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Street Patrol
Recent articles:
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3 hot trends emerging early
The year is young, but techs, global growth and economic recovery are already shaping up as the winning themes. Here are the details on where to place your bets.
By Robert Walberg
The new year is only a couple of weeks old, but a few major market themes have already begun to develop.
First, the market is telling us that the technology sector will be one of this years big winners. You might be thinking its way too early to be making such a claim, but history has shown that the sectors that outperform in January typically go on to lead the market over the balance of the year.
Through this week, communications technology, Internet services, semiconductor, technology services and electric components and equipment are among the top-performing groups.
Techs tally up profits
Why are investors betting so heavily on the tech sector? Earnings growth, for one thing. After a long and painful downturn, the tech sector is finally beginning to reap the benefits of increased demand and improved operating efficiencies. With the economy on the mend, businesses are beginning to invest again, and to remain competitive, companies need to stay at the front of the technology curve.
And, with so many companies replacing computers just prior to January 2000, we are in the early stage of what could be a strong replacement cycle that would benefit hardware, software and chip vendors.
After slashing costs sharply over the past few years, the bottom lines of many tech companies are highly leveraged to even a modest improvement in demand. This dynamic helps explain why the sector is expected to enjoy double-digit earnings growth for at least the next two quarters, and why funds continue to flow into the group.
To be sure, valuations are becoming a concern, particularly among Internet services stocks. Nevertheless, there are still many tech stocks that are positioned for additional gains in 2004.
A few worthy of consideration include Nokia (NOK, news, msgs), ESS Technology (ESST, news, msgs), Storage Technology (STK, news, msgs), IBM (IBM, news, msgs), Taiwan Semiconductor (TSM, news, msgs), EMC Corp. (EMC, news, msgs), Oracle (ORCL, news, msgs) and Nvidia (NVDA, news, msgs). These companies enjoy competitive advantage, solid financials, strong chart patterns and rising earnings.
5 funds to play the world
Another developing theme: strong performance overseas. The weak dollar over the last year has been a contributor, and theres no reason to think that the greenback will bounce back any time soon. Investors should continue to investigate ways to increase exposure to Mexico, Thailand, Malaysia, India, Chile and Russia, both for their growing consumer base and their industrial and commodity production.
For most investors the best way to add exposure to global markets is through mutual funds. Ive pulled together a list of funds with the following attributes in common: proven, experienced management teams, strong relative performance over the last few years and relatively low fee structures. I would suggest considering well-diversified international stock and bond funds with an emphasis on equities.
| No-load international funds | | Fund | Expense ratio | Morningstar rating | YTD % gain/loss | | American Century Intl Growth Inv. (TWIEX) | 1.25% | 4 Stars | +3.5% | | BlackRock Intl Opp Svc (BRESX) | 1.60% | 5 Stars | +4.4% | | Fidelity Advisor, Diversified Intl I (FDVIX) | 1.07% | 5 Stars | +2.9% | | Prudent Global Income (PSAFX) | 1.50% | 5 Stars | 1.0% | | SSGgA Emerging Markets (SSEMX) | 1.25% | 3 Stars | +6.6% |
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Counting on a recovery
The final emerging theme: The market is betting big on a healthy and sustained economic recovery. That means you want to shy away from so-called defensive groups such as food, beverage and tobacco. On the flip side, you want to be exposed to economically sensitive groups such as paper, copper, steel, machinery and energy that historically outperform during periods of global economic expansion.
Consumer confidence is also apt to remain relatively high, especially as the job market improves, so areas such as retail and autos should do reasonably well.
Valuations are already rich, and a stock such as Caterpillar (CAT, news, msgs) might struggle to maintain its recent momentum as it now trades at the higher end of its historical P/E multiple range. However, discounted valuations (based on 2004 estimated results), steadily improving earnings and solid price momentum suggest theres still room left to run in stocks such as Worthington Industries (WOR, news, msgs), General Motors (GM, news, msgs), Cooper Cameron (CAM, news, msgs), BJ Services (BJS, news, msgs), GlobalSantaFe (GSF, news, msgs), Alcoa (AA, news, msgs) and Smurfit-Stone Container (SSCC, news, msgs).
Being first in the market isnt crucial, but identifying the markets early year themes and adjusting your portfolio accordingly will help you improve your results. Ill report back on how these themes are playing out and how the highlighted stocks/funds have performed in the weeks and months ahead.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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