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SuperModels Recent articles: • Starbucks' genius blends community, caffeine, 2/16/2005 • A better index: the Diversified Dow 18, 2/9/2005 • February holds the key to investing in 2005, 2/2/2005 More... | SuperModels Exxon proves raw stuff is the right stuff Exxon Mobil's move past General Electric to become the biggest U.S. company is a signal event. It means that suppliers have trumped manufacturers. By Jon D. Markman The ascent last month of Exxon Mobil It signaled more than the triumph of the strategy of a single company. It signaled the dawn of an era in which suppliers matter more than manufacturers, and an era in which the fuel used to create things has become more valuable than the things themselves. Looking back at this moment with the benefit of hindsight 10 years from now, we might also say that Exxon's ascent signaled the rise of developing over developed nations -- a time when the value of scarce raw materials scoured from the earth paradoxically began to trump the value of plentiful finished goods increasingly covering the earth. Exxon's market capitalization, which topped $402 billion through Feb. 28, has blown past former top-spot holders General Electric
GE and Microsoft: standing still GE, priced by investors at $374 billion, grew to hold the top spot for a long time in the mid-1990s, as well as the past couple of years, on the basis of its strategy to acquire financial-services businesses and create high-value electronic, aerospace and medical-device products. The company's diverse base of operations was intended to provide rock-solid shareholder value in good times and bad. But at a time of slow global economic growth and extreme competition on price from Chinese rivals, GE has failed to meet the challenge of achieving at anything close to historic levels. Microsoft, at a market capitalization today of $274 billion, took over the top spot in the late 1990s from General Electric on the basis of its strategy to establish a stranglehold on the world's ability to use computers efficiently through a common operating system. It then leveraged that power by creating cheap, standard software for tasks ranging from word-processing to Web services. Yet increasing competition from smaller and more nimble rivals has made it nearly impossible for Microsoft, too, to grow at anything close to its former rate of high double-digits. It has languished at the same market value for the past seven years, unable to find a path to new heights despite vast improvements in the strength, importance and range of its products. (Microsoft is the publisher of MSN Money.) Networking-equipment maker Cisco Systems Coca-Cola: KO'd by Apache Several other one-time pretenders to the market-cap throne have also found it impossible to grow much in a non-inflationary world. Global beverage titan Coca-Cola The same can certainly be said for the divergence in the value of oil and drugs. Since 1999, when Pfizer More about energy on MSN Money
And how about insurance, the business of guaranteeing protection from the world's risks? American International Group The raw power of energy These examples simply illustrate the unexpected development that the raw value of energy -- whether in the form of petroleum, natural gas or synthetic chemicals -- has triumphed over all the things that energy has empowered. And the victory lap now being taken by integrated oil giant Exxon Mobil is symbolic of all of the work done by all of its smaller but fast-growing teammates. Now, as an investor, it is fair to wonder if this newfound attention to energy signals nothing so much as the end of the trend. But I would bet that the advance is far from done, even as crude oil nears its historic high of $56 per barrel this week. For even though half of the top-gaining 25 stocks in the S&P 500 Index ($INX) this year hail from the energy sector, they still represent just a tiny fraction of that market proxy -- and of most investors' portfolios. Consider, for example, the portfolios of the six strategists participating in this Web site's Strategy Lab. Out of the 61 positions taken, just six, or 10%, are in energy. And most of those are relatively small dollar positions. If the energy story were more widely accepted as bona fide, these stocks would form the core of most investor's portfolios -- not just stand around the periphery. Skepticism over the strength of energy is still rampant, and it will likely take many months, perhaps years, before all the oil bears are converted to the bullish camp. Consider too that the Dow Jones Industrial Average ($INDU), supposedly representative of the entire U.S. economy, currently has just a single energy stock: Exxon. In contrast, it has three health-care stocks, three retailers, four tech stocks and two phone utilities -- all finished-goods makers and providers that cannot hold a candle to the value creation going on today in the energy business. Triumph of the energy bulls? It's fascinating to note, in this regard, that the managers of the DJIA kicked ChevronTexaco In summary, the summiting of Exxon Mobil atop the pile might well be seen as just the first bright flag of the energy bulls on a planet that continues to deny their achievement. As the developing economies of India and China need more oil and gas to power their industrial ambitions, the earth is apparently giving it up more and more grudgingly. When voracious demand chases slim supply, the result is seldom in doubt. Don't look for a top until at least Dow Jones puts another energy stock in the Dow and Standard & Poor's puts at least a couple more energy companies in its own large-cap standard bearer, the S&P 500. At the top of the Nasdaq bubble, don't forget, S&P put a dozen tech stocks in that index to gun the representation of that sector north of 25%. Since energy is still less than 10% of market capitalization in the index, it has a long way to go. Fine Print MSN Money's StockScouter rating system continues to favor the energy sector, just as it has the past two years running. Top choices are Valero Energy Here is the screen. . . . Thanks for all of the nice mail about my Starbucks Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, he held positions in the following stocks mentioned in this column: General Electric, Microsoft, Yellow, Exxon Mobil, Coca-Cola, Cisco Systems and Starbucks. | |||||||||||||||||||||||||||
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