Working the Early Shift
Did you catch the 13% gain in utility stocks in November and December? How about the midyear move in cable and telecom issues? Or the fourth-quarter rally in phone company shares?
If you missed them, don’t feel bad. A lot of people did.
But the gains in these sectors raise an important question for investors who wish they were on board: How do you spot groups--and, by extension, stocks--that are making strong moves?
First you need to understand how investors move from one industry or sector to another, a practice known as sector rotation.
In its broadest definition, sector rotation means shifting from industry groups that are lagging the market, or are likely to in the future, to those with brighter prospects. It’s a bit like switching to a faster lane on a clogged freeway.
Why is sector rotation so important?
Studies have shown that as much as 40% to 50% of a stock’s performance is tied to how well the broad market is doing, said Don Hays, chief investment strategist at Wheat First Butcher Singer in Richmond, Va. Another 20% to 40% depends on how a stock’s industry or sector is performing. The stock itself is responsible for only 10% to 20%, he said.
“Sectors are very important and are probably more important than selecting what stocks you’re in,” Hays said.
Understanding sector rotation is all the more crucial given the uncertainty in the market today. In 1995, 1996 and even last year, investors could be fairly sure that the tide of a rising bull market would lift most industries. That’s no longer the case, with Asia-related earnings worries weighing on stock prices.
At its core, sector analysis is a way of studying the market. Many individual investors check the daily performance of the Dow Jones industrial average or the Nasdaq composite. Few look in on the Philadelphia Stock Exchange semiconductor index (ticker symbol: SOX) or the Morgan Stanley high-tech index (MSH). But moves in tech stocks will show up in specialized indexes long before they do in broad market gauges.
This analysis takes several forms. On one level, it means examining industry groups such as, say, autos versus oils to gauge which one is outperforming the other. On another level, it means looking at broad sectors such as value versus growth or cyclical versus consumer.
The problem with sector analysis is that it’s notoriously difficult. Industries and sectors make moves all the time, but it’s hard to know whether they’re beginning long-lasting or short-lived trends.
Some experts, in fact, harshly criticize sector rotation and say individual investors shouldn’t worry about it.
Their opposition stems partly from the fact that sector rotation is closely identified with momentum investors who latch on to fast-moving sectors regardless of fundamentals and jump off at the first sign of trouble.
That’s convinced critics that sector rotation is a disguised form of market-timing. They say small investors should stick to buy-and-hold strategies aimed at picking good stocks.
“The problem is there’s a tendency that the grass looks greener in your neighbor’s sector,” said Chet Needelman, chief executive of Palley-Needelman Asset Management Inc. in Newport Beach.
Proponents say sector analysis doesn’t mean small investors must hopscotch from one group to another.
At its best, sector analysis can spotlight groups and stocks worth investing in. For example, oil stocks did nothing for years until they began a two-year surge in late 1995. Ditto for airline issues, which took flight in mid-1995 and are still going. In each case, the sustained moves highlighted major fundamental changes in the industries.
Sector analysis also can help investors narrow their stock selection within a broad category. For example, health-care stocks gained 37.1% last year, said Sam Stovall, sector strategist at Standard & Poor’s Corp. in New York. But returns within the sector varied widely. Major drug companies soared 56.7%. But health-maintenance organizations fell 10.5%.
In many cases, sector analysis may be best at warding investors off from certain stocks.
“Investors should do their homework, and in doing that homework they should look at the group, because it takes a hell of a stock to go against its group,” said John McGinley, who writes the Technical Trends newsletter from Wilton, Conn.
So how can individual investors analyze sectors?
For investors with computers, one way is to create a screen of index ticker symbols, just as many investors do with stock tickers. The list of indexes accompanying this story is a good starting place. Note that index tickers can vary among data systems. The tickers listed here are commonly used, but if they don’t work, contact your service for the appropriate tickers.
Investment Web sites also can help. Some sites show group performance for various periods as part of their free offerings.
Wall Street City (https://www.wallstreetcity.com) run by Telescan, an investment information firm that caters to small investors, is very useful for sector analysis.
Click on Research & Info and go down to Industry Group Analysis. From there, investors can go directly to performance rankings of 266 industries by clicking on the subhead also titled Industry Group Analysis. Groups are measured by their performance over various periods--one day; one week; six, 18 or 26 weeks; one, three or five years.
Investors can also look up tickers of specific industries (they apply only to this site) and rank the stocks within a group over the same periods. These services are free.
For advanced investors willing to pony up $34.95 a month, Wall Street City has another twist. It features an industry-screening component in which its computers identify the groups that performed best in periods ranging from one to 12 months. The computer identifies the characteristics they share, such as strong sales or consistency of dividends.
It then lists the stock groups that display those characteristics today, even if they’re different from the original groups. By clicking on the group ticker, the top 25 stocks are listed. To get there from the home page, click on What’s Working Now? and then What Industry Groups Are Working Best?
Once you’ve settled on an industry for further study, go to the Standard & Poor’s Web site for small investors (https://www.personalwealth.com). After registering (if you’re a first-time user), click News/Research, then Industries. After making a selection, you get a broad overview of the industry, written by an S & P analyst.
From there, you have three choices: Industry News, Stars Picks and Pans and Industry Leaders.
Industry News is just that. There are company news releases and S & P articles. Stars Picks and Pans lists the star ratings from S & P analysts for each company (one is the lowest and five is the highest).
Industry Leaders provides further company-specific information such as earnings-per-share numbers. At any point, clicking on a ticker leads to a write-up about the company and financial information such as earnings estimates. Some of the information on the Web site is free. But to get other services, users must subscribe to the site for $9.95 a month.
For aggressive investors who want to try a sector-rotation strategy, S & P’s Stovall recommends five sectors. They’ve all lagged the market but are now trading above their nine-month moving averages, a sign that buying demand may be building.
The five industries are housewares, natural gas, restaurants, data-processing services and specialty printing. The strategy entails buying up to four stocks within each industry and holding them for 24 months.
Within housewares, he recommends Fortune Brands (FO), Newell (NWL), Rubbermaid (RBD) and Tupperware (TUP). In natural gas, he recommends Coastal (CGP), Enron (ENE), Nicor (GAS) and Williams (WMB). Among restaurants, the picks are Darden (DRI), McDonald’s (MCD), Tricon Global (YUM) and Wendy’s International (WEN).
In data-processing, Stovall suggests Automatic Data Processing (AUD), Ceridian (CEN), Equifax, (EFX) and First Data (FDC). Among printers, Stovall picks three stocks: Deluxe (DLX), R.R. Donnelley (DNY) and John H. Harland (JH).
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Top of Their Game
These are the top 10 industry groups, based on return over the last three weeks, among the 266 that Telescan tracks. Six- and 12-week performance ranks are also given. Within each industry are shown the top three stocks (and ticker symbols), based on a rating formula that assesses earnings growth, relative price strength and group price strength. Movement into groups such as furniture makers and drugstores, which have dependable though far from sparkling earnings, shows that investors have been cautious.
Industry group: Telecommunications (long-distance)
3-wk. return: 10.0%
3-wk. rank: 1
6-wk. rank: 6
12-wk. rank: 2
Top three stocks (ticker symbol) and Rating (1 to 99):
ACC (ACCC): 99.0
Pacific Gateway Ex. (PGEX): 97.3
LCI International (LCI): 91.1
*
Industry group: Leisure/amusement (casinos/gaming)
3-wk. return: 8.5
3-wk. rank: 2
6-wk. rank: 2
12-wk. rank: 98
Top three stocks (ticker symbol) and Rating (1 to 99):
Monarch Casino & Resort (MCRI): 82.6
Anchor Gaming (SLOT): 81.6
Harveys Casino Resorts (HVY): 79.0
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Industry group: Electronics (radio/TV manufacturers)
3-wk. return: 7.1
3-wk. rank: 3
6-wk. rank: 4
12-wk. rank: 25
Top three stocks (ticker symbol) and Rating (1 to 99):
Cobra Electronics (COBR): 89.8
Universal Electronics (UEIC): 86.8
Sony (SNE): 86.1
*
Industry group: Electronics (miscellaneous)
3-wk. return: 6.4
3-wk. rank: 4
6-wk. rank: 10
12-wk. rank: 92
Top three stocks (ticker symbol) and Rating (1 to 99):
Andrea Electronics (AND): 70.1
Craftmade International (CRFT): 70.0
Nam Tai Electronics (NTAIF): 70.0
*
Industry group: Retail stores (apparel)
3-wk. return: 6.1
3-wk. rank: 5
6-wk. rank: 7
12-wk. rank: 26
Top three stocks (ticker symbol) and Rating (1 to 99):
Abercrombie & Fitch (ANF): 97.8
Buckle (BKE): 97.5
Goodys Family Clothing (GDYS): 97.3
*
Industry group: Drugs (major companies)
3-wk. return: 6.0
3-wk. rank: 6
6-wk. rank: 5
12-wk. rank: 9
Top three stocks (ticker symbol) and Rating (1 to 99):
Schering-Plough (SGP): 92.3
Merck (MRK): 90.5
Pfizer (PFE): 87.3
*
Industry group: Home furnishings (furniture)
3-wk. return: 5.2
3-wk. rank: 7
6-wk. rank: 55
12-wk. rank: 36
Top three stocks (ticker symbol) and Rating (1 to 99):
Ethan Allen Interiors (ETH): 91.8
Virco Manufacturing (VIR): 90.8
Furniture Brands International (FBN): 90.0
*
Industry group: Leisure/amusement (toy makers)
3-wk. return: 5.1
3-wk. rank: 8
6-wk. rank: 98
12-wk. rank: 63
Top three stocks (ticker symbol) and Rating (1 to 99):
T-HQ (THQI): 90.6
Play by Play (PBYP): 89.5
Hasbro (HAS): 83.0
*
Industry group: Containers (paper)
3-wk. return: 4.5
3-wk. rank: 9
6-wk. rank: 38
12-wk. rank: 82
Top three stocks (ticker symbol) and Rating (1 to 99):
Astronics (ATRO): 69.5
Shorewood Packaging (SHOR): 62.5
St. Joe (SJP): 61.1
*
Industry group: Retail stores (drugs)
3-wk. return: 4.4
3-wk. rank: 10
6-wk. rank: 73
12-wk. rank: 21
Top three stocks (ticker symbol) and Rating (1 to 99):
Arbor Drugs (ARBR): 90.8
Walgreen (WAG): 89.1
Rite Aid (RAD): 85.6
Source: Telescan (Data as of Friday)
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The Big Picture
Here are some of the more popular stock indexes that professionals use to track movements in industry groups and broad sectors. The ticker symbols are those used on Bloomberg terminals; they may vary among data services.
American Stock Exchange oil index (XOI), 16 oil stocks; American Stock Exchange pharmaceutical index (DRG), 15 drug stocks; American Stock Exchange biotech index (BTK), 15 biotech stocks; American Stock Exchange airline index (XAL), 10 airline stocks; American Stock Exchange networking index (NWX), 15 networking stocks;
CBOE gaming index (GAX), 15 casino and gaming stocks; CBOE automotive index (CAUX), 10 automotive stocks; CBOE Internet index (CINX), 14 Internet stocks; Dow Jones transportation average (TRAN), 20 transportation-related stocks; Dow Jones utilities average (UTIL), 15 utility stocks;
Goldman Sachs computer services index (GSV), 20 computer services stocks; Goldman Sachs software index (GSO), 47 computer software stocks; Goldman Sachs hardware index (GHA), 21 computer hardware stocks; Morgan Stanley cyclical index (CYC), 30 cyclical stocks; Morgan Stanley consumer index (CMR), 30 consumer goods stocks; Morgan Stanley high-tech index (MSH), 35 major technology stocks;
Nasdaq telecommunications index (CUTL), 186 telecom-related stocks; Nasdaq insurance index (CINS), 87 insurance stocks; Nasdaq 100 index (NDX), 100 largest Nasdaq stocks; Philadelphia Stock Exchange oil services index (OSX), 15 oil services stocks; Philadelphia Stock Exchange bank index (BKX), 24 major bank stocks; Philadelphia Stock Exchange phone index (PNX), six phone company stocks; Philadelphia Stock Exchange semiconductor index (SOX), 16 semiconductor stocks;
S&P; 100 index (OEX), 100 large stocks; S&P; Barra value index (SVX), 357 large value-oriented stocks with low price-to-book ratios; S&P; Barra growth index (SGX), 143 large growth-oriented stocks with high P/B ratios.
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Source: Bloomberg News
