TRENDS FOR ’94
A look at some of the new and ongoing market trends that could affect your investment portfolio in 1994.
Can Last Year’s Winners Repeat? For investors who like to bet on stock themes, the big winners in 1993 were companies whose fortunes rise with a stronger economy. With U.S. growth continuing to accelerate, the economy-sensitive groups remain the best bets for 1994, many Wall Street pros say--though they allow for the possibility of some profit-taking in these groups some time in the first half.
Last year’s top stock group, according to Standard & Poor’s Corp.’s rankings of 87 industry groups: hotels and motels. The average lodging stock shot up 84.3% for the year. Big winners included Hilton Hotels, up 40% to $60.75 as of Friday; Promus Cos. (which owns Harrah’s hotels), up 149% for the year; and United Inns, a Holiday Inns franchisee, which surged 232% to $7.875.
The lodging industry has finally begun to bounce back nationwide, as demand has slowly absorbed the glut of rooms built in the 1980s. “Hotel construction has finally tapered off while room demand continues to improve, boosting occupancy rates across all geographic, service and location sectors,” Mark Manson, lodging analyst at DLJ Securities in New York, said in a recent report. “This trend paves the way for higher room rates and improved profits.”
It also doesn’t hurt that major hotel companies such as Hilton and Promus are heavily involved in gaming--a business that remains red hot, and one in which the major players are likely to grab market share as weaker upstarts (such as the horde of small riverboat gaming enterprises) eventually fall by the wayside.
The second-best stock group of 1993: gold mining companies, up 81.3% on average. Though inflation remains well under control, gold’s price jumped 17% last year, to $390.80 an ounce by Dec. 31, as some investors sought a hedge in case the inflation outlook deteriorates. Rising jewelry demand for gold in the Third World also boosted the metal. Because gold mining stocks have sharply outperformed bullion’s price, however, some analysts say the better bet now may be the metal rather than the stocks.
Among industrial groups, auto stocks rode surprisingly strong sales to new highs, semiconductor companies cashed in on the continuing computer sales boom, and diversified machinery companies (including Caterpillar and Deere) continually stunned investors with the magnitude of their earnings turnarounds after several dismal years.
William Dodge, investment strategist at Dean Witter Reynolds in New York, says U.S. industrial stocks still have life left, in part because so many foreign manufacturers are looking to locate plants on U.S. soil--which should boost demand for machinery and other capital goods. “The domestic capital spending boom spurred by the ‘Coming to America’ of BMW, Volkswagen, Hitachi, Honda and Mercedes-Benz favors a broad range of producers of nuts and bolts, pumps and valves, compressors and electric switches,” Dodge says. His favorite industrials include Emerson Electric ($60.25 now), General Electric ($104.875) and Ingersoll-Rand ($38.25).
What about 1993’s losers--primarily health care and consumer products stocks? Bargain hunters may think they’re having a field day here, but many Wall Streeters remain cautious about the stocks, given the pending health care reform debate and consumers’ unwillingness to pay brand name prices these days.
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Are Growth Stocks Still Vulnerable? Many high-flying growth stocks in the telecommunications and high-technology fields were hit by sharp selloffs in the fourth quarter. Greg Smith, investment strategist at Prudential Securities in New York, warns that the turmoil may not be over for those growth issues.
Smith figures it this way: Investors were willing to pay 50 to 100 times annual earnings per share for promising young growth companies in 1993 because the number of great earnings stories in the market was relatively small. Sliding interest rates for much of the year also lifted the upper range that investors were willing to pay for these stocks, because low interest rates mean investors have fewer decent alternatives.
But as the economy improves this year, Smith says, more companies will show significant earnings gains. Hence, “the idea of the relative scarcity of very high-growth companies’ earnings is less compelling,” he says. That means the stocks’ stratospheric price-to-earnings (P-E) ratios will come down, Smith argues. “In such a period, high-growth companies can beat investors’ earnings expectations and still watch their stocks go down because of shrinking valuations,” he says.
The moral: Be wary of paying excessively high P-Es, no matter how promising a company’s prospects. (FYI: The current P-E on the average big name stock, based on estimated 1993 earnings, is in the 17-to-20 range, depending on whose estimates you believe.)
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Watch Inflation--Not Commodity Prices: Prices of many basic raw materials--from lumber to cotton to sugar--surged last year, as demand (or perceived demand) outstripped supplies. Yet inflation at the consumer level remained under 3%. What gives?
Suresh Bhirud, market strategist at Bhirud Associates in Stamford, Conn., argues that competitive pressures are forcing many companies to eat commodity price increases rather than pass them on in the form of higher product prices. In part, that is what the powerful push to improve corporate efficiency has been preparing companies to do since the late 1980s, he notes. And that efficiency drive now has extended from manufacturers to retailers, who are locked in a heated battle for consumers’ dollars.
While prices of many commodities have jumped, Bhirud says, food and drink producers such as General Mills and Anheuser-Busch are actually cutting product prices, not raising them. Likewise, he notes, telecommunications companies are battling for market share by discounting like mad, and electronics retailers and home-furnishing retailers are doing the same. The bottom line, says Bhirud, is that investors shouldn’t assume that a continuing rise in commodities will result in higher inflation that would wreak havoc with stocks and bonds.
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Many Insiders Remain Bullish: When corporate executives are heavy sellers of shares in their own companies, it’s usually a bearish sign for the market. After all, who should know better than the insiders if their stocks are expensive or cheap relative to near-term earnings prospects? The good news as the new year dawns is that insiders aren’t bearish, even though stock prices are at or near record highs, says Robert Gabele, whose Ft. Lauderdale, Fla., newsletter CDA/Investnet Insiders’ Chronicle tracks insider transactions. “We continue to be intrigued by the number and dollar size of big insider purchases going on,” Gabele says. “This high level of insider buys can hardly indicate a climate where fundamentals (of companies) are deteriorating.”
Top Stock Groups, ’93
Avg. stock Group gain in ’93 Hotels/motels +84.3% Gold mining +81.3% Auto makers +62.9% Semiconductors +54.0% Hospital managers +50.2% Diversified machinery +46.4% Furniture/appliances +40.5% Broadcasters +39.3% Misc. transportation +31.6% Home builders +29.3%
Worst Stock Groups, ’93
Avg. stock Group loss in ’93 Shoe makers -31.3% Pollution control -29.2% Misc. health care -26.2% Apparel makers -26.2% Tobacco -25.5% Medical prods./supplies -24.8% Apparel retailers -16.6% Insurance brokers -12.9% Drugs -10.9% Box/bag makers -10.6%
Data through Dec. 30.
Source: Smith Barney Shearson, using S&P; indexes
