For S&P; Sectors, a Quarter of Surprises

By THOMAS S. MULLIGAN

April 3, 2001 12 AM PT

TIMES STAFF WRITER

NEW YORK —

There were few places to hide on Wall Street in the quarter just ended, but one of them was under a hard hat.

Engineering and construction companies were among the stock market’s biggest first-quarter winners, as construction spending held up surprisingly well--especially considering the softening economy and the plunge in technology spending.

At the other end of the performance spectrum, telecommunications-equipment stocks made up the biggest sector loser in the blue-chip Standard & Poor’s 500 index in the quarter, amid deepening woes for such former market stars as Lucent Technologies and JDS Uniphase.

Yet the equipment suppliers’ customers--long-distance telecom companies such as AT&T; Corp. and WorldCom Inc.--rebounded strongly in the quarter, and are the fourth-best performing of 87 S&P; 500 stock industry groups so far this year.

Overall, the sector winners and losers lists so far this year seem to be a study in contradictions.

“You can’t make a whole lot of order out of the market over the last few months,” said David A. Katz, manager of Matrix Advisors Value Fund in New York.

Given the ongoing blood bath in tech stocks, it wasn’t surprising to find semiconductor shares and investment-banking issues among the quarter’s biggest losers. Less expected was the poor performance by drug shares and soft drink issues, which often hold up well in an economic slowdown.

Katz said stock valuation concerns may simply be bothering more than just tech investors.

“A year ago, drugs were at 25 times earnings and tech was at 100 times. Now tech’s gone to 35, and so drugs started looking pricey at 30 or so,” he said.

Katz also noted that in this “rolling bear market,” the first groups to get mauled are sometimes the first to recover--at least a bit. That explains why computer “box makers” such as Compaq and Dell Computer are holding up relatively well this year compared with the still-plummeting optical-equipment and Internet sectors.

Traditional “consumer-cyclical” groups such as retailers and auto makers were among the S&P;’s top 10 winners in the first quarter, but not necessarily for the usual reasons, analysts say.

Vincent Boberski, chief economist at brokerage Dain Rauscher in Chicago, said the strength of Ford Motor Co., for example, reflects the company’s ability to anticipate slowing sales and ratchet down production accordingly.

“Autos were one of the first sectors that saw the potential for a big inventory overhang, and they responded quite well,” Boberski said.

Ford shares are up 22% year to date. Although Ford Chief Executive Jacques Nasser told Bloomberg Television on Monday that industry sales are still slowing, the company also has said it is comfortable with analysts’ lowered profit estimates for the first quarter.

In the construction and engineering group, shares of such firms as Jacobs Engineering Group, Fluor and Foster Wheeler all racked up solid first-quarter gains. Pasadena-based Jacobs closed Monday at a new 52-week high of $58.41, up 41 cents on the New York Stock Exchange. It’s up 26.5% this year.

With the Federal Reserve cutting interest rates, borrowing is getting cheaper, which encourages firms to continue with major construction projects that may have been in planning for some time, Boberski said.

The first-quarter gains of long-distance telecom stocks, by contrast, had less to do with business fundamentals than with the beating the stocks took last year, analysts said. Indeed, AT&T; hit an eight-year low of $16.94 in late December, while WorldCom and Sprint hit three-year lows. All have since rebounded, with AT&T; up 22% this year and WorldCom up 33%.

At year-end, “value”-oriented money managers such as Kevin Risen of the Neubeger Berman Guardian Fund were touting long-distance firms as some of the best bargains around. Those managers may have continued to boost their stakes in the shares in the quarter.

Hugh A. Johnson Jr., chief strategist at brokerage First Albany, said that the sector-by-sector performance in the first quarter may have sent investors some false signals that the bear market was turning around.

Many industrial “cyclical” stocks, which tend to struggle in an economic slowdown but then lead the market when the economy rebounds, did well. But that hasn’t yet translated into a broader stock revival.

The cyclical stocks’ gains “unfortunately made a lot of investors jump the gun in early January and again in early March,” Johnson said.

Nonetheless, Matrix fund’s Katz said he is convinced that the stock market’s next lasting move will be up, in part because rallies tend to germinate amid an onslaught of bad news.

“You’re not going to hear a lick of good news about first-quarter earnings or outlooks,” he said. “But by the time we recognize the [economic] upturn, the market will be higher.”

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Sector Winners and Losers, 2001

Here are the 10 best-performing and worst-performing stock industry groups in the blue-chip Standard & Poor’s 500 index year to date through Monday. The S&P; 500 index itself is down 13.2% this year.

Engineering and construction: +30.8%

Toys: +23.6

Conglomerates: +22.3

Long-distance telecom: +20.4

Housewares: +17.7

Railroads: +15.8

Automobiles: +14.2

Auto parts and equipment: +14.0

Department stores: +10.4

Specialty chemicals: +9.0

Airlines: -19.1

Medical products: -19.2