Many Betting on Big Comeback for Industrial Stocks
Is it crazy to think the recession will end soon?
Maybe. But that isn’t stopping many investors from pouring their dollars into the depressed shares of basic industry companies--stocks such as aluminum giant Alcoa, machinery maker Ingersoll-Rand and chemical firm W. R. Grace.
Some of the buyers see demand for those companies’ goods rebounding by midyear, after nearly a year of sluggish growth. Other investors figure it this way: Even if the recession drags on longer than expected, these stocks are cheap enough to warrant buying now and waiting. The bulls expect many industrial companies to boom in this decade, especially as developing countries overseas boost capital spending.
For the average investor who wants to join in that bet, some stock mutual funds fit the bill nicely. The accompanying table lists eight funds that have major stakes in industrial stocks.
Most of these funds have championed the downtrodden industrial group for quite a while--they aren’t newcomers to the stocks, and they aren’t likely to abandon them any time soon.
Of course, industrial issues aren’t all that these funds own. Because many of them target stocks selling for low price-to-earnings ratios, they often have large holdings in such stock groups as banks, insurance companies and oil companies, as well as industrial stocks.
That’s why you have to look closely at a portfolio before you buy. Some details on a few of the funds:
* The $24-million AMA Classic Growth fund in Blue Bell, Pa., has 53% of its assets in three industry groups: basic materials (including Arco Chemical, Bethlehem Steel and Inland Steel), capital goods (Caterpillar, Deere and others) and metals (including Amax, Alcoa and Inco). Reflecting the poor performance of those stocks since 1987, the fund’s total return in the five years ended Dec. 31 was just 26.9%, half the gain of the average stock fund. But if you believe in “buying when they’re down,” this fund offers a way to make a big bet on industrials.
* The Franklin Equity fund in San Mateo, Calif., with $398 million in assets, has about one-third of its portfolio in basic industry stocks, including such names as Dow Chemical, Illinois Tool Works and copper giant Phelps Dodge. Steven Orpurt, co-manager, says the fund follows a basic “Graham and Dodd” investing philosophy, which stresses companies whose stocks sell for low prices relative to earnings per share. “We look for the most earnings per share at the best price,” Orpurt says simply.
* The Pioneer III fund in Boston has about a quarter of the portfolio in basic-industry stocks. Pioneer also is a way to play mostly small to mid-size names in that group, because the fund limits its investments to companies whose market capitalization (stock price times number of shares outstanding) is under $750 million. Some of the names in the portfolio are auto parts firm Arvin Industries, industrial signals company Federal Signal and lumber giant Potlatch.
* Fidelity’s Select funds let you invest in stocks of individual basic industries, including chemicals, industrial materials and paper. All they buy are the stocks in their specific industries. So the risk is higher in these funds, but so is the potential reward if you guess right.
Before you jump into any of these funds, keep in mind that industrial stocks could plunge again if the optimists are wrong and the recession stretches well into the latter part of this year. If you’re making a commitment to industrial companies today, it ought to be a long-term commitment. Many of these stocks are cheap, but that’s been the story for several years. Long-term, they look like a solid bet, but traders could get murdered this year.
January Barometer a Good Omen?The stock market finished January with a gain, and that’s good news for believers in the “January barometer.”
Historically, the market’s direction in January--as measured by the Standard & Poor’s 500-stock index--has often foretold the direction for the year. An up January has mostly meant an up year, and a down January has mostly meant a down year.
That’s been true in 36 of the 41 years since 1949, for an 88% batting average. Market historian Yale Hirsch, who publishes the Stock Trader’s Almanac from Old Tappan, N.J., says “no other indicator has predicted the annual course of the market with such accuracy.”
The S&P; 500 rose 4.2% in January. In the previous three years that the S&P; rose about 4% for the month--1971, 1979 and 1988--the gain for the year was between 10.8% and 12.4%.
Why does January predict the year so well? Theories abound, but the most frequently mentioned is that investors make their bets in January based on government and Federal Reserve policies set out at the start of the year. More often than not, it’s pretty clear in January where interest rates and the economy overall are headed, at least in the first half.
One troubling fact, however, is that the January barometer was flat-out wrong in 1966, 1968 and 1982--the first two because of the Vietnam War, and the third because of recession. The market was up in January, 1966, but plunged for the year. In 1968, the S&P; tumbled in January but gained for the year. In 1982, January was a loser but the year was a winner.
If the barometer was off in years affected dramatically by war or recession, what happens in a year when we have both?
Briefly: For the gutsiest speculators, the Brazilian stock market may warrant a look. The market’s Bovespa stock index rocketed 89% in January, to close the month at 47,480. Brazilian stocks are being driven higher by a drop in interest rates and expectations that the government plans to rejuvenate capital investment in the country in a major way--including, perhaps, allowing foreigners to buy Brazilian shares directly.
Investment now can only be done through investment funds, such as the Brazil Fund, which trades on the New York Stock Exchange. It closed at $8.875 a share on Thursday, up 34% for the month. . . .
Junk bonds followed stocks higher in January: First Boston Corp.’s index of high-yield bonds posted a total return of 2.7% for the month. The gain suggests that investors are betting that the worst is behind the junk bond market, even though the economy remains mired in recession and even though more bankruptcies of debt-laden companies are virtually certain this year. Of the 350 bonds in its index, First Boston said about 260 rose in price for the month, while about 70 fell in price.
In 1990, the First Boston index posted a negative total return of 6.4%.
BETTING ON BASIC INDUSTRY These mutual funds have major stakes in basic-industry stocks--such as metals, paper and chemicals--that could benefit significantly from an economic recovery.
Minimum Total return: Fund/phone number investment 5 yrs. Yr.-to-date* AMA Classic Growth $1,000 +26.9% +3.9% 800-262-3863 Fidel. Sel. Chemical $1,000 +98.2% +6.7% Fidel. Sel. Indus. Mat. $1,000 +17.0% +3.6% Fidel. Sel. Paper $1,000 +17.8% +8.3% 800-544-8888 Franklin Equity $100 +58.5% +10.3% 800-342-5236 Pioneer III $1,000 +39.6% +5.7% 800-225-6292 T. Rowe Price New Era $2,500 +71.0% +1.7% 800-638-5660 Wellington $3,000 +66.2% +3.4% 800-662-7447 Average general stock fund +54.5% +5.8%
* through Thursday close
Source: Funds listed, Lipper Analytical Services
