Selling in Tech Shares While Other Issues Rise Suggests a Broader View
Investors rediscovered the merits of shampoo, electricity and hypertension drugs last week, while having second thoughts about the promise of--or at least, the prices of--technology companies.
But the overriding message in last week’s unnerving stock market volatility worldwide may, ironically, be a very positive one: that many investors are bullish on the global economy for 2000, and not just for the tech and telecom parts of that economy.
Last year’s star technology stocks were, of course, hammered for much of the week, in what many analysts first described as routine profit-taking, then suggested was something more worrisome.
On Friday, however, the tech-dominated Nasdaq composite index scored its biggest one-day point gain ever, rising 155.49 points to 3,882.62--though that still left it with a 4.6% loss for the week.
But as some investors fled tech issues, many of the dollars they pulled quickly found a home in stocks such as personal-care products giant Procter & Gamble, electric utility Duke Energy and drug maker Merck.
The Dow Jones industrial average, which includes P&G; and Merck, rocketed 269.30 points on Friday to a record 11,522.56, after falling 500 points in the first two trading days of the new year.
The sudden interest in old-line industrial and consumer companies, especially those U.S. giants that do business on a global scale, was partly just a knee-jerk reaction to the speed with which tech stocks were falling by midweek, said Peter Canelo, investment strategist at Morgan Stanley Dean Witter in New York.
“If you get burned by ‘new economy’ stocks, you find some ‘old economy’ stocks” in which to hide, he said.
But there’s something else going on as well, Canelo said: Some investors are clearly betting that an improving world economy in 2000 will mean better sales and earnings for many U.S. multinational companies--perhaps especially those that have struggled through the last few years.
Hence, Coca-Cola, which has suffered from sluggish global demand that recently helped cost Douglas Ivester his job as CEO, soared $3.75 to $60.75 on Friday.
Procter & Gamble, up $8.63 to a record $116.50 on Friday, got a boost from Prudential Securities, which raised its rating on the stock to “strong buy” from “accumulate,” in part citing accelerating sales growth.
Jet maker Boeing, extremely dependent on the health of the global economy, rose $1.25 to $44.31 on Friday and is up 19% since Dec. 7. In the same period, America Online has fallen 9%.
Investors looking to put money to work last week also broadened their scope to include electric utilities (the Dow Jones utility stock index jumped 5.1% for the week), real estate investment trusts (the average REIT mutual fund was up 1.8% for the week) and energy companies (the average natural-resources stock fund rose 1.2%).
So-called value stocks in general performed better than growth stocks last week--a turnaround from last year, when investors shunned value in favor of growth, which mostly meant technology.
Moreover, while many of the stocks and stock groups that advanced last week used to be viewed as classic “defensive” plays--that is, stocks you bought if you worried that an economic slowdown was imminent--the gains in other key sectors suggested investors were thinking economic boom, not bust.
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Case in point: Chemical and machinery stocks were among the week’s biggest gainers. Farm machinery giant Deere, for example, jumped to its highest level since mid-1998. You don’t buy a stock like that if you’re worried about the economy.
But if the bet is that the global economy accelerates this year, with both Europe and Asia picking up speed, how is that bad for technology companies?
It isn’t, of course. Despite the earnings shortfalls announced last week by such tech leaders as BMC Software, Gateway and Lucent Technologies--announcements that helped worsen the selling in the tech sector at midweek--many analysts expect this to be a terrific year for tech company earnings overall.
But the performance of the stocks may be another matter. The advance in the tech-stock sector last year was so tremendous (the Nasdaq composite index, remember, rocketed 86% in 1999) that it fully reflected earnings expectations not just for 2000, but perhaps part of 2001 as well, some analysts say.
Despite Friday’s rebound, the selling in tech stocks last week isn’t likely to be followed by another huge wave up in the stocks, said Phil Orlando, strategist at Value Line Asset Management in New York.
“I don’t believe investors are going to let the stocks get ahead of themselves” more than they already may be, he said.
Likewise, Doug Cliggott, strategist at J.P. Morgan Securities in New York, argues that the market in the near term will continue to see a “payback” of sorts.
In 1999, he noted, many institutional and individual investors dumped stocks in many other sectors to raise cash to shovel into technology and telecom stocks.
“The other stocks were food to feed the extraordinary growth in tech issues,” Cliggott said.
But given their tech purchases and the ballooning of the tech sector’s valuation overall, “I think more than a few money managers now are uncomfortable with the technology weightings” in their portfolios, he said.
The answer for some last week was to reduce those weightings by selling some tech issues and using the proceeds to buy other stocks.
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Cliggott sees more of the same through the first quarter, resulting in a continuing broadening of the U.S. market’s advance.
If he’s correct, it will mean that many investors with diversified portfolios will see more pluses on their portfolio statements in coming months than simply in the case of their tech stocks.
Still, investment pros also caution that stock prices are high relative to underlying earnings in more than just the technology sector. Few sectors are truly on sale in the market, perhaps except for utilities, REITs and some financial stocks.
Which is one reason last week’s gains in industrial issues such as Dow Chemical (up 4.8% for the week) and DuPont (up 8.7%) were hardly in the league of Internet stocks in their heyday.
Deere is currently priced at 27 times the $1.73 a share that analysts, on average, expect the company to earn this year.
Procter & Gamble’s price-to-earnings ratio based on estimated earnings for the fiscal year ending June 30 now is 36. That’s higher than computer chip titan Intel’s P/E, which is 31 based on estimated 2000 earnings per share.
Morgan Stanley’s Canelo, however, argues that there may be more life in heavy industry stocks because they traditionally do better in the first half of the year than in the second, and because some investors may want to own them now in case the global economy’s advance is even stronger than expected.
“You don’t really know how cheap [the stocks of industrial companies] are because you don’t know how good their earnings can be,” he noted. If demand surpasses expectations, the leverage these companies enjoy can mean a huge boost to their bottom lines.
(If the economy grows too fast, and inflation accelerates, industrial issues also may be among the few groups for which the benefit of higher prices for their goods might outweigh the negative effects of what would surely be another rise in interest rates.)
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Even so, no one is recommending that investors suddenly jettison all of their tech stocks in favor of consumer products or heavy-machinery issues. Indeed, technology companies are virtually certain to continue to boast the best growth prospects of any industry sector looking out the next three to five years.
The market’s message of last week, however, seems to be that in a global economy with an improving outlook, the wealth among stock sectors ought to be a little more evenly distributed than it was in 1999.
Tom Petruno can be reached by e-mail at tom.petruno@latimes.com
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Return of the U.S. Multinational
Last week saw many technology stocks slide, while investors jumped back into U.S. multinational companies in many other industries--a vote, it seemed, for a strong global economy in 2000.
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Source: Bloomberg News
