BKNY3, is this the way you want your post #7528 to appear? Are you sure you didn't mean to imply that PFE will be on a loooooong trading range? <ggg>
FWIW, I'd rather be in PFE than in some cyclical stocks at this time. Bought some @ 116. Hope they will be higher before the split.
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They're Not the Dowdy Jones Industrials Anymore
By Andrew Bary
05/03/1999
Barron's
Page MW3
The April just ended will be remembered for one of the most dramatic shifts in investor sentiment in the current bull market. The mood swing had once-shunned industrial stocks shining, while longtime market darlings such as Microsoft, Pfizer, General Electric and Wal-Mart suffered setbacks.
This dull-is-dandy trend, which began in early April, reversed briefly at midmonth but regained force last week. The resulting strength in industrial stocks has turned the once-dowdy Dow into one of the market's hottest barometers.
The Dow, helped by such cyclical stocks as Alcoa, Caterpillar, Minnesota Mining & Manufacturing and AlliedSignal, rose just under 100 points last week to 10,789, a gain of 0.9%. The S&P 500, dominated by huge glamour stocks like Microsoft, Cisco Systems and GE, declined 21 points, or 1.6%, to 1335.
Both indexes did come under pressure Friday with the Dow falling 89 points after an early rally that put the index within just 39 points of 11,000. The afternoon selloff resulted from a sharp decline in the bond market, where prices of long-term Treasuries fell almost 2% after the government reported that the economy expanded at a faster-than-expected 4.5% annual rate in the first quarter, raising fears that the Federal Reserve may raise short-term rates by summer to cool a booming economy.
The Dow is now up an impressive 17.5% in 1999, well ahead of the S&P 500, which has risen 8.6%. Looking back to the start of 1998, both indexes now are up around 37% as the Dow's strength this year has enabled the average to recoup lost ground versus the S&P, which bettered the Dow by 10 percentage points in 1998 (see accompanying table).
"Investors have gone from chasing AOL to Alcoa," says David King, manager of the Putnam Growth & Income Fund. Alcoa, the world's biggest aluminum producer, was the Dow's biggest percentage gainer last week and in the month of April. Alcoa rose 8 1/4 to 62 1/4 last week and gained 50% in April. Caterpillar rose 3 13/16 in the five sessions to 64 3/8 and AlliedSignal was up 2 15/16 to 58 3/4. Losers last week in the Dow included Merck, McDonald's, AT&T and GE. Reflecting the advance in industrial issues, the Morgan Stanley cyclical index rose 20% in April, while the firm's Nifty Fifty index gained only 1%.
The big question on Wall Street is whether the rotation out of the drugs and techs into the cyclical stocks is over. Byron Wien, domestic strategist at Morgan Stanley, believes the cyclicals may still have some legs. "The U.S. economy is strong, the developing world is recovering, Europe is stimulating monetary policy, and Japan is coming out of a recession. That will only increase the demand for basic materials and industrial goods."
Wien's is probably a minority view on the Street now. The conventional wisdom is that the cyclicals don't have the earnings power to sustain their recent rally. Alcoa trades at a lofty 24 times projected 1999 profits, while Caterpillar has a P/E of 19. Yet historically, the cyclicals generally have advanced before any meaningful brightening in their financial prospects.
The bullish view on the cyclicals is that overseas earnings, which were depressed in much of 1997 and 1998, will rebound with global economies. Minnesota Mining & Manufacturing offers some hope on that score because it reported better-than-expected profits for the first quarter on Friday and said it sees improving Asian sales in 1999. 3M's shares rose 3 3/8 to 89 Friday and were up 8 3/16 on the week.
-- The improving global outlook also is helping Coca-Cola, which rose 1 9/16 last week to 68 1/16, and now has gained almost 10 points from its early April low. Coke's recent performance prompted one money manager to joke that "it's acting like a cyclical." Until last year, Coke reigned as the market's premier growth stock because it was perceived to be immune from worldwide economic ills even though it generates 75% of its profits abroad.
But the soda giant's recent profit woes show that its earnings are far more economically sensitive than its fans have long maintained. Roy Burry, beverage analyst at Brown Brothers Harriman, recently downgraded his rating on Coke to "avoid" from "neutral" -- a rare sell rating by a Street analyst -- partly because its stilllofty P/E could come down. Coke trades at almost 50 times projected 1999 earnings of $1.40. Coke's profits are expected to be flat in 1999 for the third straight year. Detractors say that since the company's earnings now are more cyclical, it doesn't deserve such a growth-style multiple.
One negative for the entire market is the growing appeal of bonds relative to stocks. Wien's model, which measures the relative merits of stocks and bonds, suggests that the S&P 500 now is nearly 30% overvalued, marking the most extreme overvaluation since just before the 1987 market crash. Before last summer's market drop, the S&P was about 23% overvalued. Many investors don't pay much attention to bonds, but given the lofty valuations of stocks, interest rates do matter. Should long Treasury yields move up toward 6%, stocks could have a nasty spill. The benchmark bond ended Friday at 5.66%.
-- The Nasdaq rallied Friday in the face of weakness in the Dow and S&P, rising 14 points to 2542. For the week, however, the index was off nearly 2%, hurt by declines in Microsoft, Dell and some of the Internet stocks. The Dow and Nasdaq lately have been going their separate ways during many sessions as investors favor either technology or industrial stocks. On four of the five days last week, the two indexes moved in opposite directions.
For the month of April, the Dow rose 10.3%; the S&P, 3.8%; and the Nasdaq, 3.3%. The Russell 2000 was up 0.2% last week to 432 and rose 8.8% in the month as small stocks came back into vogue. The Russell, however, has risen just 2.6% in 1999.
-- Where are there values left among the cyclicals? Rich Pzena, head of Pzena Investment Management in New York, cites AGCO, a maker of farm equipment, as well as specialty-chemical makers Lubrizol and Cytec Industries
Putnam's King points to the regional banks, which now command modest price-to-earnings multiples and could see stepped-up takeover activity. Late Friday, Firstar, a premier Midwestern regional with richly priced shares, announced a deal to purchase Mercantile Bancorp for $66 in stock, or $10.9 billion. That amounts to a premium of $9 over Mercantile's closing price of 57 Friday. The stock was up 5 3/4 on the day amid rumors of a Firstar deal.
-- The brokerage stocks had a tough week, with major players coming under pressure Friday after news broke that the Justice Department is looking into possible price fixing in initial public stock offerings. Morgan Stanley Dean Witter fell 5 13/16 to 99 3/16 in the five sessions, and Merrill Lynch was off 7 to 84 3/16.
The selloff in the brokerage shares, however, is unlikely to dampen the huge interest in Goldman Sachs Group's initial public offering set for Monday. The Street's last major partnership plans to sell 60 million shares at a price between $45 and $55 a share, valuing the entire company at $23 billion at the midpoint of that range. Goldman is slated to come public at a P/E discount to Morgan Stanley because of the more volatile mix of Goldman's earnings. Goldman also wants to do all it can to ensure that its shares appreciate above the IPO price so as to avoid embarrassment.
It's worth noting that Goldman's market value will be half that of online king Schwab and less than either Merrill or Morgan Stanley, which now are worth $30 billion and $56 billion, respectively. E*Trade Group, with a market value of $13 billion, isn't all that much smaller than Goldman. At a price of 50, Goldman will be valued at about 13 times annualized profits for its fiscal first quarter. For more on the Goldman IPO, see page 43.
-- Energy stocks also enjoyed a revival in April with the major oils rising about 14%, bringing their year-to-date advance to 19%. The gains continued last week as crude oil moved above $18 a barrel, finishing at $18.66. Exxon was up 4 3/4 to 83 1/16; Chevron gained 3 7/8 to 99 3/4 , and BP Amoco rose 7 to 113 3/16. All three issues hit records in the week.
Some Wall Street analysts cut their ratings on the stocks in recent days, saying the runup in the shares has outpaced the improvement in fundamentals. Fred Leuffer, the oil analyst at Bear Stearns who correctly turned upbeat on the group late last year, says there is still some upside potential among selected issues. He favors USX Marathon, Shell Transport & Trading and Atlantic Richfield.
As the accompanying table shows, the oils do trade at fairly lofty P/Es based on projected 1999 profits. In fact, Exxon and BP Amoco now have higher multiples than drug giant Merck, whose profits are far more predictable. The drugs lately have been victims of the investor rotation into industrial issues and of the disappointment about Pfizer's near-term profit outlook and Eli Lilly's sales of Prozac, its top-selling drug. The pharmaceuticals fell 9% in April, making them one of the worst groups in the market, and they now are off an average of 5% in 1999.
Their fans say that valuations are pretty reasonable considering many drug companies are expected to show doubledigit profit growth for the next few years. Neil Sweig, analyst at Southeast Research Partners, favors Bristol-Myers Squibb, Lilly and Warner-Lambert.
Merck, he says, is more problematic because its profit outlook hinges on the success of Vioxx, a painkiller, which is due to hit the market around June 1. The hugely successful launch of Celebrex , a competing drug marketed by Monsanto and Pfizer, has raised investor concerns about whether Vioxx's sales will prove strong enough to offset the pressure Merck will experience from a series of patent expirations starting in 2000. Merck does face challenges, but it's rare that investors have been able to buy its shares at a P/E roughly equal to that of the overall market.
Last week, Merck was off 5 3/8 to 70 3/8 ; Pfizer fell 12 to 115; Lilly declined 7/8 to 73 5/8 , and Warner-Lambert dropped 1/16 to 67 13/16.
-- Amazon.com, eBay and America Online grabbed the headlines last week when they reported results that beat Wall Street expectations. But last week's big, really big story in the Internet "space" involved the newly public Priceline.com, whose shares soared 74 3/8 to a record close Friday of 162 3/8 after rising 24 9/16 during that session.
Priceline, which allows online users to bid for odd-lot airline tickets, hotel rooms and other items, now has a stunning market value of $29 billion, more than the combined market value of the three major U.S. airlines, AMR, UAL and Delta Air Lines. Priceline, which went public in late March at 16, rose sharply after announcing its first daily sale of $1 million in airline tickets and after Henry Blodget, the Internet analyst at Merrill Lynch, began coverage of the stock with an "accumulate" rating, calling Priceline one of the "big ideas" in the Internet so far.
The bullish argument is that Priceline will open up a whole new avenue for shopping by allowing consumers to bid for items and services rather than having to accept a take-it or leave-it proposition from sellers. Blodget said Priceline could post $300 million in revenues next year and potentially earn $2 a share in 2003. Priceline therefore is being valued at almost 100 times next year's revenues and at over 80 times possible 2003 profits.
Skeptics wonder whether the potential market for Priceline will ever get large enough to justify its valuation. The company has been so eager to generate sales that it has been willing to subsidize airline ticket sales by making up the difference between a customer's bid and the airline's offer.
One reason Priceline commands such a high valuation is a relatively tiny float. The company sold 10 million shares in March, a fraction of the total of 180 million outstanding.
Airlines, ironically, could be big beneficiaries of Priceline's success if sales through the Priceline network enable them to improve their yields by putting more passengers on flights without crimping their regular pricing structure. Delta has a direct stake in Priceline through warrants that now are worth $3 billion, or over $20 per Delta share. Delta fell 3 1/8 to 63 7/16 last week, while AMR dropped 2 to 69 13/16 and UAL also was off 2, to 80 3/4.
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Reversal of Fortune
-- Helped by a sharp rally in crude prices, long-suffering oil stocks
shined in April, while drug issues, formerly highflyers, suffered. The
oils rose 14% in April and are up 19% this year, while the drugs fell
9% in April and are off 5% for the year. As the table shows, the big
oils now trade at comparable price/earnings ratios to most of the
major drug stocks. Time to switch back into drugs?
OIL STOCKS
Company Price* '99 P/E**
Exxon 83 31
BP Amoco 113 30
Chevron 100 29
Texaco 63 27
Royal Dutch 59 30
DRUG STOCKS
Company Price* '99 P/E**
Merck 70 1/2 29
Pfizer 115 47
Eli Lilly 74 32
Warner Lambert 67 1/2 28
Bristol-Myers 64 31
* Friday prices
** Based on estimated 1999 profits
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VITAL SIGNS
FRIDAY'S WEEK'S WEEK'S
CLOSE CHANGE %CHG.
DJ Industrials 10789.04 + 99.37 +.93
DJ Transportation 3647.29 + 57.61 +1.60
DJ Utilities 311.55 + 10.28 +3.41
DJ 65 Stocks 3270.37 + 48.00 +1.49
DJ Global-US 1266.31 - 20.75 -1.61
NYSE Comp. 634.30 - 5.00 - .78
Amex Comp. 776.97 + 6.61 + .86
S&P 500 1335.18 - 21.67 -1.60
S&P MidCap 394.59 + 4.69 +1.20
S&P SmallCap 171.62 + .97 + .57
Nasdaq 2542.85 - 47.84 -1.85
Value Line (arith.) 985.62 + 12.65 +1.30
Russell 2000 432.81 + 1.08 + .25
Wilshire 5000 12259.36 -135.10 -1.09
NYSE
Advances 1,991 2,232
Declines 1,392 1,150
Unchanged 304 317
New Highs 235 252
New Lows 98 104
Av Daily Vol (mil) 1,082.1 1,141.7
Dollar
(Finex spot index) 101.00 100.87
T-Bond (CBT nearby futures) 120-06 120-31
Crude Oil
(NYM light sweet crude) 18.66 17.94
Inflation KR-CRB
(Futures Price Index) 192.38 189.71
Gold (CMX nearby futures) 286.80 283.60
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