Investors Willing to Make Bets Are Lending Strength to Some Sectors
More than halfway through the first quarter, investors trying to get a handle on how the markets’ year is shaping up can discern at least two key trends:
* Small and mid-size stocks are performing much better than blue-chip stocks--continuing the market shift that began in the second half of last year.
* “Value” stocks are beating “growth” stocks, also continuing a trend that began last year in the wake of the technology sector’s collapse.
Overall, losses are the rule rather than the exception among U.S. stock mutual funds so far this year, as major market indexes have mostly surrendered the gains they racked up in January in the wake of the Federal Reserve’s surprise interest rate cuts.
Fund-tracker Morningstar Inc.’s performance tally of 28 stock fund categories shows that just 10 are posting gains year-to-date. Amid continuing investor worries over the economy and corporate earnings, the average stock fund is down 1.9% for the year. That also was the average percentage loss for 2000 as a whole.
Technology stocks, many of which rebounded dramatically in January from last year’s heavy losses, have gone into another swoon. They were hammered late last week after computer and telecom networking giant Nortel Networks issued a severely downbeat forecast for near-term sales and earnings, compounding warnings from other tech leaders in recent weeks.
The tech-dominated Nasdaq composite index tumbled 127.53 points Friday, or 5%, to 2,425.38. That left it down 1.8% from year’s end, after surging 12.2% in January.
The blue-chip Standard & Poor’s 500 index is off 1.4% for the year after rising 3.5% in January.
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The market’s push-me/pull-you action so far this year reflects big investors’ reluctance to make hefty new commitments to the market, despite what had been surging optimism for much of January about the Fed’s ability to stave off economic recession.
Economist Edward Yardeni of Deutsche Bank Securities in New York last week described what he heard from investors on two separate road trips:
“Two weeks ago, I found that European institutional investors are positioning their portfolios as sector-neutral and as theme-neutral as they can,” he said.
“This week I found the same tendency among institutional investors in Chicago and Milwaukee. No one wants to take big bets on technology, on growth, on value, on energy, or anything. No one wants to bet against the Fed, of course. Yet there is a great deal of anxiety that consumer and business spending might not respond as quickly as in the past to easier credit conditions.”
Still, the relative strength in some market sectors this year suggests that investors with money to put to work have certain bets they’re willing to stick with. Here’s a look at what’s working and what isn’t:
* Small stocks versus large stocks. Bigger isn’t turning out to be better so far this year. While the big-stock S&P; 500 is down for the year, and down nearly 15% from its record high reached last March, the S&P; index of 600 smaller stocks hit a record high Thursday before sliding with the broad market Friday.
Year to date the S&P; 600 is up 3.8%. The S&P; 400, an index of mid-size stocks, also is faring better than the blue-chip index, with a gain of 0.5% this year.
Investors’ interest in small and mid-size stocks--especially those in non-technology businesses--began to mushroom in the middle of last year, as Wall Street began to sense that tech shares were unlikely to recover quickly from the brutal spring plunge.
For all of 2000 the S&P; 600 index gained 11% and the S&P; 400 rose 16.2%. The S&P; 500, by contrast, slid 10.1%.
Why do investors continue to see smaller stocks as a better ticket? In part, analysts say, buyers are attracted by what they perceive to be bigger bargains in the small-stock universe relative to blue chips. Many smaller non-tech issues were ignored for years as Wall Street focused almost entirely on big stocks in general and big tech stocks in particular.
Indeed, the gain in the S&P; 600 this year has been driven by shares of companies that are hardly household names. Case in point: Nature’s Sunshine Products (ticker symbol: NATR), a maker and distributor of vitamins and other personal-care products, has rocketed 35% this year, to $9.19 on Friday.
Another hot sector in the S&P; 600 this year is the engineering and construction business. The average stock in that sector has surged 46% since year’s end, led by Foster Wheeler (FWC), which builds plants for the energy business. The stock has rocketed 125% this year.
The small-stock story is to some degree a seasonal story: Historically, smaller shares have tended to bounce in January as investors hunt for shares that were beaten down by tax-related selling at the end of the year.
Still, the appeal of smaller companies may be magnified by Wall Street’s increasingly dismal earnings outlook for many blue-chip companies. Average earnings growth of S&P; 500 companies was just 3.4% in the fourth quarter, according to earnings tracker First Call/Thomson Financial. Worse, Wall Street expects blue-chip profits to decline in the first half of this year.
While many smaller firms may also struggle to keep earnings on track, the small-stock sector has another thing going for it: Many of the stocks still sell for much lower price-to-earnings ratios than many bigger stocks.
Which points up the other notable split in the market this year:
* Value stocks vs. growth stocks. The crash in high-priced tech stocks last year opened the door for value stocks to reassert themselves--and they did.
In the second half of 2000 investors learned once again to appreciate shares that sell for below-average price-to-earnings ratios and price-to-book-value ratios.
That drove the average small-value-stock mutual fund to a 17% gain for the year. The trend continues this year: The average fund in that sector has risen 6.4% so far this year, according to Morningstar.
The average fund that targets mid-size value stocks is up 2.6% this year after gaining 16.9% last year.
Meanwhile, investors’ continuing wariness of growth stocks has left the average mid-size-growth-stock fund down 5.3% this year and the average large-growth-stock fund down 5.5%.
A half-quarter’s worth of performance doesn’t make the year, of course. Even so, in a market in which many investors are having trouble staying committed, the carry-over performance of smaller stocks and value stocks from 2000 to 2001 may be signaling that there’s more to come from those sectors.
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.
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Small-Stock Bargain Hunting
The Standard & Poor’s index of 600 smaller stocks has been one of the best-performing market indexes this year, and it inched up to a record high Thursday. Despite Friday’s market sell-off, the S&P; 600 is up nearly 4% year-to-date, whereas the blue-chip S&P; 500 is down 1.4%. Some of the hottest stock groups in the S&P; 600:
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Small-stock sector YTD avg. stock gain Personal care +48% Engineering/construction +46% Consumer finance +41% Department stores +40 Auto parts +28% Clothing retailers +19% Building materials +16% Leisure +13% Agricultural products +13% Restaurants +9%
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Source: Bloomberg News
Blue-Chip Profits’ Dismal Tale
Operating earnings of the average company in the blue-chip Standard & Poor’s 500 index rose 3.4% in the fourth quarter, but that figure was skewed by huge gains for many energy and utility firms. Many other key industry sectors saw earnings fall sharply. Here’s a look at actual fourth-quarter profit growth by S&P; sector (with 90% of companies having reported results so far), and analysts’ estimates for the first three quarters of 2001:
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Growth in operating earnings* Sector Q4-’00 Q1-’01E Q2-’01E Q3-’01E Energy 107.0% 50.0% 7.0% -9.0% Utilities 27.0 11.0 10.0 17.0 Health care 15.0 14.0 14.0 13.0 Capital goods 8.0 4.0 5.0 15.0 Technology 3.0 -14.0 -13.0 -2.0 Financials -7.0 -1.0 9.0 14.0 Consumer staples -7.0 10.0 12.0 15.0 Transportation -11.0 unch 4.0 18.0 Basic materials -17.0 -39.0 -22.0 6.0 Consumer cyclicals -18.0 -26.0 -14.0 10.0 Communications -19.0 -25.0 -23.0 -15.0 S&P; 500 3.4 -1.3 -0.4 6.8
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* actual or estimated percentage change from a year earlier
Source: First Call/Thomson Financial
