WEL mentioned here--
usatoday.com
Posted 2/24/2003 10:36 PM Updated 2/25/2003 1:51 AM
Investors seek wartime haven
By Matt Krantz, USA TODAY
If hostilities occur, where should you park your money? War between the U.S. and Iraq hasn't broken out yet, but investors have already spent a lot of time trying to figure out which stocks could benefit, or get blasted, when it does.
Picking wartime winners and losers is harder than it sounds. Even with the growing threat of war, stocks you'd expect to do well aren't. Oil is near 29-month highs, yet energy stocks are down 13.5% over the past year — better than the Standard & Poor's 500's 25% decline, but still in the red. Even big defense stocks are struggling. (Related story: Ceradyne counts on contracts with military)
These surprises don't mean investors should ignore the war, because that could have a dramatic effect on their portfolios, says Francis Gannon, senior portfolio manager at AIG SunAmerica Asset Management. "You have to look at what not to play," he says.
So what are experts predicting could be the winners, losers and close calls in war?
Potential winners
Smaller defense companies that win direct contracts for the war. So far, one of the only ways to profit from a possible war with Iraq has been by investing in small companies that make specific gear needed for war.
Take, for instance, Ceradyne.
Will history repeat itself?
What stocks did after the start of the 1991 Gulf War:
Stocks (especially financials) rallied as bonds lagged percentage change after allied strike on Jan. 16, 1991
Market/index 1 day 10 days 22 days 63 days
S&P 500 3.7% 7.8% 16.7% 23.5%
Dow 20 bonds 0.6% 1.7% 3.9% 3.3%
S&P financials 3.9% 12.1% 29.2% 42.7%
Nasdaq 100 3.1% 13.0% 22.4% 39.6%
S&P information tech 4.2% 13.6% 22.8% 17.7%
Crude oil -25.1% -27.2% -55.4% -22.0%
Amex oil & gas index 0.2% 0.3% 5.2% 12.7%
Source: Ned Davis Research
It is one of just three companies able to make lightweight ceramic shields that can protect soldiers and helicopters from direct hits.
The stock has rallied this year on news the government was ordering more.
Another example is Applied Signal Technology.
The company makes eavesdropping equipment, some of which might have been used to gather intelligence cited by Colin Powell at the United Nations, says Steven Gish, analyst at Roth Capital Partners.
Shares of Applied and rival SenSyTech have gained 28.5% and 41%, respectively, the past year as investors have seen how valuable high-tech spy gear is to the U.S. military.
Insurers. The Sept. 11 attacks created so much demand that insurance companies raised their premiums for the first time in years. Industry giant AIG told investors this month the same thing could happen if there is another war with Iraq, allowing it to benefit again.
Oil service firms. Betting on higher oil prices is risky because they could collapse after a war. But if the economy heals and improves demand, firms involved in the early stage of production will benefit, says Ken Zschappel, manager of the AIM Constellation Fund. Zschappel's fund is betting on stocks ranging from oil drilling renter Weatherford to drillers Noble Energy, Rowan and Transocean.
Technology. Tech stocks did well after the 1991 Gulf War, according to Ned Davis Research, which expects the same to happen again. Gannon agrees, so his fund has invested in German business software company SAP, which he says was already showing signs of improvement.
Potential losers
Airlines. A war would only complicate things for this struggling industry. The airlines already have higher energy costs to pay and might suffer a further decline in business as fliers worry about terrorism, says Todd Salamone, vice president of research at Schaeffer's Investment Research.
Major oil companies. Shares of ExxonMobil are down 2.7% and ChevronTexaco, 3.1% this year, indicating a war might not be the boon some had thought. Making things worse, after a war, the price of oil would likely fall and cause the energy stocks to underperform, says Sung Won Sohn, chief economist for Wells Fargo. It's a real risk, since that's exactly what happened after the Gulf War, says Ned Davis.
Demand for oil will pick up only when the economy heals, says Dan Gillespie, manager of the precious metals and energy funds at Rydex.
Tossups
Oil-well firefighters. Some investors have speculated that the three major companies able to put out oil well fires would benefit. Shares of Boots & Coots, RPC (which owns Cudd Well Control) and Superior Energy (which owns Wild Well Control) have had sporadic run-ups on the thinking they'll be called in to put out fires in Iraq.
If Saddam Hussein blows up Iraq's wells, the disaster could be many times larger than in Kuwait, says Michael Shonstrom, analyst at Shonstrom Research. But the risks are huge. Boots & Coots is already in financial distress.
There will be no windfall if Saddam Hussein doesn't blow up his own wells this time, and Gannon doesn't think he will. "Saddam blew up Kuwait's oil, not his own," Gannon says.
Gold stocks. Gold and gold stocks have already had a nice run the past year, thanks partly to the threat of war. The run could continue as long as investors are looking for safety, Salamone says. Newmont Mining, Barrick Gold and AngloGold are the three largest gold producers.
But investors need to remember there are still big risks. For instance, the dollar must remain weak for gold to keep performing, Gillespie says. "There are other factors at hand than the war," he says.
Defense contractors. Betting on Lockheed Martin, Northrop Grumman and Boeing might seem a no-brainer, since they make many of the weapons used in war. But that's a mistake, analysts say, because any marginal benefit is already priced into the stocks.
S&P market strategist Sam Stovall adds that any gains in defense could be offset from weakness from the companies' commercial sides.
But Richard Bernstein, strategist at Merrill Lynch, disagrees, showing just how tough it is to predict the effect of war on stocks. Bernstein says defense stocks are good bets because the Pentagon, not Silicon Valley, will again be the engine of technology.
"We're returning to a cold war mentality," he says. |
