Supermarkets, Utilities, REITs and Drug Companies Among Sectors Seen As Havens
August 28, 1998 4:59 PM
By Janet Morrissey and Brian Steinberg
NEW YORK (Dow Jones)--Large supermarket chains,
utilities, real-estate investment trusts, homebuilders and
drug companies are among the sectors observers are
touting as good defensive plays during the volatile broad
market.
"Supermarkets are totally domestic and sell the
necessities of life," said Prudential Securities Inc. analyst
George Thompson. "They perform well whether the
economy is good or bad."
Thompson noted that supermarkets have little or no
exposure to Asia or Russia. And aside from their
predictability, he said, many are posting double-digit
earnings growth.
"Many have had significantly better growth rates than the
S&P," he said.
Thompson cited larger chains such as Kroger Co. (KR),
Albertson's Inc. (ABS) and Safeway Inc. (SWY) as
good bets during the market downturn.
Year to date, Kroger's shares are up 39.3%,
Albertson's are up 12.3% and Safeway's are up 36.8%,
he said.
BT Alex. Brown Inc. analyst Edward Tirello names
utilities as the best havens.
"Anytime the market gets jittery, these are the ones you
go to first," he said. "They hold up better and they go
down less."
But Janney Montgomery Scott analyst David Schanzer
cautioned that it's an old myth to assume that utilities are
real defensive plays.
"I continue to warn against the use of the electric utility
group as a sound defensive investment," he said. "It's not
what it used to be."
Schanzer said "re-regulation and competition" changed
the utility landscape, and some companies are getting
involved in overseas investments that haven't panned
out.
Indus,Mall,Certain Office REITs Good Bets
Legg Mason Wood Walker Inc. analyst Ronald Tanner,
who covers about 25 electric utilities, noted that utility
stocks have taken a hit.
"They're rolling in sympathy with people getting out of
the market, but they are more attractive on a relative
basis," he said.
REITs historically have been seen as defensive stocks
because of their predictable earnings and high-yielding
dividends. But investors began viewing them as growth
stocks after they posted returns of 36% in 1996 and
19% in 1997, according to the National Association of
Real Estate Investment Trusts.
In 1998, investors, worried about slowing growth and
talk of overbuilding in certain sectors, began pulling out,
causing REIT prices to tumble.
The Morgan Stanley REIT index was off 15.4% at the
close of business Wednesday on a year-to-date basis,
the S&P was up 8.48% and the Russell 2000 was off
16.23%, according to Morgan Stanley.
But despite REITs' battered share prices, Morgan
Stanley analyst Greg Whyte said REITs are a good
haven in a falling market.
"The dividend is still attractive in this environment. ... Its
yield is better than a bond or utility," he said.
Within the REIT world, he said industrial and warehouse
distribution companies are the most attractive havens
because they usually have tenants with good-quality
credit on long-term leases. He also cited office REITs
that operate in central business districts that have
barriers to entry, such as New York, Boston and San
Francisco.
CIBC Oppenheimer Corp. analyst Jordan Heller also
believes the "high yield" is a compelling reason for
investors to seek out REITs in a falling market. He
named community shopping center REITs, which sell
necessities, and manufactured home community REITs,
with their low tenant turnover, as especially attractive in
a downturn.
Homebuilders, Drug Cos. Called Attractive
Morgan Stanley's Greg Whyte cited
industrial/warehouse REITs such as Duke Realty
Investments Inc. (DRE), Weeks Corp. (WKS), Spieker
Properties Inc. (SPK) and ProLogis Trust (PLD), and
office REITs, such as Boston Properties Inc. (BXP),
Crescent Real Estate Equities Co. (CEI) and Equity
Office Properties Trust (EOP), as examples of REITs in
good defensive sectors.
Chateau Communities Inc. (CPJ) and Sun Communities
Inc. (SUI) and Manufactured Home Communities Inc.
(MHC) are examples of manufactured-home community
stocks that could be good havens, according to CIBC
Oppenheimer's Heller.
Homebuilding stocks are also being touted as good
defensive plays to help ride out turbulence in the broad
market, at least in the short-term.
Homebuilders have no exposure to Asia or Russia and
have been reaping the benefits of low interest rates,
good job growth, surging consumer confidence and a
robust economy. In the past two quarters, most crashed
through Wall Street earnings projections as a result of
healthy demand, fewer sales incentives and rising house
prices. For example, Pulte Corp. (PHM) beat First
Call's first-quarter numbers by 30 cents a share, while
Ryland Group Inc. (RYL) exceeded second-quarter
estimates by 29 cents.
Although most posted record home orders in the latest
quarter, which generally translate into revenues two or
three quarters down the line when the home closes,
growth has slowed over the past couple of months,
prompting some investors to take notice.
Still, Merrill Lynch & Co. analyst Bob Curran
anticipates orders will continue to rise at a low
double-digit or high single-digit pace through the end of
the year and 5% to 10% in 1999. He predicts higher
home prices will offset the slowdown. Barring a
recession, he said, he sees homebuilders continuing to
post good numbers through most of 1999.
Curran named Kaufman & Broad Home Corp. (KBH),
Lennar Corp. (LEN), D.R. Horton Inc. (DRI) and
luxury builder Toll Brothers Inc. (TOL) has examples of
builders with good growth potential.
Although the problems in Asia and Russia don't affect
homebuilders, economic turbulence in Latin America
could throw an economic wrench into the U.S.
economy, Curran said. And if that happened, he said,
homebuilders could be affected.
Credit Suisse First Boston Corp. analyst Ivy Zelman
said the homebuilding sector is currently trading at only
9.5 times estimated 1999 earnings, compared with S&P
stocks, which trade, on average, at a multiple of 22 to
24.
Zelman said the low valuation along with the group's
lack of Asian exposure and healthy earnings growth
make building stocks attractive picks. But she cited
growing concerns that builders may be nearing the end
of their cycle. She sees building stocks as good
short-term investments - for three to six months, not the
long term.
Pharmaceutical and biotechnology stocks are also being
dubbed as good defensive plays as a result of their
stable earnings stream, steady market demand and
limited exposure to emerging markets.
Analysts are touting stocks such as Pfizer Inc. (PFE), Eli
Lilly & Co. (LLY) and Merck & Co. (MRK) as safe
havens in the pharmaceutical world.
Analysts Point To Baby Bells, GTE
In the mostly volatile telecommunications sector, the
Baby Bell operators and GTE Corp. (GTE) are
nonetheless considered a safe haven for defensive
investors.
Despite efforts to expand overseas, the Bells still derive
90% or more of their revenue from the U.S., analysts
say, which protects investors from global volatility.
Additionally, these stocks offer high annual dividends
relative to other large-cap stocks. These yields range
from 2.2% for BellSouth Corp. (BLS) to 4.3% for U S
West Inc. (USW).
"Earnings for these companies (the Bells and GTE) are
extremely visible and grow at a pace that exceeds the
general market," said Robert Donahue, an analyst at
Salomon Brothers Asset Management.
Donahue added that both Bell Atlantic Corp. (BEL) and
GTE, which agreed last month to merge, are at
historically inexpensive levels and are likely to gain in
either a bear or bull market.
- Janet Morrissey; 201-938-2118
- Brian Steinberg; 201-938-5218
- Craig Karmin contributed to this report.
Defense Industry Stks Seen As Good Bets
Morgan Stanley Dean Witter aerospace analyst Pierre
Chao said stocks that benefit from the defense industry
shouldn't be overlooked. He noted that the federal
government approved an increase in defense spending
for the first time in more than a decade, boosting
spending to $49 billion in 1999 from $45 billion. He
added that it's expected to climb to $60 billion by 2002.
"The defense budget is not based on the economy or
interest rates," he said. He cited Lockheed Martin Corp.
(LMT), Raytheon Co. (RTNA,RTNB), and Alliant
TechSystems Inc. (ATK) as stocks that benefit from the
defense industry.
- Janet Morrissey 201-938-2118
- Brian Steinberg 201-938-5218
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