The Big Cap - Tough times for big cap leaders
By Don Scott, CBS MarketWatch
Last Update: 4:42 PM ET May 24, 1999
NEW YORK (CBS.MW) – Big Cap investors are facing some tough
choices with some market leaders like Merck, Pfizer, Intel, Microsoft,
and Dell trading sideways.
Fritz Reynolds, who runs the Reynolds Blue Chip
Fund and the Reynolds Opportunity Fund likes
Merck (MRK: news, msgs) and Pfizer (PFE: news,
msgs). Merck's fallen (to 69 7/8 on Monday) from
its March 19 high of 87 3/8. And Pfizer closed at
106 1/4, down from a recent high just above 150.
"The fundamentals really haven't changed much,"
says Reynolds, "Health is still 14 percent of the
economy and the demographics are great for this
area as the population ages and the demand for
quality drugs and medical care is still a very high
priority."
John Murphy, who closely follows a wide range of
market charts at his web site, murphymorris.com,
notes that the drug index is down almost 15 percent
from its April high and testing its 200-day moving
average. He believes Friday closes are important
and he views the price action at the end of last
week as discouraging.
"They may even go a little bit lower," Murphy cautions, "but we are in an
area of some support and it's one of the groups that we think are very
oversold and it might be worth nibbling a little bit, especially if investors
turn a little defensive here, and rotate back into the drug stocks."
Big tech
Murphy's also keeping a close eye on the big tech bellwethers, which
have been coming down into "very, very important support levels, where if
they hold, this may represent a great buying opportunity and everything is
fine." But Murphy says if they break those support levels, "that would
indicate that there's something more serious going on to the downside."
Murphy says Dell (DELL: news, msgs), Microsoft (MSFT: news, msgs),
and Intel (INTC: news, msgs), are all approaching their 200-day moving
averages. That's very is significant because, as Murphy notes, "If it's just
a correction, they tend to bounce off the 200-day moving average." Take
Dell, for example. The 200-day moving average is around 36 and the
stock's about a point away from that going into the week. He also finds it
unsettling that Dell is selling off on heavy volume.
But Murphy says that "if a person is fundamentally bullish on these stocks,
when they're looking to buy weakness, you could certainly make a case
for nibbling in these areas."
And that's just what Reynolds says to do when it comes to Microsoft.
He's owned the company since it went public back in the 80s and figures
he's bought it on some 400 of these price pullbacks over the last 13
years.
"Microsoft makes a lot of sense long term," says Reynolds, "The company
continues to be well-positioned in dominant growth areas long term and
they're doing a lot of new and exciting things, taking positions in smaller
companies or joint ventures, like with AT&T, which just winds up putting
them in a stronger competitive position."
Getting cheaper?
Microsoft is a core position for Reynolds, and he wryly notes that one of
the nicer aspects to owning high quality growth companies is that "they
just keep getting cheaper as each day, week, month, quarter, and year
goes by, as long as their earnings keep growing, even if the price stays
flat."
Reynolds' whole philosophy is based on owning well-managed,
worldwide, leading companies with great products. And he doesn't think
much of the market's swing to small- and mid-cap names. "I don't have to
go down into the small guys that compete against these big companies."
Reynolds thinks that come summer, portfolio managers will start focusing
on earnings estimates for the year 2000, and that will bolster stocks going
forward. "The market's gotten a little wobbly in here," he says, "but
basically I think we're just in the middle of creating another buying
opportunity for a lot of these stocks and I feel good about the outlook for
these companies long-term."
But Murphy is more cautious. He thinks we're seeing a rotation out of big
cap stocks and into small and mid-caps. "The bottom line is: it's
somewhat negative on a short-term basis for the major averages like the
Dow, the S&P and the NASDAQ, because they've been driven higher
by these big tech stocks, and that seems to be where the money's coming
out of right now."
Last June, Murphy called last summer's smash up just before it happened.
Does he see another summer pull back? "Yes, but I think it will be
probably more the S & P and the NASDAQ, but I think it will be
deceiving and the small stocks may be going into what some have called
"a stealth bull market." A lot of these oversold areas like the utilities, the
REITS and maybe even the energy stocks, so those sectors will probably
do okay." |
