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Looking for opportunity
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November 9, 2001: 11:09 a.m. ET
Most sectors hit hard by attacks; but that could make for good bargains.
By Staff Writer John Chartier
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NEW YORK (CNNmoney) - The Sept. 11 terrorist attacks, and the aftershocks felt on Wall Street, left many retail investors searching for stability in an already volatile market.
Two months later, companies across all sectors are feeling the effects on their bottom lines. Many are reporting lower earnings and a slump in sales.
Yet, some analysts see this as a buying opportunity for those who take the time to do their homework. Such a move, they say, could put their portfolios back on track when the economy eventually recovers.
"The market remains highly selective. People have to pick their spots," said Alan Ackerman, market strategist with Fahnestock & Co.
It is important, he notes, to remember that things are likely to get worse before they get better.
"On the earnings front, there's not much on the positive side," said Chuck Hill, director of research for First Call. "...The fourth quarter is going to be a disaster."
Hill estimates fourth quarter earnings for companies on the Standard & Poor's 500 index will come in a startling 22 percent lower than in the comparable year-ago quarter. And that's despite the easier comparisons to 2000, when the tech bubble burst and resulted in fourth quarter earnings growth of just 3.2 percent. That compared with 18.4 percent growth the same quarter in 1999.
Yet a little legwork does unveil some opportunities.
Technology holds firm
Technology as a whole has enjoyed something of a rally since Sept. 11. The tech-laden Nasdaq Composite index is up 10.7 percent from its Sept. 10 close of 1,695.38. The index erased its post-attack losses in mid-October as investors became bullish on the prospect of a recovery sometime in 2002.
"Technology has done well, not necessarily because of the crash, but because it has moved up the alert that the market's concentrating on a 2002 recovery," said Barry Hyman, chief investment strategist at Ehrenkrantz King Nussbaum. "Rather than focusing on the earnings that are going to come out in the fourth quarter, people are looking forward rather than near-term."
Microsoft (MSFT: up $0.41 to $64.83, Research, Estimates), Sun Microsystems (SUNW: down $0.15 to $13.12, Research, Estimates), and Oracle (ORCL: down $0.21 to $15.24, Research, Estimates) are all seeing strong daily gains.
Other companies on traders' radar scopes include data storage firm Q-Logic (QLGC: up $0.39 to $44.67, Research, Estimates), whose shares have soared nearly 100 percent since Sept. 11. Veritas (VTS: up $0.78 to $17.80, Research, Estimates) is another storage software company whose shares have jumped since the attack.
Other strong candidates, Hyman said bear watching are Applied Materials (AMAT: unchanged at $38.40, Research, Estimates), LSI Logic (LSI: down $0.14 to $18.30, Research, Estimates), and Nokia (NOK: up $0.08 to $22.47, Research, Estimates).
"People have gotten into the belief that much of technology is cyclical now," Hyman said.
And yet, these strong gains come amid dismal earnings expectations for the sector.
Wall Street anticipates fourth quarter technology earnings to be down 63 percent from a year earlier compared with a 23 percent decline expected for the sector on the eve of the attacks, according to First Call's Hill.
But some see that as a signal to get in on bargain prices, particularly fiber-optic telecommunications issues, which have been struggling over the last year with weak demand.
"I think they've run rather quickly, and if anything they're buys on the weakness rather to buy into the upside momentum," Ackerman said.
Oil, utility stocks hold promise
Oil stocks took a big hit immediately following the attacks on fears that military action in the Middle East could choke off supply, but that quickly turned into a rally as the price of gasoline dropped in the wake of decreased demand in air travel.
And that rally could surge further if OPEC cuts oil production to bolster the price.
"We're carefully watching OPEC. The indication is that crude production, crude daily output is likely to be cut a million to a million and a half barrels," Ackerman said.
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The market remains highly selective. People have to pick their spots
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Alan Ackerman
Market strategist
Fahnestock & Co. |
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Utility providers also hold promise going forward, thanks in large part to ongoing deregulation of the industry, which despite the high-profile energy crisis it caused in California earlier this year, still promises more competition along with a nation's increasing energy demands, Hill said.
"Utilities are pretty much business as usual. In the aggregate, we see the numbers bounce around some, but this will change. We're still looking at better-than-normal performance," Hill said.
Insurance stocks sank in the days following the attacks as investors sold off shares in anticipation of astronomical claims stemming from the destruction of the World Trade Center and part of the Pentagon.
The stocks of re-insurance companies, or companies that insure the insurers against overwhelming claims, took particularly huge hits. But many have begun to rebound nicely as investors realize those companies will now raise premiums.
Companies such as AIG (AIG: down $1.17 to $79.70, Research, Estimates), XL Capital (XL: down $3.14 to $90.68, Research, Estimates), and W.R. Berkeley (BKLY: Research, Estimates) are all worth keeping in mind, Hyman said.
Defense companies are good long-term strategies as new technologies being developed for pilot-less fighter aircraft, not to mention development of the joint strike fighter, are expected to benefit that sector's earnings over the next several decades.
Be defensive on defense
Lockheed Martin (LMT: up $0.10 to $47.85, Research, Estimates), which won the government's $20 billion contract to develop the joint strike fighter earlier this month, and Northrop Grumman (NOC: down $0.18 to $97.77, Research, Estimates) bear watching, analysts said.
Health care is another defensive play in which investors are taking cover. Americans still need their prescription drugs and over-the-counter health products no matter what the economy does.
While stocks such as Pepsico Inc. (PEP: down $0.16 to $48.87, Research, Estimates) and Hershey (HSY: down $0.25 to $66.02, Research, Estimates) didn't sink after the attacks, they have not lost ground either as investors look to consumers to continue buying soda, chocolate and other everyday food items, for stability in these stocks.
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However, analysts caution taking a closer look at individual performances. For example, Coca Cola's (KO: down $0.47 to $48.60, Research, Estimates) stock has slid while Pepsi's has been on the rise because of management styles, marketing agreements and other micro-economic issues.
Many factors could alter the outlook for these stocks, but the key sign investors should look for, according to First Call's Hill, is that investor optimism has finally ebbed and that they are ready to throw in the towel. Only then will the markets be positioned for a sustained rally.
"We're in that mode here where there's a dead cat bounce and that the glass is half full," Hill said. "At some point reality will set in and then the glass will be half empty." 
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