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Investors Willing to Make Bets Are Lending Strength to Some Sectors

February 18, 2001|TOM PETRUNO

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.

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