Analysts Pick Favorite Industries for 1996

STOCK pickers, unite! Your time has come.

In any year, it pays to be invested in the best-performing industries or companies. But in 1996, some analysts say ''sector'' and ''selectivity'' are particularly sound financial watchwords.

Last year the market made a broad advance, with just a handful of industry sectors posting returns below 5 percent and the Standard & Poor's 500 stock index gaining 37.4 percent, including dividends.

Few investment houses expect similar results in 1996.

The market is shaping up as a turbulent one marked by ''rotation,'' or frequent advances and losses by specific sectors, says Larry Wachtel, a vice president of Prudential Securities Inc. in New York.

''High-tech firms are up one day, and down another. And when technology does well, then consumer stocks seem to take a hit. Money is flowing in and out of different sectors,'' Mr. Wachtel says.

Moreover, within sectors, ''individual companies are having dramatic impacts,'' he adds. Last week, for example, more than 68 million shares of Intel Corporation changed hands in a single day, setting a new record for trading volume by a company on the Nasdaq market. Intel's drop put the whole high-tech sector momentarily out of favor. And a sell-off of Wal-Mart Stores Inc. shares following an announcement of lower earnings briefly roiled the entire sector of retail stocks.

''The keys to success in 1996 will be having the right sector weighting, and then, most important ... having the right stock within that sector,'' says Peter Anderson, chief investment officer for IDS Advisory Group in Minneapolis.

''We expect 2 percent growth [for the US economy], declining interest rates, and corporate earnings advancing only around 2 percent to 5 percent. That is a classic scenario for looking for specific growth stocks, especially solid technology stocks,'' Mr. Anderson says. He also likes financial stocks and some industrial cyclicals and consumer staple stocks, such as pharmaceuticals and food companies.

Wachtel, meanwhile, is attracted to ''financial stocks and some utilities, given their interest-rate sensitivity'' and the promise of further interest-rate cuts.

For people who want to buy into specific sectors, many mutual-fund companies offer specialty funds focusing on everything from gold to automobiles.

Experts see two broad ways of slicing the market into sectors: (1) by industry and (2) by market capitalization or style of company. The latter categories include growth stocks (companies expected to post high annual returns), for example, or small-capitalization stocks, (firms valued between $50 million to $500 million).

Some industry sectors are likely to be challenged in '96, experts say, including retail (given slower consumer spending).

As for sectors divided by size or style of company, small-cap stocks look somewhat troubled for now, says Claudia Mott, an analyst at Prudential. Given the slowing economy, earnings growth for most small-cap companies will be in doubt, she says. The bright spots within the small-cap universe, she concludes, will be financial-service firms and technology companies.

Rao Chalasani, chief investment strategist for Everen Securities Inc. in Chicago, likes growth stocks and exporters. By industry, he recommends capital-goods, basic-industry, real estate investment trusts (REITS), and financial services.

A cautionary note: Some market experts say average investors should avoid the entire sector-picking game, which is a form of market timing.

''It is very difficult for most individuals to jump from one sector to another. You have to be very nimble to succeed,'' says John Markese, president of the American Association of Individual Investors in Chicago. There can also be adverse tax consequences, he says. ''It is far better to put together a good portfolio [of stocks, bonds, and mutual funds] and then just sit on it over time.''