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INVESTMENT OUTLOOK : ASSESSING 1987 : UP AND DOWN : Stocks in Some Industries Are Thriving Despite Wall Street's Tumble

December 06, 1987|VICTOR F. ZONANA | Times Staff Writer

It looks like stock prices, as measured by such broad market indexes as the Dow Jones industrial average, will finish out 1987 just about where they started. But oh, what a ride it has been.

Still, there was money to be made--or lost--this year. Even conservative buy-and-hold investors could have fared well--or lost their shirts--depending on what types of stocks they owned.

"If you were in the right groups, you had a fine year," said John D. Connolly, chairman of Dean Witter Reynolds' investment policy committee. "If you were in the wrong groups, you did horribly."

By and large, the biggest gains for the year have been posted by the highly cyclical industrial materials and precious metals companies. "Those were the stars," Connolly said. The precious metals concerns were up 61% while the non-ferrous metals group--which includes copper and aluminum--climbed 40% over the first 11 months of the year, he calculated. Steel companies fared almost as well.

Not surprisingly, "the worst performing group were the securities brokers, down 44% for the year, with the worst of the damage coming in the fourth quarter," Connolly said.

Next came the big money center banks, which were off 35%. Housing stocks were also big losers, plunging 31%, as interest rates climbed and housing starts fell.

Among other industries, energy issues were average performers, up about 2% for the year despite the rebound in oil prices and strong demand for petroleum products. But technology stocks were a mixed bag. For example, software companies showed strong gains, up an average of 25% for the year, bolstered by strong sales of new minicomputers and personal computers, according to Connolly.

But aerospace companies were off about 10% because of slowdowns in the rate of increase in defense spending, Connolly said. Computer makers were all over the lot.

"The companies that are up the most are the heavy cyclicals--machinery companies, papers, metals, chemicals," said Charles Clough, Merrill Lynch's chief portfolio strategist.

"The market may be signaling an important shift in profitability from consumer-oriented companies to industrial companies" such as Caterpillar, USX and Phelps Dodge, Clough added.

The strong performance of cyclical companies is no surprise. Such strength is typical of the late stages of economic expansions, market strategists noted. Moreover, such companies are also major beneficiaries of the weak dollar, which helps American companies boost exports while raising the prices of competing imports.

Besides, added Michael Sherman, chairman of Shearson Lehman Bros.' investment policy committee, "most of these companies had been in the doghouse for four years. Their time had come."

Of course, "the cyclicals came crashing down with the rest of the market in October," Sherman continued, "but by and large they crashed more slowly and are recovering more quickly."

The crash, of course, is singled out by market watchers as the most significant event of 1987. "In a very real sense, you had two stock markets in 1987," noted Arnie Kaufman, editor of Standard & Poor's publication, the Outlook.

"Before the crash, people were looking for a strong economy," he continued. "Capital spending was expected to improve--hence the boom in the cyclicals--and people thought consumer spending would hold its own."

Moreover, during the opening months of the year, Kaufman said, "interest rates were rising and inflation fears were picking up"--so such interest-sensitive groups as banks, S&Ls, insurance companies and utilities performed badly.

Since the crash, however, "many of the best performers have been those that did poorly earlier in the year--foods, tobaccos, insurers and utilities. These are the classic defensive groups."

Defensive stocks are those that tend to outperform the market during times of economic duress. The companies they represent tend to hold their own during recessions, providing such necessities as food, electricity and medicine.

"In short," Kaufman said, "investors were hunkering down for a slowing economy--if not a recession."

The most recent theory to emerge, Kaufman noted, is that beneficiaries of the dollar's sharp decline represent good investment prospects. As a result, drug companies --"a classic defensive group that is also aided by the lower dollar"--have had a good run in recent weeks.

Cyclicals are a dicier proposition, even though they benefit from the lower dollar, Kaufman said; "if the economy goes into a recession," he warned, "the cyclicals will be net losers."

WINNERS AND LOSERS

The performance of stocks in various industries from Jan. 1-Nov. 30.

Top Performers

Precious metals: +61% Nonferrous metals: +40% Iron ore and steel: +36% Computer software: +25% Mobile equipment: +20%

Worst Performers

Securities Brokers -44% Money Center Banks -35% Housing -31% Savings & Loans -30% Trucking -29%

Source: Dean Witter Reynolds

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