To thread - FWIW (and more coming) :-)
SECTOR SPOTLIGHT / JAMES F. PELTZ
Presto Change-O
In a Fast-Moving Market, Winners Can Lose Their Perch Quickly
By JAMES F. PELTZ
The Internet, airlines and health care were hot stock sectors
during the first quarter, and real estate, oil services and
computer disk drives were not. But don't count on that scenario
extending through the second quarter, because the list of winners
and losers is already being shuffled.
Take the oil services and airline sectors, for instance. Amid a
steady slide in global oil prices, oil services stocks took a dive while
airline shares took flight in the quarter.
Until 10 days ago, that is, when several major oil-producing
nations announced production cuts that triggered a sharp rebound in
prices of crude. That sparked a fierce rally in oil services shares and
a drubbing of the airlines.
Result: Although the Philadelphia Stock Exchange's index of 12
airline shares still was up nearly 22% year-to-date as of Friday, it
had been up almost 30% at March 16.
My note: I don't know what he means by fierce, but I'll take it<g>
Meanwhile, real estate investment trusts, or REITs, which lagged
badly through most of the first quarter, have started moving up lately
as bargain hunters have resumed buying the issues.
Overall, the U.S. stock market was up 12.9% for the quarter
through Friday, as measured by the blue-chip Standard & Poor's
500 index.
A healthy pace of consumer spending helped push many S&P
stock groups higher, including retailers, auto makers and home
builders.
Among the standout performers not well-represented in the
S&P index were online stocks. Investors caught Internet fever again
and bid related shares into the stratosphere relative to the
companies' earnings--for the few companies that even have earnings
yet.
The Chicago Board Options Exchange's index of 15 Internet
stocks has soared 36% year-to-date, led by such issues as Yahoo
Inc. (ticker symbol: YHOO), up 31% this year, and America
Online() Inc. (AOL), up a breathtaking 52%.
Internet bookseller Amazon.com() Inc.(AMZN)
shot up 41%.
Shares of wireless communications companies also surged, as
some investors bet on fast growth prospects for the industry.
CoreComm() Inc. (COMM), for instance, has
soared 67%.
In the health-care sector, health maintenance organization stocks
rebounded after a fourth-quarter plunge related to depressed profit
margins. Major drug stocks also were hot, on expectations for
continued strong earnings growth: Warner-Lambert Co. is up 34%
year to date.
* * *
What about the second quarter? For starters, there's
widespread agreement about one thing: The economic backdrop for
the market overall could hardly be better, which is a key reason
why stocks keep reaching record highs.
"The current U.S. economic environment is the best
ever--steady growth without inflation," declared Goldman Sachs &
Co. economists William Dudley and Edward McKelvey in a recent
report. With the economy's expansion 7 years old in March, "there
still is no recession in sight."
Perhaps. But that doesn't mean the economy won't at least slow
down at some point. And when it does, what then?
The prospect is already on the mind of entertainment industry
analyst Jill Krutick of Salomon() Smith Barney.
"As the economy heads into the late stages of its expansion,
consumer spending could become pressured," she said.
In the entertainment field she advises sticking with the big
diversified players that are less sensitive to an economic pullback.
Her top picks: Walt Disney Co. (DIS), Time Warner(
) Inc. (TWX) and Mattel() Inc. (MAT).
Computer services stocks also get good reviews because, even
if the economy slows a bit, demand for electronic data processing
and related services is expected to sustain good growth.
J.P. Morgan Securities analyst Raimundo Archibold
recommends airline reservations systems operators Sabre Group
Holdings Inc. (TSG) and Galileo International() Inc. (GLC);
financial industry computer services provider Equifax(
) Inc. (EFX); and Walsh International()
Inc. (WSHI), which provides information services to the health-care
field.
Indeed, "our clear bias within technology is toward computer
services, the telecom equipment [stocks] and networking groups,"
owing to their "strong expected revenue growth," said Douglas
Cliggott, J.P. Morgan's investment strategist.
Wireless communications stocks are one of the favorite groups
of Standard & Poor's analysts, whose stock sector ratings are
based on both stock price momentum and the companies' business
fundamentals.
Although some investors favor price momentum alone as a good
stock-picking system--the idea that what is hot often stays hot for a
while--that can be dangerous.
For instance, shares of the Big 3 auto makers--General Motors
Corp. (GM), Ford Motor Co. (F) and Chrysler Corp. (C)--easily
outpaced the S&P 500 in the first quarter. But now few analysts are
recommending them, because of a glut of new cars on dealers' lots.
So the stocks' momentum might not be enough to warrant buying
them now.
Besides the wireless sector, S&P's analysts are bullish on
several areas of the computer industry, including hardware,
networking, semiconductors and data-processing services. They
also give high ratings to drugstore chains, major banks, consumer
finance companies, drug makers and air freight firms, among others.
* * *
Sam Stovall, S&P's sector strategist, said his team likes
technology stocks because many of them have been sold off
recently, to the point where they're "buys" for investors looking out
over the next year or so.
"If you ask our analysts, yes--in the next three to six months they
continue to see a tough earnings environment" for many tech stocks,
he said. "But they can't say the stocks are going to under-perform
12 to 18 months from now. They think they're going to do well."
In the semiconductor-manufacturing equipment sector, S&P's
strongest recommendations go to KLA-Tencor Corp. (KLAC) and
Applied Materials() Inc. (AMAT). In the
hardware arena, Dell Computer Corp. (DELL) is S&P's top pick
even though the personal computer maker has nearly quadrupled in
price over the last year.
Similarly, Salomon Smith Barney analyst Neil Herman likes
software kingpin Microsoft Corp. (MSFT). Yes, Microsoft has
surged 36% so far this year (giving it a market capitalization of
$214 billion) and it trades for a hefty 52 times its expected
per-share earnings for its fiscal year ending June 30--versus the
S&P 500's price-to-earnings multiple of 24 based on 1998
forecasts. But although others see Microsoft's growth slowing in
tandem with a slowdown in personal computer sales, Herman said
he expects Microsoft "will have long-term revenue growth of 25%
[annually], as compared to the S&P 500's 7%"--and that's a key
reason he's got a "buy" rating on the stock.
Elsewhere, some oil-refining and marketing stocks are on S&P's
list. Although oil prices have jumped recently, they are still down
sharply from last fall, and thus consumer demand for gasoline
remains strong, Stovall said. In the marketing sector, S&P likes
Tosco Corp. (TOS), which owns the Union 76 brand, and
Ultramar Diamond Shamrock Corp. (UDS).
* * *
S&P and Morgan Stanley Dean Witter analyst Debra Levin
both recommend some drugstore stocks. The stocks are
considered ideal "defensive" issues if the economy should falter, and
with a spree of mergers, the industry is consolidating into larger,
more prosperous players, they said.
CVS Corp. (CVS), which operates east of California, is among
their top picks. Levin also has a "strong buy" on Rite Aid Corp.
(RAD), which owns the Thrifty Payless() chain.
Some analysts also are bullish on selected air freight companies,
which are benefiting from strong worldwide demand.
FDX Corp. (FDX), the new holding company for Federal
Express, is ranked a "buy" by Douglas Rockel of Furman Selz and
Steven Lewins of Gruntal & Co. FedEx last week reported
quarterly earnings above expectations, as domestic strength offset
Asian weakness. |
