Basic industrials, long overlooked, surge anew

The steels, autos, tires, chemicals, and other cyclical stock issues popped up like crocuses on Wall Street last week. "These stocks have been overlooked for the past two years," notes Bruce Rehr, the chairman of the Penn Square Mutual Fund, a $160 million fund that invests primarily in such stocks.

"It's been a long time since investors have seen these issues bloom," agrees Ralph Acampora, vice-president for technical research at Kidder, Peabody & Co. However, Mr. Acampora notes, "these issues have been under accumulation for some time -- at least over the last six months."

Investors have shied away from the stocks, says Mr. Rehr, because of the feeling that the companies would be vulnerable to federal controls or regulations. Now, he notes, "there is more interest in them because of less talk about government regulations and more liberal depreciation allowances. The big beneficiaries of any tax relief will be the larger companies." At the same time, he comments, "these companies have been undervalued for years. They have a low price-to-earnings multiple, high book value, and high yield. Investors are getting a bargain here."

To Mr. Acampora, the portfolio shift has a lot to do with the big profits that investors made in the oil stocks over the last two years. "Now," he explains, "they are taking profits in the oils and reemploying them in the cyclicals. "It's just a natural part of the rotation."

And Robert Farrell, a vice-president at Merrill Lynch, Pierce, Fenner & Smith Inc., the big brokerage house, wrote recently that "the stage appears to be set for a better performance for such groups as the old nifty-fifty and many basic cyclicals." Mr. Farrell observed, "New government policies appear likely to help reverse the trends that made our industries less competitive in world markets during the 1970s. Futhermore, many traditional industries are streamlining --closing inefficient plants and selling unprofitable divisions."

However, not all investors are certain that the shift into the cyclicals is anything more than a slight turn in the market. Monte Gordon, director of research at the Dreyfus Corporation, says "the cyclicals are absorbing money, but they don't have the sense of leadership about them. They aren't acting like a lightning rod, drawing in money in unrestrained quantities." When the oil stocks and the high technology stocks were in vogue, Mr. Gordon observes, "the buying interest was unrelenting."

One of the reasons behind the buying in the auto stocks was a new buy recommendation on General Motors by Harvey Heinbach, vice-president at Merrill Lynch. Mr. Heinbach says of GM, "Its strong product and financial positions leave it well placed to weather the current storm.In our opinion the stock should be bought while the sales and production picture is still weak, and before investors begin focusing on 1982 recovery prospects."

Investors have also been favorably impressed with the steel industry by the upsurge in orders. According to Iron Age magazine, some major producers finished February "with order rates approaching 100 percent of capacity." One of the reasons for this upswing is the relatively low level of inventories.

When is less more?

When it's imported oil. The Department of Commerce reported last week that US oil imports were off 19.8 percent from 8.75 million barrels of oil per day in 1979 to 7.01 million barrels of oil per day in 1980. However, because of price increases, the total bill rose by 29 percent to $82 billion.

The stock market had its second best week since President Reagan was elected. For no particular reason stocks began rallying on Wednesday afternoon and continued through Friday. For the week, the Dow Jones industrial average picked up 38.49 points, closing at 974.58. Volume was relatively heavy.

Because of the heavy concentration of blue chip stocks in the Dow, the average performed better than the market as whole. Newton Zinder, a well-known analyst with E. F. Hutton, noted, "As even a novice chart reader can see, the blue chip index has clearly broken out on the upside of a lateral five-week trading range. . . ."

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