With the initial shock of the terrorist attack abating, it could pay to look back at some strange twists affecting sectors highlighted in this space in the last few months.
The major averages have rallied since hitting lows on Sept. 21, despite further slowing in the U.S. economy and little evidence that corporate profits are recovering. The
has gained 6.2% since then, while the
is up 26% and the
Dow Jones Industrial Average
has climbed 14.6%.
The previously spotlighted sectors -- auto suppliers, cigarette makers and savings and loans -- have had mixed showings, and the fortunes of each were changed by the terrorist attacks. For instance, the auto-parts makers were lifted by Detroit's zero-financing binge, while tobacco companies saw their status as a defensive play go out of vogue when the
put easing into overdrive.
Auto Suppliers: Driven
The S&P Auto Parts & Equipment index has easily outperformed the market as cars and trucks speed out of showrooms. The index is up 19.35% since Sept. 21, vs. the S&P 500's 14.2% rise, and up 8.1% since Oct. 1, compared with the average's 6.2% growth.
But the fuel may run out, say analysts. Zero-financing has helped prop up car sales, but "we would be concerned about the sustainability of those incentives and hence demand," said Gregory Fritz, analyst at Midwest Research. Fritz said auto-parts makers face a "difficult" fourth quarter.
In a research note Tuesday, Gregory Kagay, analyst at ABN Amro, maintained his buy rating on
, which reports its third-quarter earnings on Wednesday. But the analyst said he believes vehicle demand "will slow materially over the next 12 months to 18 months," and advised an "underweight bias to the automotive sector."
"The real trick is to see how quickly, and how deeply, new vehicle sales fall off," said Charles Brady, analyst at Credit Lyonnais, who believes the car-parts makers aren't as susceptible to falling demand as the vehicle manufacturers. That's because their products are more specialized and "almost without substitute," said Brady. His favorite pick within the sector is
American Axle & Manufacturing
, whose sales to
are "doing very well in an otherwise so-so market." His firm hasn't had an underwriting relationship with American Axle.
"I'm just looking for the true, sustainable level of consumer demand," said Fritz, who has a neutral rating on the auto-parts sector.
Tobacco: No Cure
Wall Street seems to have lost its taste for tobacco. The sector, a bastion of safety in tough markets and soft economies, has underperformed the market since mid-September. The S&P Tobacco Index is up a meager 3.9% since Sept. 21, but down 2% since Oct. 1.
The sector's underperformance reflects a growing investor appetite for growth stocks, which could be winners in a recovery, strategists said. "Tobacco stocks are kind of a classic defensive sector where money goes when you're scared about earnings growth and economy," said Richard Maroney, chief editor at Dow Theory Forecasts. But such groups have been under pressure since the market bottomed, Maroney said, as investors tried to "boost the cyclical leverage of their portfolios."
Experts say the selloff doesn't reflect fundamentals. Volume of tobacco sales has been declining, said Rob Campagnino, analyst at Prudential Securities, but "that's a trend that's been in place for 20 years."
British American Tobacco
, which owns brands such as Dunhill and Lucky Strike, both posted strong quarterly results, Campagnino noted.
"What's so attractive about the sector from an investor standpoint is the fact that given the nature of the product, prices are so inelastic," Campagnino said. "That's what leads to profit margins and profit growth that tobacco can generate vs. a food company," he said. His firm hasn't done any underwriting for these companies.
Campagnino raised his rating for diversified holding company
( LTR) to buy from hold last Monday, following the company's decision to create a tracking stock to reflect the performance of its tobacco unit, Lorrilard. Campagnino also said "a lot of the recessionary concerns both in the U.S. and globally do not necessarily have a significant impact on tobacco." He considers Philip Morris's valuation attractive, but said both British American and
( RJUR) are approaching their historic trading levels.
Thrifts: Cycle's End?
Before the attacks, savings and loans had been beneficiaries of the Fed's generous rate cuts, but the sector has been a loser since the broad market's bottom. Since Sept. 21,
( GDW) is down almost 12%, while
Golden West Financial
( GDW) has lost 5.3%.
Analysts cite a variety of concerns, including growing consumer debt and fear that the Fed's aggressive rate-cut cycle is tapering out. Savings and loan stocks also "took a beating" after the Fed suspended the 30-year Treasury bond, a move that put a lot of pressure on 10-year yields, said Paul Miller, analyst at Friedman Billings Ramsey. Lower yields may encourage homeowners to refinance their mortgages, but savings and loans that depend on adjustable-rate mortgages could have trouble generating assets, Miller said.
Joy Palmer, an analyst at Merrill Lynch, agreed that the question in the sector is how mortgage originators can "actually grow their balance sheets." Still, Palmer expects per-share earnings growth for the sector to be about 10% next year, and said credit quality remains firm and the sector isn't a "high credit-risk group."
Miller also believes investors have been overly worried. "A lot of concerns have been overblown," he said, and that shares, trading around seven times earnings, are "completely oversold." Both Golden West and
Golden State Bancorp
are "good names" that could still get "double-digit earnings-per-share growth," even in worst-case scenarios, said Miller, whose firm hasn't done any underwriting for the companies.
Nevertheless, trading in the sector could be volatile in the next six months as the market frets over the level of interest rates next year. "I don't think a lot of money will flow back until we're clear about what the Fed will do with interest rates next year," Miller said.