Industrials Take the Lead
No stranger to mood shifts, Wall Street finds itself undergoing a big one this summer.
Many of the highflying technology stocks that led the spring market rally suddenly are out of favor.
What’s in demand now are shares of old-line blue-chip companies, especially in the industrial sector -- names such as heavy-equipment maker Caterpillar Inc. and paper giant Georgia-Pacific Corp.
Analysts say the turnabout in large part reflects increasing optimism that the economy is accelerating, which could translate into rising earnings for a host of businesses that traditionally do well in times of faster growth.
“This confirms that we’re in an economic recovery,” John Bollinger, head of Bollinger Capital Management in Manhattan Beach, said of the rally in so-called cyclical stocks, whose fortunes rise and fall with the economy.
Technology companies also stand to benefit from a stronger economy. But many of those shares had rocketed in the spring to prices, relative to earnings, that began to remind some investors of the excesses of the last bull market.
The surge in longer-term interest rates in recent weeks has made highly valued tech stocks seem even more expensively priced, analysts say. So some investors have been bailing out of those names.
The result has been a split market performance: The Dow industrial average, dominated by old-line blue-chip firms, gained 64.71 points, or 0.7%, to 9,126.45 on Thursday and is off just fractionally since July 14, despite rising interest rates.
By contrast, the technology-focused Nasdaq composite index, which eased 0.50 point to 1,652.18 on Thursday, has fallen 5.8% since July 14.
Nasdaq lost ground Thursday despite fresh evidence that the economy is improving. The government reported that the increase in worker productivity in the second quarter was more than double the first-quarter rate, which could bode well for continued gains in corporate earnings. Also, new claims for jobless benefits last week fell to the lowest level since February.
The sell-off in tech issues has dragged down such spring stars as Irvine-based telecom chip maker Broadcom Corp., which has slumped 30% from its recent high; many Internet-related names, including e-commerce firm Chinadotcom Corp., down 40% from its peak; and software leader Oracle Corp., down 17% since mid-June.
On the flip side, Caterpillar has rallied 23% since July 1; chemical titan Dow Chemical Co. is up 10% since then, and Georgia-Pacific also is up 10%.
Kevin Marder, chief strategist at Ladenburg Thalmann Asset Management in L.A., said he views the losses in tech shares as part of a “very normal correction” within a still-bullish environment for the market overall.
“You had really tremendous moves in those stocks, and at some point you have to expect some kind of pullback,” he said.
That doesn’t mean tech stocks have peaked, Marder said. He noted that many semiconductor stocks continued to hold up and that the Nasdaq market’s decline had not been accompanied by heavy trading volume. That suggests that big investors, for the most part, are reluctant to sell, he said.
At the same time, the strength in industrial stocks is a healthy sign for investors who want to believe that the market’s rally since mid-March isn’t a flash in the pan, Marder said.
The action in stocks such as Caterpillar, he said, “corroborates our view that the glass is half full when it comes to 2004 economic growth.”
Tom McManus, strategist at Banc of America Securities in New York, said he expected stocks in such sectors as basic materials and heavy industry “to remain in demand in the near term,” as investors focus on a rising economy.
Many industrial stocks also have two other factors in their favor, analysts say: Their price-to-earnings ratios, at least based on expected 2004 earnings per share, may seem reasonable to more investors. And the stocks tend to pay hefty cash dividends, which now will be taxed at a maximum of 15% thanks to the tax cut Congress passed in May.
Caterpillar, for example, is priced at 17 times analysts’ average earnings estimate of $3.91 a share for 2004, according to earnings tracker Thomson First Call. That P/E is about average for blue-chip stocks.
Caterpillar also pays an annual dividend of $1.40 a share, equivalent to a 2.1% yield at the stock’s price Thursday.
Broadcom, by contrast, is priced at about 32 times analysts’ average 2004 earnings estimate and doesn’t pay dividends.
Long term, however, Wall Street expects Broadcom to grow faster than Caterpillar, which in theory justifies a higher P/E ratio for Broadcom.
On Thursday, industrial, retail and energy shares led the broad market higher. Caterpillar jumped $1.05 to $67.16, Wal-Mart Stores Inc. gained $1.26 to $57, and ChevronTexaco Corp. was up $1.38 to $72.26.
Winners topped losers by 20 to 12 on the New York Stock Exchange. On Nasdaq, however, losers had a 16-15 edge.
Among tech shares, QLogic Corp. rose $1.44 to $43.05 and Synopsys Inc. gained $1.12 to $61.71, but Yahoo Inc. lost 59 cents to $28.87 and United Online Inc. tumbled $2.35 to $31.45.
Yields continued to pull back from recent highs in the Treasury bond market, which helped underpin stocks’ rally.
The Treasury auctioned $18-billion in 10-year notes at a yield of 4.37% amid strong demand. That completed the government’s sale of $60 billion in new debt this week to finance the federal deficit.
The yield on the two-year T-note dropped to 1.71% on Thursday from 1.75% on Wednesday.
Market Roundup, C4-5
