Tech, Industrial Stocks Await Sign of Upturn
Lots of people have been waiting for a selloff in high-tech and industrial stocks, for the chance to buy in cheaper. Well, you’re getting that selloff. But will you be brave enough to buy?
Last week, much of the optimism that fueled the January and February stock rally seemed to evaporate all at once. The catalyst was a string of announcements from major companies, such as IBM, 3M and Eastman Kodak, that first-quarter earnings would be weak.
Never mind that the news shouldn’t have been a surprise. (Does anyone remember that a war was going on?) To a growing number of nervous investors and traders, any company in a business that is even remotely affected by economic swings now is a candidate for sale--because the economy’s recovery from recession has turned suspect.
So between March 14 and last Thursday, computer stocks plunged 10%, on average. Right behind them were transportation stocks, such as Federal Express, off 9.4%; pollution control stocks, off 8.1%, and machine tool makers, down 8%.
Many of these groups led the market surge after the Persian Gulf War began in mid-January. Investors bought on the belief that the recession would end by summer and that corporate profits would begin to rebound.
Funny thing is, most investors probably still believe that the economic recovery will begin by summer. But more people are also beginning to understand that the recovery won’t be as neat and clean as had been hoped.
Case in point: Prudential Securities analyst Melissa Brown in New York suggests that some investors who have bought industrial stocks during the past year haven’t realized that “the quarterly earnings for this group have been just pathetic since mid-1989.” Maybe that’s beginning to sink in now, and it’s causing investors to wonder exactly how well the companies will fare when the economy rebounds, she says.
Looking at a group of 150 basic-industry companies, Brown says, the numbers go like this: In the third quarter of 1989, the group’s profits were flat with year-earlier levels. In the fourth quarter of 1989, profits plunged 48%. In the four quarters of 1990, the year-over-year group profit figures were, in order, -30%, -20%, -28%, -50%.
What about the first quarter of this year? Too early to tell, Brown says, “but it looks like they’ll be down by a fair amount.”
Whatever meager profits many industrial companies have made since 1989 have depended largely on their export business, because domestic business was slow even before last summer. Now, the industrial firms have another problem to worry about: slowing sales overseas.
“Our trading partners are following us into recession,” warns Abby Cohen, co-chair of investment policy at Goldman, Sachs & Co. in New York. “I think that investors and analysts both have been missing the ball on what’s going on outside the U.S.,” she says.
The importance of exports shows in U.S. gross national product numbers, Cohen says. In the early 1980s, less than 10% of our GNP was related to foreign trade. Now the figure is 16% and growing, she says.
So if exports now slow as foreign demand drops, and domestic consumption doesn’t come back as strong as Wall Street had expected, many industrial and technology companies could be in the profit doghouse well into this summer, even if the recession officially ends by then.
Does that mean the stocks will sell off further? Probably. But smart investors who’ve been itching to take a stake in these companies ought to be easing into the stocks as they go lower.
Remember, this is a group that Wall Street still believes has great potential for the 1990s. Short term, many of the investors in the stocks may decide that they’re too early. You can just about bet a month’s salary, though, that at the first sign of a bona fide business upturn this summer or by fall, these stocks will rocket again.
If you were hungry to buy a high-quality industrial or tech stock at $50 a month ago, and the price now is $40, think about how you’d react if that were a new car you’d always wanted instead of a stock.
Meanwhile, Back to Safety: As owners of basic-industry and tech stocks bail out, they’re herding back into the safety of steady-demand companies such as food packagers, utilities and drug stocks.
We’ve seen this pattern over and over again in recent years, as the stock market has lurched back and forth. There’s nothing more comforting to most investors than consistent earnings growth, and that’s what many companies in the food and health-care businesses, in particular, manage to provide.
Robert Kommerstad, whose $5.7-billion-asset Provident Investment Counsel in Pasadena has big holdings in such classic growth stocks as Home Depot, Wal-Mart Stores, Bristol Myers-Squibb and Eli Lilly, notes that “growth has got a much more respectable name to it these days,” as investors have turned their backs on more speculative investing concepts.
And looking out to summer and fall, Kommerstad says, there is a strong chance that classic growth stocks will become the only game in town, if profits at industrial companies continue to disappoint. “If you have a plodding, slow-growth economy, it’s the ideal setup for what we’re doing,” he says, not hiding his glee.
This week, the final week of the first quarter, those growth stocks could get a significant boost because more portfolio managers will want to show those names on their March 31 statements to clients. Likewise, as the sentiment against industrial stocks turns more hostile, more money managers will want to get those stocks out of their portfolios this week, before the quarter’s end.
Briefly: Was it just a coincidence that a long list of companies quickly followed IBM’s announcement last week about lousy first-quarter earnings? More likely that many of those companies figured that they might as well get it over with, under the cover of the general malaise that IBM’s report caused. “IBM did lead something of an open confessional,” says Goldman Sachs’ Cohen.
It used to be that companies with bad quarterly news would wait at least until the new quarter began to drop their bombs. But James Barrett, senior officer in Paine Webber’s investment policy group, says that with major firms’ sales and order information so computerized now--and thus easily available--management knows by now how the quarter will shape up, “and there’s no reason to hold it back.” . . .The Mexican stock market continues to surge to new highs. The Bolsa index of the 39 most active stocks jumped 25,622 points Friday, or 3.4%, to a record 788,732. The market is being driven in part by expectations that a potential North American free-trade pact would help many Mexican companies. But late Friday, state Democratic Party leaders meeting in Washington blasted President Bush’s trade pact proposal, arguing it would damage U.S. companies and also “perpetuate” exploitation of Mexican workers.
HERE WE GO AGAIN Once again, investors have decided that the cyclical industrial stocks they thought they had to own no longer are worth the risk. So money is flowing back to “safe” stocks, such as food and beverage companies. The 10 biggest gainers, and 10 biggest losers, among stock industry groups in the week ended last Thursday:
What They’re Selling
Pct. change, Stock group March 14-21 Computer systems -10.0% Transportation (misc.) -9.4% Pollution control -8.1% Machine tools -8.0% Shoemakers -7.7% Semiconductors -7.1% Machinery (diversified) -6.4% Aluminum -6.2% Automakers -6.2% Hotels/motels -6.0% S&P; 500 index -1.9%
What They’re Buying
Pct. change, Stock group March 14-21 Savings & loan cos. +4.2% Foodmakers +3.6% Tobacco +2.2% Alcoholic beverages +2.1% Genl. merch. stores +1.1% Telephone utilities +1.1% Soft drinks +1.0% Grocery stores +0.8% Broadcasters +0.7% Electric utilities +0.7% S&P; 500 index -1.9%
Source: Smith Barney, Harris Upham & Co., using S&P; group indexes
