining industry, including companies such as Valero Energy, Phillips 66, and Marathon Petroleum, which would essentially be bypassed to some degree if raw U.S. crude no longer needs to go through a domestic crude distillation unit.

Stewart Glickman, CFA, S&P Capital IQ Equity Analyst

Financial Services Disruptor : Mobile Technology

Increased adoption of mobile technology shows that customers of all ages and education levels will feel increasingly comfortable with banking, trading, and shopping online. Technology will further change how customers make deposits, trade securities, and buy insurance. Rapid technological advances are changing how financial services are purchased and used by consumers and how companies market and deliver their products.

Winners: Companies such as MasterCard, Visa, JPMorgan Chase, Citigroup, Bank of America, American Express, and Discover are only a handful of the early adopters of mobile and customer-friendly technology.

Losers: GMI thinks smaller financial companies, such as regional banks such as BancorpSouth, Cullen/Frost Bankers, and WestAmerica Bancorp and asset managers, will struggle to keep up with the technological pace set by the larger companies. Similarly

- Kenneth Leon, Cathy Seifert, and Erik Oja, S&P Capital IQ Equity Analysts

Healthcare Disruptor: The Supreme Court

The nation's highest court agreed to hear a case that could test the survivability of Obamacare. After years of challenges and threats, the central tenet of the law, which enables the vast majority of Americans to obtain health insurance, could be in jeopardy in 2015 because of seven words included within the law's voluminous text that explain who can qualify for health care subsidies: "through an exchange established by the state."

Winners: If the Supreme Court rules against the challengers, it will retain the status quo. Health care sector investors have benefited significantly since the law was passed and will most likely continue to succeed in 2015.

Losers: All health care industries would be hurt, but these industries/companies would likely suffer the greatest negative effects: health care facilities, including Tenet Healthcare, HCA Holdings, and Community Health; managed health care, including Aetna, WellPoint, UnitedHealth Group, and Cigna; health care services, including Laboratory Corp. of America and Quest Diagnostics; and pharmaceuticals, including Pfizer, Eli Lilly, Bristol-Myers Squibb, and Merck.

- Jeffrey Loo, CFA, S&P Capital IQ Equity Analyst

Industrials Disruptor: Significantly lower oil prices

A rapid drop in the price of oil has many potential implications outside of the energy sector, and GMI thinks these are mostly positive for the industrials sector. Oil prices peaked at a high of $147.27 in July 2008, and then, after a brief crash, they remained in the $90-$120 range. But, prices have recently declined sharply and are now below $80 a barrel.

Winners: GMI thinks the largest beneficiary is likely to be the U.S. airline industry, which consumes about 19 billion-20 billion gallons of jet fuel a year. Specific beneficiaries are likely to include Delta Air Lines, United Continental Holdings, JetBlue Airways, Spirit Airlines, Southwest Airlines, and Alaska Air Group. Commercial transportation will also likely benefit as well as any company that uses energy to manufacture products will benefit because of the lowered major input price.

Losers: The construction and engineering space, which is the major fulfiller of oil and gas projects throughout the world, will face negative effects. Because lower oil prices could make some drilling projects economically unfeasible, projects could be delayed, cancelled, or reduced in scope. Two companies that operate in this space and that could be affected by declining oil prices are Foster Wheeler and Joy Global.

- Jim Corridore, S&P Capital IQ Equity Analyst

Materials Disruptor: the Chinese Economy

China has been a strong source of demand for materials and goods produced by companies in the materials sector. The average rate of Chinese GDP growth between 1989-2014 was 9.1%, according to the National Bureau of Statistics of China. However, in the most recently completed third quarter, China's GDP growth slipped to 7.3%.

Winners: In this disruptive scenario, no materials sector companies would be positively affected. However, Clearwater Paper and Wausau Paper are purely tissue paper companies, and they would likely not feel much pain. Similarly, some specialty chemical companies make products that are less cyclical. Celanese, Ecolab, and PPG industries are examples of companies that would feel less of a negative effect than diversified chemicals companies.

Losers: Many packaging companies have direct exposure to Chinese markets and to other Asia-Pacific countries such as International Paper, Glatfelter, and Louisiana-Pacific could be hurt. Specialty chemical companies with exposures to China or the Asia-Pacific region would be expected to suffer as well including Axiall, Cabot, and Westlake Chemical. Metals companies could also suffer somewhat in the event of a Chinese slowdown including Cliffs Natural Resources, Freeport McMoran, and Vale.

- Christopher Muir, S&P Capital IQ Equity Analyst

Technology Disruptor: Wearables

Until now, wearables have had limited success, being dominated by fitness-related products such as the Fitbit, where collected data is transported to another device (such as a smartphone, tablet, or personal computer). In 2015, it is expected that most wearables will be able to connect to an Internet-enabled device, ideally a smartphone, with the ability to add software and apps. The Apple Watch, indicated recently by a company executive as set to release in the spring, will set the stage for the market in 2015.

Winners: Although GMI expects Apple and Samsung to lead the market initially and benefit the most in 2015 from the emergence of wearables, we anticipate that other hardware makers will also release products to become early players in this dynamic category. In addition, the hardware supply chain should be aided as these devices will serve as another growth driver for chipmakers and other suppliers.

Losers: GMI predicts that there will be few, if any, true losers as wearables will result in a greater amount of information technology dollars being spent versus cannibalizing any particular segment or company (i.e., the way tablets initially affected PCs and their manufacturers). However, we do note that traditional watchmakers could be negatively affected by the advent of the wearables era.

- Angelo Zino, CFA, and Scott Kessler, S&P Capital IQ Equity Analyst

Telecommunications Services Disruptor: Emergence of REIT structures

Telecom has seen its share of REITs emerge in recent years with tower companies, such as American Tower, Crown Castle, and others moving to become REITs. However, 2015 will be different as GMI foresees the trend extending to infrastructure-oriented companies.

Winners: GMI thinks the local telecom service providers are the most likely to consider such a REIT spin-off. Northeast telecom service provider Frontier Communications is the most likely company to consider such an organizational change given its assets and objectives. Others that could follow include CenturyLink, Cincinnati Bell, and Telephone & Data Systems.

Losers: Verizon and AT&T are likely also discussing the possibility of potential structural change, whereby they can spin off certain wireline assets. However, given the size and regulatory hurdles the companies would face, such a transaction would be more difficult. This would also occur several years from now, if at all, because AT&T and Verizon contribute much more significant tax revenue dollars for states than the smaller, local players. Therefore, either AT&T or Verizon moving to a tax-free structure would have massive negative implications for state government tax revenues.

- Angelo Zino, CFA, S&P Capital IQ Equity Analyst

Utilities Disruptor: Congressional EPA action

In past few years, the EPA has implemented many new rules surrounding emissions from electric power plants. In 2012, the EPA released its final rule on the Mercury and Air Toxins Standard (MATS) for power plants. The rule aims to limit mercury, acid gases, and other toxic pollution from power plants. With the Republicans taking control of the Senate and widening their lead in the House, they could take action to limit the effect of the newly proposed EPA rules.

Winners: The new rules would increase the cost of generating electricity from many sources and limit investment in new natural gas-fired and coal-fired power plants. In our view, higher electricity prices would likely lead to an increase in consumer conservation efforts, which would likely slow the rate of earnings growth in the industry. All utilities would likely benefit if the EPA's efforts to implement carbon rules were obstructed. The largest utilities include Dominion Resources, Duke Energy, NextEra Energy, and Southern Co.

Losers: GMI doesn't think any utilities would be losers in this scenario as lower electricity prices are likely to benefit all distribution utilities. However, should the federal government implement policies that reduce the value of renewable generation assets, then companies with a large exposure to those assets, such as NextEra Energy's subsidiary NextEra Energy Partners, could suffer.

- Christopher Muir, S&P Capital IQ Equity Analyst


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Read more about the analysts' thoughts on the disruptors in the Wall Street Journal.

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