By Sam Stovall One group that has enjoyed a strong up cycle while the broader market has tumbled is household appliance stocks. This industry is new to the list of those with top Standard & Poor's Relative Strength rankings.
Investors have warmed to this segment, given the continued strength in the housing sector in the midst of overall economic weakness. Year-to-date through Mar. 1, the S&P Household Appliances index advanced 12.3%, vs. a decline in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) of 1.1%. That comes on top of a 26.5% surge in the index during 2001, vs. an 11.8% decline for the 1500.
S&P analyst Efraim Levy has a positive near-term investment outlook on the group. He cites the Federal Reserve's aggressive cuts in interest rates, surprisingly robust housing activity, and signs of faster-than-expected economic improvement in the U.S. Another important factor, though not as easily quantified: An increased focus on home and hearth following the September 11 terrorist attacks.
UPGRADE CYCLE. Levy believes these factors should outweigh increased unemployment, lower levels of consumer confidence, and increased pricing pressure within the industry, to help the shares move higher.
What about the longer term? Levy says demographic shifts are working in favor of appliance manufacturers and retailers. Their main target is the 35- to 64-year-old population group -- the fastest growing segment in the U.S. This group includes those who have reached their peak spending years. And these consumers are likely to replace earlier purchases of major durable goods, such as appliances. The bottom line: This industry's longer-term uptrend in sales and earnings is likely to continue.
Levy's top pick in the group is industry leader Whirlpool Corp. (WHR). He recently upgraded his opinion on the stock to 5 STARS (buy) from 3 STARS (hold), noting that Whirlpool has been outpacing the domestic industry, thanks to a more favorable product mix (as a larger percentage of sales comes from higher-margin items) and market-share gains. Levy thinks Whirlpool should benefit from new-product introductions and cost savings from its ongoing restructuring efforts.
S&P Relative Strength Rankings
These industries carry six-month relative strength rankings of "5" as of Mar. 1, 2002 -- meaning that they're in the top 10% of the 115 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior six-month price performance.
Largest Company (Market Cap.)
S&P STARS* Rank
Air Freight & Couriers/Industrials
Casinos & Gaming/Consumer Discretionary
Park Place Entertainment (PPE)
Lyondell Chemical (LYO)
General Merchandise Stores/Consumer Discretionary
Home Furnishings/Consumer Discretionary
Leggett & Platt (LEG)
KB Homes (KBH)
Household Appliances/Consumer Discretionary
Internet Software & Services/Information Tech.
Metal & Glass Containers/Materials
Trading Cos. & Distr./Industrial
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS
(accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief sector strategist for Standard & Poor's