Consumer Issues Lead the Pack--but Will It Last?
Summertime, and the living is easy--except, of course, if you’re trying to figure out how to make a quick buck in the stock market.
Wall Street has been exhibiting more than even its usual share of angst and confusion in recent weeks. The Dow Jones industrial average, at 3,386.77 on Friday, keeps finding the strength to hit new highs, but little else follows.
Most troubling is the herky-jerky movement of many key stock groups.
Through April, it seemed pretty clear to many investors that you wanted to own auto, chemical, lumber and other industrial stocks that would benefit from the economic recovery.
The stocks to sell, meanwhile, were the biotech, drug and food issues that were fading as investor favorites, after leading the market for the last few years (or in the case of some drug and food stocks, for the last eight years).
So far in May, however, Wall Street seems much less sure of which stock groups to cleave and which to leave:
* The rally in many industrial issues has stalled, the Dow index’s gains notwithstanding. Chemical king Du Pont, for example, shot up from $46.625 at year’s end to $54.25 by the end of April. But the stock has gone nowhere since, closing Friday at $52.50.
Lumber giant Georgia-Pacific, which soared from $53.625 to $67.125 between Jan. 1 and April 30, has since pulled back to $64.875.
* Biotech stocks, which were massacred in the first four months of the year as investor optimism about the industry evaporated, have staged a comeback. Immunex, for example, has risen to $31 from $26 on April 30. It traded at $59.25 on Jan. 1.
And Merck, the biggest name in drugs, zoomed $4.625 on Friday alone, closing at $152.625--up from $145 at the end of April. (Merck stock will split 3 for 1 Tuesday, and some investors apparently are betting that the stock will rocket after the split--hence Friday’s buying.)
If you could count on this change in market sentiment carrying through the summer, the obvious decision would be to stay away from the industrial stocks, and buy the drugs and other beaten-down consumer stocks. But some Wall Streeters say that would be a costly mistake.
So long as the recovery continues, any pullback in industrial stocks should be used as an opportunity to buy, says William Raftery, a technical analyst at Smith Barney, Harris Upham & Co. in New York.
He argues that the market is “probably facing one of its most crucial moments of the last 10 years.” Investors who may have been on the verge of committing to industrial stocks for the recovery have been confused by the market’s about-face this month, and have stepped away, Raftery says.
But he believes that those investors will return to industrial issues with a vengeance as new signs emerge that the recession is history.
Raftery and other like-minded bulls figure it this way: If the recent shift away from industrials and back toward consumer stocks were the start of something big, trading volume should be rocketing as investors leap off one bandwagon and jump aboard the other.
Instead, New York Stock Exchange volume has been in a steady downtrend since late April. Volume hit almost 240 million shares on April 23, but since then only one trading day has even exceeded 210 million shares. Friday’s volume totaled just 146.6 million shares, third slowest of the year, as traders left early for the long holiday weekend.
Raftery argues that investors are showing the same kind of hesitation about industrial stocks that they showed toward drug and food stocks in the early 1980s--just before those groups began their long climb skyward.
In the early ‘80s, investors were conditioned to expect rising inflation, rising commodity prices and a strong dollar, because that was the story of the ‘70s. All of those trends were bad for consumer stocks, slicing into their profit margins here and abroad.
Once those trends reversed, however, the consumer companies were positioned to reap windfall profits. Yet for a long time into the ‘80s, investors had a tough time believing that the declines in inflation and the dollar were for real--even as drug and food company profits ballooned and the stocks surged.
This time around, investors can’t fathom how industrial companies will make much money in a slow-growth economy, Raftery says. Noting the dramatic streamlining of many industrial firms since 1989, he’s betting that the doubters will be proved wrong in a big way.
Paper, lumber and chemical companies, in particular, “will be the leaders going into 1993,” Raftery predicts.
Thomas Broadus, who manages the $1.6-billion T. Rowe Price Equity Income fund in Baltimore, is keeping his bets on such industrial titans as IBM and Ford Motor.
Despite IBM’s deep-rooted problems, Broadus says, “If you’re thinking about the next year, they’re going to be helped by a new (computer) product cycle and by the economy.” The stock, at $91.75 now, has rallied from a low of $81.625 in April, one of the few major industrial issues to buck the group’s general stall.
Likewise, Ford’s recovery continues to impress Broadus. “Ford ($44.125 Friday, versus $28 at year’s end) has done everything right for the last 10 years, while General Motors has done everything wrong. I think you’ve got to go with the track record” and buy Ford today.
At the Gintel Fund in Greenwich, Conn., manager Robert Gintel has tied his $82-million mutual fund’s success to one major industrial stock: Phoenix-based copper producer Phelps Dodge. It makes up 25% of the fund’s assets.
Why such a huge bet? As the global economy recovers, copper will be in greater demand for housing, autos and many other products, Gintel says.
Phelps is one of the world’s lowest-cost producers of copper. In 1989, the last year of significant economic growth, the company earned $14.24 a share.
This year, Phelps should earn about $8.25 a share on revenue of $2.5 billion. Gintel expects that a rising economy over the next few years will mean earnings well above Phelps’ 1989 peak, thanks to the company’s cost-cutting. He sees the stock, at $89.75 a share now, topping $100 and then some.
Gintel can’t see how this bet could go wrong. He notes that Phelps management provided another vote of confidence in the firm’s prospects this month by raising the dividend on the stock 10%, to $3.30 a share annually.
At the current stock price, Phelps’ dividend alone yields 3.7% a year to shareholders. That’s better than the 3.5% yield of the average money market fund, as tracked by IBC/Donoghue’s Money Fund Report newsletter.
Indeed, dividends provide the same kind of incentive for such industrial issues as IBM and Ford. IBM’s dividend yield now is 5.7%; Ford’s is 3.6%. If Wall Street takes a few more months to fall back in love with these stocks, you’re being paid to wait.
