A Lousy Market? Many Investors Might Beg to Differ

By TOM PETRUNO

Oct. 1, 2000 12 AM PT

What’s wrong with the stock market?

Everything, or nothing, depending on your vantage point.

Mercifully for many investors the third quarter came to an end Friday, but not before September once again lived up to its post-World War II reputation as the market’s worst month of the year.

The Nasdaq composite index fell 12.7% for the month, a decline that left the technology-heavy barometer (remember when “technology-heavy” was a compliment?) off 9.7% year-to-date.

The blue-chip Standard & Poor’s 500 index (remember when “blue-chip” was a compliment?) fell 5.3% for the month and now is off 2.2% for the year.

The hundreds of billions of dollars invested in S&P; index stock funds are having, shall we say, a timeout in 2000.

But that is hardly a universal experience on Wall Street. Mutual fund tracker Morningstar Inc. calculates that the average domestic stock fund is up 7% so far this year, despite the losses in the S&P; and Nasdaq.

With three months left to go in the year, Nasdaq and the S&P; are on track for their worst calendar-year performances since 1990, when they fell 17.8% and 6.6%, respectively.

Yet with a modest fourth-quarter gain, the average stock fund’s return could easily be in double digits for the year. And double-digit returns, of course, are what we’ve all come to expect as inevitable from the stock market.

What we’re living through this year--and either enjoying greatly or not at all, depending on how our money is invested--is the All-Over-the-Place Market.

It also might be viewed as the Return of the Stock Picker’s Market.

For much of the last two years, what worked on Wall Street was technology, and very little else.

This year, long-term investors are still making money in some sectors of technology. Semiconductor stocks, for example, are up 20.9% for the year, on average, as measured by the SOX semiconductor index.

But in the All-Over-the-Place Market, there have been many other opportunities outside technology to find winning stocks.

To which many investors would say, “It’s about time!”

A few examples:

* The average utility-stock mutual fund is up 10.6% for the year, reflecting the turnabout in many investors’ perception of the appeal of electric utilities.

After a hot summer in much of the country that threatened brownouts and blackouts because of a lack of electrical generating capacity, Wall Street has come to realize that it should have been financing more power plants in the 1990s, and perhaps fewer “dot-com” retailers.

The Dow Jones index of 15 utility stocks, dominated by electric companies, is up a stunning 40.5% this year.

So why is the average utility-stock mutual fund’s return 30 percentage points below the Dow utilities index?

Blame the fascination with a sub-sector of technology: Many utility funds have in recent years morphed into telecommunications funds, loading up with phone companies on the expectation that the telecom sector’s growth would vastly exceed the electric utility industry’s growth.

That still may be true in the long run. But for now, telecom giants such as WorldCom (ticker symbol: WCOM) and Verizon Communications (VZ) are struggling to convince Wall Street that they can deliver consistent earnings growth in an increasingly competitive global telecom market.

* If you happen to have some money in a health-care-oriented stock mutual fund, you may be looking at a year-to-date gain in the neighborhood of 57%, according to Morningstar.

Many major drug stocks have turned in respectable gains this year, despite the perennial presidential-campaign rhetoric about possible price controls on drugs.

More important for many health-care funds, health-maintenance-organization stocks have rebounded dramatically. The stocks have responded as the companies have managed to push through health-care premium increases that the industry says are necessary if it is going to stay afloat.

The companies and individuals paying those premiums may not appreciate the added expense, but Wall Street at least is proving that it still reacts well to an improving earnings picture.

A Morgan Stanley index of 12 major HMO stocks has surged 56% so far this year.

Interestingly enough in a market that has been so hard on money-losing technology stocks, one of the sector stars so far this year has been the biotechnology field. The gains in those shares also have pumped up many health-care stock funds.

The American Stock Exchange index of 17 major biotech issues has rocketed 96.6% so far this year.

Like everything else with “tech” in its name, the biotech sector soared in the winter, then crashed in the spring. But unlike with many computer-related tech stocks, the appetite for many biotech issues came roaring back by summer.

In particular, investors have rushed back to many human-genome-research stocks, such as Human Genome Sciences (HGSI), which at $173.13 as of Friday is up 30% in three months and 127% in the year to date.

With no real earnings on the horizon, Human Genome is clearly more of a speculation than an investment at this point. Thus, investors’ willingness to pay these prices for the stock belies the idea that the market has turned more conservative this year. There are still plenty of speculators out there--they just aren’t buying the same technology names that dominated the market in 1998 and 1999.

* Perhaps the biggest reason the average domestic stock fund’s return is a positive 7% so far this year is the contribution of small- and mid-size stocks.

Until this year, big-name blue-chip stocks had ruled the market for most of the period since 1994. Investors got used to 20%-plus annualized returns on the S&P; 500 index, and many probably assumed those returns could go on indefinitely.

But “blue-chip” no longer has the cachet it used to with many investors. To be sure, we’re still talking about some very powerful companies in names such as General Electric (GE), Wal-Mart (WMT) and Procter & Gamble (PG). But the growing number of third-quarter profit warnings from major companies in recent weeks--especially from multinational giants--has reminded Wall Street that many of these firms can’t completely control their own destinies, despite their size.

Whether it’s that realization or some other reason, more investors this year have looked to buy stocks down the food chain.

That trend has helped lift the S&P; index of 400 mid-size stocks 21.2% so far this year, and the S&P; index of 600 small stocks 9.9%.

One of the shares in that S&P; small-stock index is Calabasas-based restaurant chain Cheesecake Factory (CAKE). While McDonald’s Corp. (MCD) struggles with depressed earnings from its European operations (courtesy of the weak euro currency), Cheesecake Factory’s 36 restaurants are all within U.S. borders. And at least through the second quarter, business was still booming for Cheesecake.

Investors appear to be betting on more of the same: Cheesecake’s stock, at $43.25 on Friday, is at a record high, and is up 85% this year. McDonald’s shares, by contrast, are down 25%.

In the All-Over-the-Place Market, Cheesecake has been a great place to be. Ditto for many stocks in such disparate sectors as finance, energy, aerospace, home building and leisure.

If this is a lousy market, a lot of investors would like more of the same.

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The All-Over-the-Place Market

This is a stock picker’s market if there ever was one. Year to date, many individual sectors and stocks have posted handsome gains, even as plenty of other sectors and stocks have slumped. A sampling of major share indexes’ performance so far this year:

Amex biotech: +96.6%

Dow utilities: +40.5%

S&P; mid-cap: +21.2%

SOX semiconductors: +20.9%

NYSE financials: +20.9%

S&P; small-cap: +9.9%

Amex oil sector: +4.7%

NYSE composite: +2.0%

S&P; 500: -2.2%

Nasdaq 100: -3.7%

Dow industrials: -7.4%

Nasdaq composite: -9.7%