ANALYSTS: US JOBS REPORT HELPS NON-TECH STOCKS BUT TECHS TO OUTPERFORM
--For Conservative Investors, They See Bargains in 'Old Economy' Stocks
By Mark Pender
NEW YORK (MktNews) - Analysts say U.S. technology shares will continue to outperform their beleaguered non-technology counterparts in the weeks ahead, though non-tech shares likely formed a bottom and may rise modestly.
Much weaker-than-expected job creation of 43,000 in February as well as a rise in the unemployment rate to 4.1% helped ease equity market worries over significantly higher interest rates, worries that have been a key factor in the group's underperfomance since December.
Yet analysts say the strong momentum of money flows as well as conviction that technologies will be impervious to higher rates will continue to hold back the performance of non-technologies. This was evident in Friday's market, where the Dow Industrials, ladened with traditional industry, rose about 1.9% compared to a 3.3% rise for the Nasdaq Composite.
Henry Herrmann, chief investment officer of Waddell & Reed, believes that one month of weak job growth will not dramatically improve the comparative outlook for old economy shares. He says the longer term trend for non-farm payroll is about 250,000, a rate that is "still too fast."
"I think we'll have a honeymoon period where people will be a little relieved, but I don't think it's long lasting," Herrmann said. But he is hopeful that a bottom was formed with last week's lows at just below 10,000, saying, "I think we're a third of the way or half of the way through a rally that's going to bring us back to closer to 11,000." But at 11,000, Herrmann thinks the gas tank will run empty and rotation will once again turn aggressively toward technologies.
Larry Rice, chief strategist at Josephthal & Co, also sees some improvement in non-technologies but is less optimistic. "Yes, we've seen some good trading bottoms, but the real question is, Are they going to hold?
"Was the correction deep enough?" Like Herrmann, Rice is uncertain that economic growth is in fact slowing significantly, saying that the language of the Fed's next rate announcement could hold the key for the sector.
"Whether these bottoms hold depends I think on what the Fed is looking at and how far they re going to tighten." Even should the economy slow to the immediate relief of non-technologies, Rice warns paradoxically that this will raise growth worries and end up weighing on the sector and limiting the advance. What's more, he says that even if rates go up only slightly or at a slower rate, old industry, which must rely on traditional borrowing, will continue to suffer a comparative disadvantage.
Fundamentals aside, both think that the technical momentum in the market will continue to point to greater gains for technologies. "Looking at the money flows and where people are putting money, it seems to me that the preferred investment category remains high growth, and as a result of that I think tech will continue to move upward," said Herrmann.
Thursday's spectacular initial public offering by Palm Inc [PALM], a maker of hand-held organizers that remains majority owned by 3Com [COMS], is just the latest indication of this momentum. Says Rice, "Just more froth. Just more craziness going on in this market. Just more IPO money that's chasing smaller deals in terms of liquidity. Just something that makes little or no sense."
But on a long-term basis, most analysts are upbeat on the valuations in non-technologies, saying they are a good buy for sober investors. Says Herrmann, "I think if you're a conservative investor you should be taking advantage of the tremendous value that exists in the non-tech sector of the marketplace.
"We're talking about price-earnings ratios of 12 to 14 times, and that strikes me as very cheap. There's lots of opportunity. I don't expect any reason to see immediate gratification, but on a long-run basis I think there are a lot of very good, solid, wonderful U.S. companies that are selling at very reasonable prices."
Herrmann is especially upbeat on the oil patch, saying the dramatic rise in oil has not been reflected in their share prices. "The stocks haven't done nearly, nearly as well as the rise in the commodity price and the rise in the commodity price is going to lead to strong earnings improvement for these companies," he said.
Specifically, Herrmann recommends BP Amoco Plc [BPA] and ExxonMobil [XOM] among others. Rice says there are few values among technologies, but among the rest of the market he suggests Eastman Kodak [EK], which he says is a turnaround story that is selling at a 50% discount to the market, and also Xerox [XRX], another depressed turnaround company that he says poses little risk to the investor.
Rice also likes the financials, which have been hit hard by the rate fears. He recommends JP Morgan [JPM] and Mellon Financial [MEL]. He also says look at pharmaceuticals like Merck [MRK] and Schering-Plough [SGP]. "Don't just pick one in these depressed sectors, pick yourself up a couple." |
