Looking to Sectors for Relief

ByABC News
March 13, 2001, 9:43 AM

March 13 -- While investors may be pondering which companies will follow their brethren into the meat grinder that is the market, the more important question might be which companies won't.

One key factor is the interest rate. If the overall economy slows further, ongoing Federal Reserve rate cuts will likely produce a list of retail and financial services stocks that will benefit most from the softer stance on monetary policy.

Footwear, health care, oil and gas (drilling & equipment), beverages, and electronics/semiconductors consistently outperformed during the three, six, and 12-month periods during Fed easings in 1987, 1989, 1995, and 1998, according to the ISI Group, an advisory firm that tracks such data.

For instance, footwear produced an average return of 45.5 percent; communications equipment posted an average return of 37 percent; and retail gave investors a 35 percent return, all in the one-year period following rate cuts in October 1987, June 1989, July 1995, and September 1998.

Old Reliable?

Some money managers, though, are wary of sectors that have been havens in the past. "For the past six months, there's been a reallocation from tech stocks. Investors have been hiding in value and Dow stocks," says Kyle Rosen, a hedge fund manager with an eponymous operation based in Southern California. "Today that notion was crushed. Stocks that had been favored fell out of favor today."

Other managers, however, say they've returned to following the muse of Warren Buffett. "You look at the tape and the sectors you want to be in are the oldest of Old Economy," says one New York hedge fund manager who requested anonymity, tossing off names of his holdings that include Allstate, Philip Morris, Vornado, and Pepsico.

Utilities, oil and gas, and consumer staples are the kinds of sectors that investors will be looking for, hunting stocks that look inexpensive based on their price-to-earnings ratios and pay sweet dividends.

Scoring Drugs

In most times of market turbulence, investors think of drug stocks much like they think of the Baltimore Ravens: great defense. The reason is simple people get sick no matter what the economy is doing so they'll still have to buy drugs.

But the stocks have had a rough 2001. For instance, Merck has fallen about 21 percent, while Eli Lilly has tumbled 16 percent and Pfizer has dropped 12 percent. On Monday, Merck slipped $1.54, or 2 percent, to $74.15, Lilly dropped 50 cents, or 0.63 percent, to $78.50, and Pfizer fell $2.10, or 4.9percent, to $40.35.