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Wall Street, California: Quarterly Review and Outlook

Presto Change-O

In a Fast-Moving Market, Winners Can Lose Their Perch Quickly

March 31, 1998|JAMES F. PELTZ

The Internet, airlines and health care were hot stock sectors during the first quarter, and real estate, oil services and computer disk drives were not. But don't count on that scenario extending through the second quarter, because the list of winners and losers is already being shuffled.

Take the oil services and airline sectors, for instance. Amid a steady slide in global oil prices, oil services stocks took a dive while airline shares took flight in the quarter.

Until 10 days ago, that is, when several major oil-producing nations announced production cuts that triggered a sharp rebound in prices of crude. That sparked a fierce rally in oil services shares and a drubbing of the airlines.

Result: Although the Philadelphia Stock Exchange's index of 12 airline shares still was up nearly 22% year-to-date as of Friday, it had been up almost 30% at March 16.

Meanwhile, real estate investment trusts, or REITs, which lagged badly through most of the first quarter, have started moving up lately as bargain hunters have resumed buying the issues.

Overall, the U.S. stock market was up 12.9% for the quarter through Friday, as measured by the blue-chip Standard & Poor's 500 index.

A healthy pace of consumer spending helped push many S&P stock groups higher, including retailers, auto makers and home builders.

Among the standout performers not well-represented in the S&P index were online stocks. Investors caught Internet fever again and bid related shares into the stratosphere relative to the companies' earnings--for the few companies that even have earnings yet.

The Chicago Board Options Exchange's index of 15 Internet stocks has soared 36% year-to-date, led by such issues as Yahoo Inc. (ticker symbol: YHOO), up 31% this year, and America Online Inc. (AOL), up a breathtaking 52%. Internet bookseller Inc.(AMZN) shot up 41%.

Shares of wireless communications companies also surged, as some investors bet on fast growth prospects for the industry. CoreComm Inc. (COMM), for instance, has soared 67%.

In the health-care sector, health maintenance organization stocks rebounded after a fourth-quarter plunge related to depressed profit margins. Major drug stocks also were hot, on expectations for continued strong earnings growth: Warner-Lambert Co. is up 34% year to date.


What about the second quarter? For starters, there's widespread agreement about one thing: The economic backdrop for the market overall could hardly be better, which is a key reason why stocks keep reaching record highs.

"The current U.S. economic environment is the best ever--steady growth without inflation," declared Goldman Sachs & Co. economists William Dudley and Edward McKelvey in a recent report. With the economy's expansion 7 years old in March, "there still is no recession in sight."

Perhaps. But that doesn't mean the economy won't at least slow down at some point. And when it does, what then?

The prospect is already on the mind of entertainment industry analyst Jill Krutick of Salomon Smith Barney. "As the economy heads into the late stages of its expansion, consumer spending could become pressured," she said.

In the entertainment field she advises sticking with the big diversified players that are less sensitive to an economic pullback. Her top picks: Walt Disney Co. (DIS), Time Warner Inc. (TWX) and Mattel Inc. (MAT).

Computer services stocks also get good reviews because, even if the economy slows a bit, demand for electronic data processing and related services is expected to sustain good growth.

J.P. Morgan Securities analyst Raimundo Archibold recommends airline reservations systems operators Sabre Group Holdings Inc. (TSG) and Galileo International Inc. (GLC); financial industry computer services provider Equifax Inc. (EFX); and Walsh International Inc. (WSHI), which provides information services to the health-care field.

Indeed, "our clear bias within technology is toward computer services, the telecom equipment [stocks] and networking groups," owing to their "strong expected revenue growth," said Douglas Cliggott, J.P. Morgan's investment strategist.

Wireless communications stocks are one of the favorite groups of Standard & Poor's analysts, whose stock sector ratings are based on both stock price momentum and the companies' business fundamentals.

Although some investors favor price momentum alone as a good stock-picking system--the idea that what is hot often stays hot for a while--that can be dangerous.

For instance, shares of the Big 3 auto makers--General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler Corp. (C)--easily outpaced the S&P 500 in the first quarter. But now few analysts are recommending them, because of a glut of new cars on dealers' lots. So the stocks' momentum might not be enough to warrant buying them now.

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