Solid Bets for a Shifting Market


By Gene Marcial With the stock market ever blowing blow hot and cold, what's an investor to do? A perfect question for an imperfect market, and it clearly hasn't been easy for investors to stick to any coherent strategy.

Not to worry, say some pros, who profess to know just what to do -- and how to advise confused investors. Here is what several market experts have to say:

Don't chase technology stocks -- they're mainly for the adroit short-term traders. Consumer stocks are looking very healthy and could be vehicles of opportunity right now. So are the defense stocks. Forget the troubled telecoms. They'll stay a group of pain. And they say if you're short many stocks, or invested in a bear fund, close out -- or cover!

QUIET RISE. Veteran market strategist Bert Dohmen, editor and publisher of the Wellington Letter in Los Angeles, describes the current activity as a "stealth bull market" that's masked by the weakness in the major indexes and investors' fixation on the battered tech and telecom sectors. In reality, he says, the market's "breadth," or the advance-decline line, shows that majority of the stocks listed on the New York Stock Exchange have been rising this year, while the big indexes, so widely watched by the average investor, have been on the skids.

Dohmen expects that over the short term, this situation might temporarily reverse itself, with the techs experiencing a rebound from shorts covering their positions. "This short-covering rally promises to be vigorous enough to squeeze all the short sellers at the end," warns Dohmen. The big hedge funds that have been heavily shorting the techs will cover their short positions -- rather than buy new stocks.

Investment adviser Louis Navellier, editor of the highly rated Blue Chip Growth Letter, warns that the stock market is undergoing a massive change in leadership. The techs, hampered by a major downturn in business spending, are out, he says. "Any company that's dependent on business spending, as opposed to consumer spending, is now in big trouble, says Navellier.

"THUMBS-UP." Edward Yardeni, investment strategist at Prudential Financial, says "consumers are still the best bet," in this market. "I am mostly thumbs-up on consumer stocks and thumbs-down on technology." Last year's trend, in which tech stocks were down about 26%, while consumer stocks were mostly up, is being repreated this year, says Yardeni. So far in 2002, techs are down 22%, and consumer staples are ahead of the pack with a 13% gain, says Yardeni.

Consumers are in much better shape than is widely recognized, he asserts. "The secular rebound in productivity since the mid-1990s continues to boost inflation-adjusted earnings per worker." The dramatic gain in wages and salaries since 1995, he adds, explains the strength in consumer spending in general and auto sales, in particular.

To the bulls, the major stock indexes' vigorous rally on Wednesday, May 8, followed by another upside blast on Monday, May 13, felt as refreshing as a downpour during a drought. The May 13 rebound boosted the Dow Jones industrial average above the 10,000 level -- up 1.7%, to 10,109.66. And it drove up the Nasdaq by 3.2%, to 1,652.54. The S&P 500 climbed 1.9%, to 1,074.56. As of midday on May 14, the indexes are all up again, with the Dow around 10,250, Nasdaq at 1,710, and S&P 500 at 1,090.

TOUGH BARRIERS. To put the market's advance in perspective: The Dow this year faces "strong resistance" at -- or finds it difficult to surpass -- the 10,600 mark, according to Dohmen, who's a veteran technical market watcher. The Nasdaq finds it tough to rise above the 1,800 zone. And the S&P 500's upper resistance level is 1,100. A rally that pushes the indexes beyond these points will ultimately position the market toward hitting new highs, forecasts Dohmen.

So what stocks are attractive in the current environment?

Dohmen says he remains bullish on several defense stocks: General Dynamics (GD), trading at 100 a share; L-3 Communications (LLL) at 130; and Raytheon (RTN) at 43. New additions to his buy list: Airborne (ABF), 22; Cisco Systems (CSCO), 16; FLIR Systems (FLIR), 46; and Rent Way (RWY), 12.

Navellier continues to favor Wal-Mart (WMT), now at 57, and Anheuser-Busch (BUD), 50. Among his new buys are Progressive (PGR), now 57, which is increasingly becoming dominant in the auto insurance business, he says. He's also picking up health-care giant Johnson & Johnson (JNJ), 61; aerospace- and weapons-systems maker Lockheed Martin (LMT), 62; health-care provider Tenet Healthcare (THC), 70; and, among food stocks, General Mills (GIS), 44; Sysco (SYY), 27; and ConAgra (CAG), 24.

EXPECTATION SHIFT. Navellier is also bullish on London-based Diageo (DEO), now 51, parent of Burger King and a major producer of alcoholic beverages, including Bailey's and Johnny Walker. All OF these stocks will benefit from consumer spending, maintain their healthy operating margins, and post steady earnings growth, according to Navellier.

Dohmen advises those who are heavily invested in sectors that have done well this year to take some profits in order to be able to reenter the same areas when prices drop again. Keep in mind, says Dohmen, that expectations are starting to shift toward a more positive environment later this year. In the past two months, the general sentiment had been some concern that the economy could see a double-dip recession. That feeling is dissipating, notes Dohmen.

The recent strong productivity numbers -- the biggest gains in 19 years -- show that corporate earnings should have a good rebound later this year, Dohmen believes. That, he claims, is a most important bullish factor. Indeed, if Wall Street is now a "stealth bull market," these forecasts and analyses might just be the hidden path to healthy gains. Marcial is BusinessWeek's Inside Wall Street columnist


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