The savviest stock investors in the first quarter simply hitched a ride on the big market winners of 1992 and held on. In the next quarter that same strategy may work well once again--especially with red-hot energy stocks, some Wall Streeters say.
This quarter, semiconductor makers led all other stock groups, just as they did in 1992. Powered by Intel and Motorola, semiconductor stocks have surged 27.3%, on average, since year's end, after rising 63% last year.
Likewise, auto stocks have jumped an average 21.6% this year, adding to a 42% rise in 1992.
Rounding out the quarter's other leading groups are steel stocks, hotel issues and building materials makers--all of which also spearheaded last year's bull market move.
The surprise winners this quarter: energy stocks, which have zoomed thanks partly to a cold winter, which has boosted natural gas use.
For pickers of individual stocks, being with the leaders was particularly important in the quarter because the broad market was relatively dull. The Standard & Poor's 500-stock index is up 3.7% year-to-date, while the NASDAQ composite index has inched up just 1.4%.
Most of the first-quarter winners were tied to expectations of a continuing economic recovery. And despite signs that the economy's momentum has ebbed somewhat since year's end (note the latest falloff in consumer confidence), many market strategists advise sticking with a recovery-themed investment portfolio.
With interest rates still extraordinarily low, "most likely the economy will not suddenly run out of steam and deflate here," says A.C. Moore, strategist at Argus Investment Management in Santa Barbara.
In fact, because lousy weather hurt all sorts of businesses in many parts of the country this quarter, there may be pent-up consumer and business spending set to be unleashed in the second quarter, says Mike Kucera, a principal at Wedge Capital Management in Charlotte, N.C. That's one reason why he's still bullish on Chrysler, Goodyear and some industrial commodity suppliers, such as copper giant Phelps Dodge.
But Kucera and other strategists worry that the majority of heavy industrial firms (chemicals, paper, machinery) will report disappointing first-quarter earnings, despite the growing economy. "A lot of these companies still have not been able to raise prices," he says.
Even though he'd like to buy more basic industry stocks for the long haul, Kucera says, he probably will wait--expecting the stocks to weaken further in the second quarter.
To Argus' Moore, structuring a recovery-themed portfolio means picking stocks that can gain from "a productivity-led economy, not a consumer-led economy," he says. The firms benefiting most are those that sell productivity-enhancing equipment (such as computers and telecommunications equipment), and those that have made themselves more productive via cost cutting, he says. The latter group includes many steel firms--whose stocks turned in a surprisingly hot quarter, Moore notes.
At Integral Capital Partners in San Francisco, money manager Roger McNamee is reluctant to pound the table for many technology stocks, given their strong first-quarter gains. But he believes that the tech group's potential remains excellent if measured in years rather than months. In particular, the giants such as Intel, Motorola and software king Microsoft "all are involved in really powerful product cycles," McNamee says. In technology, he says, "The key is not to miss the obvious."
Perhaps the safest bet for market leadership over the next two to three quarters is the energy sector, especially natural gas. Though many energy stock groups rocketed this quarter, "this is still a very attractive sector, based on our work," says Richard Bernstein, a Merrill Lynch & Co. analyst who tracks stock groups for earnings momentum and other positive fundamentals.
Because the cold winter caused much of the nation's short-term natural gas storage to be drawn down, energy companies "will now have to produce flat-out to produce inventory for next winter," says Ernst von Metzsch, manager of the Vanguard Specialized Energy stock mutual fund in Boston. Higher production, in turn, will benefit drilling companies and their suppliers.
Longer term, however, the Clinton camp's energy program is aimed at stimulating natural gas use, but it won't do enough to stimulate production, argues Dan Rice of the MetLife State Street Global Energy stock fund in Boston.
That means demand for gas is likely to continue rising faster than supply, even with some new exploration and production, Rice says. He views that as a recipe for rising gas prices--and higher energy company profits--over the next few years.
Stock Group Trends Here are the biggest winners and losers among 87 stock industry groups in the first quarter, through Monday.
1st qtr. Group change Semiconductors +27.3% Oil/gas explor. +24.7% Hotels/motels +24.5% Natural gas +23.0% Oil/gas drilling +22.3% Autos +21.6% Steel +15.6% Bldg. materials +15.3% Gold +14.5% Machinery +14.1%
1st qtr. Group change Misc. health -40.1% Tobacco -18.4% Drugs -18.3% Hospitals -16.5% Med. supplies -16.2% Divers. health -14.2% Pollution control -12.5% Paper containers -9.8% Drug stores -9.8% Toy makers -9.0%
Source: Smith Barney, Harris Upham & Co., using S&P indexes