By Sam Stovall Investors have been snapping up shares of big-name consumer-electronics and computer retailers like they're plasma TVs. That strength has enabled the S&P 1500 Computers & Electronics Retail subindustry index to join S&P's high momentum list (its relative strength price chart is shown below.)
This index consists of five large- and small-cap companies, all of which are followed analytically by Standard & Poor's. Year-to-date through July 8, 2005, this subindustry index has advanced 14.5%, vs. a 0.7% rise in the S&P Composite 1500 Index. During 2004, this group gained 16.8%, vs. a 10% advance for the 1500.
TROUBLE IN STORE? So the question is: Is there any upside potential left? Amy Glynn, CFA, the Standard & Poor's equity analyst who follows the group, says her fundamental outlook for the computer and electronic retail subindustry is positive, although her opinion varies on individual stocks. S&P's outlook reflects current stock valuation levels, company-specific factors, its estimate of the extent to which new products or technologies are likely to fuel near-term sales and profits, and the prospect of profit margin pressure.
Longer term, Glynn expects consumer-electronics retailers to benefit further from a shift toward increased consumer use of digital products and services. She notes that these stocks can have sharp, relatively quick price movements.
Glynn expects that further development and acceptance of digital products will boost future sales of consumer electronics. At this point in the cycle, she also see declines in average selling prices, which S&P thinks are hurting manufacturers, helping stimulate demand, and benefiting retailers. As new products are introduced, Glynn expects that management of inventories and product mix will become increasingly important in determining which retailers will be the most successful.
BROADBAND'S IMPACT. Looking ahead, S&P sees a growing convergence between computers, TVs, cameras, and telecommunications equipment. This should include portable devices that make it increasingly easy to access information and entertainment. As to the impact of the Internet, a growing availability of entertainment for downloading from home is likely to hurt long-term sales of prerecorded disks and cassettes at stores, in S&P's view.
Glynn believes that the extent to which the Internet is used as a medium for downloading or distributing recorded entertainment is likely to depend, in part, on the pace at which consumers switch to faster Internet hookups, through such means as cable modems and digital subscriber lines. Also, S&P expects that retailers will have increasing opportunities to sell devices that play downloaded content and possibly to sell new subscription services for music and video.
So there you have it. The subindustry's fundamental outlook and current momentum are in agreement, in S&P's opinion, pointing to likely future advances in share prices. Glynn's top pick among the stocks she follows? She has a 4-STARS (buy) opinion on shares of Best Buy (BBY
; recent price, $73).
Source: Standard & Poor's
Industry Momentum List Update
For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), and their proxies (the highest STARS-ranked companies in the sub-industry index-tie goes to the largest market value) as of July 8, 2005.
S&P High Momentum List
S&P STARS Rank
Computer & Electronics Retail
Distillers & Vintners
Fertilizers & Agr. Chem.
Managed Health Care
Oil & Gas Drilling
Oil & Gas E&P
Oil & Gas Refg. & Mktg.
S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.
S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:
S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.
S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.
Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.
In the U.S.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.
As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
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Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Stovall is chief investment strategist for Standard & Poor's