Crystal Ball Shows What’s Hot, What’s Not for Rest of ’93
The rich just kept getting richer on Wall Street in the second quarter, as many of the first quarter’s most popular stock groups continued to soar through the spring. But time may be running out on some of the first-half leaders, market pros warn.
Shares of energy, gold mining, semiconductor, auto and machinery companies were among the second quarter’s star performers, based on moves of 88 stock industry groups tracked by Standard & Poor’s Corp. The otherwise eclectic mix of winners was mostly a bet on a stronger economy--which may now be fading again, depending on which economic stat you choose to follow.
While the average stock in the S&P; 500 index slipped 0.3% in the quarter, gold mining stocks rocketed 35.6% as a group, after jumping 14.5% in the first quarter.
The gold stocks accurately foreshadowed a surge in the metal’s price, which began the second quarter at $337.60 an ounce and finished at $378.40 on Wednesday--then tacked on another $9 in wild buying Thursday. Many investors aren’t exactly sure what the frenzy over gold is about, but any time the world seeks safety in the metal, fear usually is the common denominator.
Other big second-quarter gainers included machinery stocks, up 13.7% after a 14.1% first-quarter rise (thanks largely to a big move in revitalized Caterpillar, the bulldozer king); semiconductor stocks, up 12% as Motorola and other computer chip makers rode the surge in personal computer sales, and auto stocks, up 11.6% as otherwise tightfisted consumers continued to shop auto showrooms (especially the domestic Big Three’s auto showrooms).
There also were a few surprises on the second-quarter winner’s list. Downtrodden hospital stocks were the No. 2 stock group, up 29.2% on average, but that was mostly because of a takeover offer that boosted shares of hospital chain Galen Health Care.
Also, the toy group--which consists of just two stocks, Mattel and Hasbro--shot up 18.5%. Both of the companies have been spectacular growth stocks since 1990, as the endless global boom in kids has translated into an endless global boom in toy sales. Yet Mattel stock, at $24.375 now, still sells for just 14 times its estimated earnings of $1.75 a share this year--far cheaper than many so-called growth stocks.
Which stock groups offer the best fishing in the second half of this year? Here’s a look at some key market sectors and their prospects:
* Gold/gold stocks. The assumption on Wall Street is that gold’s hot streak is about rising inflation, since gold is the traditional inflation hedge. And because the conventional wisdom is that inflation fears will dissipate in the second half as the economy stays sluggish, a lot of market pros believe gold and gold mining stocks are vulnerable to a sharp selloff after their first-half surge.
Wrong, say gold fans. What’s driving gold is a dramatic change in the supply and demand equation for the metal. After 10 years of moving out of gold, investors worldwide suddenly want in again, often for very different reasons.
Larry Heim, a longtime gold bug at Heim Investments in Portland, Ore., says the underlying emotion fueling gold is fear, but not necessarily of inflation. Wild fluctuations in foreign currencies, growing national budget deficits worldwide, widespread social unrest and sky-high stock markets all are putting investors increasingly on edge, Heim says.
A shift this dramatic can’t possibly be finished in a mere six months, gold bulls say. “It’s the flow of money into an investment that causes it to move,” notes Robert McCurtain, a technical analyst at Reid, Thunberg & Co. in Westport, Conn. “Gold is going up because somebody’s buying it.”
* Economy-sensitive stocks. Manufacturing, especially of heavy industrial stuff like steel, machinery and other big-ticket goods, has newfound respect on Wall Street. Companies like Caterpillar, farm machinery giant Deere and industrial fastener maker Illinois Tool Works went through their own private restructuring hells in the 1980s. Now they’re expected to wring great profits from even small increases in sales.
But the stocks have been Wall Street darlings for much of the last year, while the profits haven’t quite begun to flow as expected. “Conceptually, I like the machinery stocks,” says Eric Miller, investment strategist at DLJ Securities in New York. “But Caterpillar stock did in the second quarter what it should do in the course of a year.” Cat stock, now $74, started the second quarter at $59.
One solution: Wait for a pullback in the industrials if you want to buy. But make sure you buy on the pullbacks. These are the stocks for the ‘90s.
Another idea: Forget the naysaying. A contrarian on Wall Street would buy what other people don’t believe in. “If you ask, ‘What’s the one thing that no one believes in?’ it’s economic growth in the second half of this year,” notes Ken Heebner, money manager at CGM Capital in Boston. He owns Chrysler, Ford, Bethlehem Steel, USAir and United Airlines’ parent, UAL. If the economy surprises, he says, “these stocks are going to be like rockets.”
* Energy stocks. This sector has been red-hot as the price of natural gas has zoomed and held up. But with oil prices falling rapidly on fears of a summer supply glut, many Wall Streeters worry that energy stocks could be hit by severe profit taking soon. In New York trading, oil sank 40 cents a barrel on Thursday, to $18.45, on worries that Iraqi oil will begin to spill on the world market again.
Long-term, though, this is another market sector with great promise. Joel Dobberpuhl, manager of the AIM Value Fund in Houston, says Apache Corp., Enron Corp. and Sonat are excellent ways to play the new optimism about the future of natural gas. They’d be even better ways to play if the stocks fall a bit.
* Technology/telecommunications stocks. Those companies with proprietary technology--chip makers, telecommunications firms, software leaders--remain high on the must-own lists of many money managers.
“I’m staying with names like National Semiconductor, Novell Corp. and Hewlett-Packard,” says J. Richard Walton, strategist at Wertheim Schroder Investment Services in New York. Technology is a play on the increasing global need to boost productivity. But “what you have to look for today is innovative technology,” he says--not me-too products or technology without a true edge.
Stock Group Trends
Here are the biggest winners and losers among 88 stock industry groups in the second quarter ended Wednesday. WINNERS
Group 2nd-qtr. change Gold +35.6% Hospitals +29.2 Toys +18.5 Machinery +13.7 Long-dis. tele. +13.6 Semiconductors +12.0 Oil/gas drilling +11.9 Autos +11.6 Conglomerates +11.1 Home builders +10.0
LOSERS
Group 2nd-qtr. change Shoes -23.8% Tobacco -19.8 Retail: general -13.8 Apparel -13.3 Housewares -11.6 Box/bag makers -10.8 Manuf. homes -10.3 Truckers -10.1 Major banks -9.7 S&Ls; -9.2
Source: Smith Barney, Harris Upham & Co., using S&P; indexes
