The Right Sectors Sizzle; The Wrong Sectors Sink
BOSTON — BOING ... BOING ... BOING ..."
Investors should be forgiven for thinking Wall Street today exists not for stock profit, but for imitating pogo sticks.
The Dow Jones Industrial Average for two months has bounced within a 400 point range. With corporate earnings skidding and East Asian finance careening, the ups and downs in stock prices will probably persist for several weeks more, say securities analysts.
But a focus on industry sectors can uncover some new opportunities.
* Retailers have soared in recent months on the heels of industry consolidation and cheaper prices on Asian goods. Consumers are also spending more as wages stabilize.
* Health-care companies are also on a roll. Because of steady demand, the companies tend to fall less in a declining market. Moreover, demographic trends favor health-care companies as baby boomers age.
But two other sectors - technology and oil - may offer even greater promise as long as investors park their money for the long term, say analysts.
Prices of high-tech shares swing fast and furiously, but analysts say that high tech is where the growth is, and funds that successfully track it will benefit investors.
Technology stocks rebounded recently after several tech companies warned early in June that economic turmoil in East Asia had damaged profits.
After the bad news passed through the market, money managers snapped up appealing stocks at cheaper prices.
"Most investors are concluding that the worst is behind them," says Dave Powers, senior technology analyst at Edward Jones in St. Louis.
Without further turmoil in Asia, the sector should gain strength through the year. "We have an overweight recommendation on high tech," says Sam Stovall, sector strategist at Standard & Poor's in New York.
By October, high-tech shares should rise as companies sell off inventory, East Asia stabilizes, and consumers snap up new software, he says.
But other analysts see only a selective high-tech recovery. "There has been a nice bounce back, but the market in high-tech stocks is by no means monolithic," says Mark D'Annolfo, an analyst at Adams, Harkness & Hill in Boston.
Companies that help firms use information technology (IT) enjoy a strong demand, with their pre-tax earnings rising at an annual clip of more than 15 percent, says Mr. D'Annolfo.
The persistent trend in outsourcing, the need to prevent sweeping computer glitches by the year 2000, and the imperative for companies to absorb constant changes in technology promise continued growth, say analysts.
Moreover, IT service firms are largely insulated from Asian problems. They "are a safer tech play because the bulk of their revenues are recurring," says Mr. Powers.
Two promising leaders in IT services are Cambridge Technology Partners and Sapient Corp., say analysts.
Stocks involved in the Internet also promise some spark - and they also threaten a possible burn. "We think the whole Internet phenomenon will be a key driver for industry over the next 10 to 20 years," says Powers.
The problem is, Internet stocks sell at sky-high prices. The price of a share in America Online goes for more than 320 times earnings compared with an average of about 23 times earnings for many companies trading on Wall Street.
Still, on June 30, investment house Warburg Dillon Read issued a "strong buy" rating on the stock, calling it the best investment in the online world.
"Internet executives are still searching for a business model, with a lot of companies offering promise but not making a lot of money," says D'Annolfo.
Investors in oil and oil-service stocks can avoid many of the short-term ups and downs that dog other industries. The stock prices have fallen down a sinkhole, but some analysts think many of these stocks can't go much lower. They are also selling at mouth-watering valuations.
The price of oil recently hit a 10-year low, below $12 a barrel, despite efforts at revival by the Organization of Petroleum Exporting Countries. The cartel last month agreed to cut oil production by 3 percent, but the price still did not edge above $15 per barrel. Last year, oil averaged about $17 per barrel.
Plunging oil prices - driven down by shrinking demand in Asia - have depressed prices across the oil industry. After rising 47.7 percent last year, stock prices for drilling and equipment companies this year crashed 19.6 percent, according to Standard & Poor's.
Indeed, a three-month lease on a drilling rig recently sold for 40 percent less than its prior cost, says George Gaspar, managing director of petroleum research at Robert W. Baird & Co. in Milwaukee. "We are recommending investors stay away from the oil sector," says analyst Stovall.
But some oil analysts say now is the time to snap up oil shares. The price of oil in recent decades has rarely stayed below $18 for long. Moreover, a recovery in Asia should bring a sharp rebound of oil demand and price.
"This sector offers lots of value," says Mr. Gaspar: "now is the time to wade in." The stock prices may not have hit bottom, but if not, they're probably not far from it, say analysts.