Industries to Watch in the Final Quarter

Some sectors of the S&P 500 always seem to outperform the overall index during the period. Here's a look at how they're doing in 2003

By Sam Stovall

Curious about how sectors typically stack up in the final months of the year? From 1990 through 2002, the 10 subindustries in the Standard & Poor's 500-stock index listed in the table below outperformed the overall index during the fourth quarter 70% or more of the time. The other 10 subindustries underperformed the broad market at least 70% of the time, on average.

How are they doing this time around? Six of the perennial outperformers were ahead of the S&P 500 from Sept. 30 through Nov. 7, led by homebuilders and drug retailers. Meanwhile, six of the likely laggards were underperforming the broader market, with food retailers and energy-services providers at the bottom of the heap so far this quarter.

While there's no guarantee that future performance will mimic the past, all of the prior industry leaders currently have a stock that S&P analysts have favorable 12-month investment opinions of buy or accumulate. Eight of the 10 industry laggards have stocks that currently carry avoid or sell recommendations.

S&P 500 Sub-Industry Frequency of Outperformance in Q4 Sept. 30-Nov. 7 % Change Company, STARS Ranking
Homebuilding 69% 23.9% Lennar (LEN ), 5
Drug Retail 77% 17.7% Walgreen (WAG ), 4
Communications Equipment 69% 16.5% Cisco Systems (CSCO ), 5
Home Improvement Retail 77% 15.9% Lowe's (LOW ), 4
Publishing & Printing 77% 8.6% Gannett (GCI ), 5
Soft Drinks 77% 6.5% PepsiCo (PEP ), 5
Personal Products 77% 4.6% NBTY (NTY ), 5
Household Products 77% 2.2% Procter & Gamble (PG ), 5
Multi-line Insurance 77% 1.3% Hartford Financial (HIG ), 5
Systems Software 77% -1.7% Microsoft (MSFT ), 5
S&P 500 Index NA 5.7% NA
Department Stores 31% 10.9% Saks (SKS ), 2
Gold 15% 9.1% Placer Dome (PDG ), 3
Automobile Manufacturers 31% 8.7% Ford (F ), 2
Diversified Chemicals 31% 6.9% Du Pont (DD ), 2
Environmental Services 31% 1.8% Ionics (ION ), 2
Oil & Gas Exploration & Production 23% 0.4% Kerr McGee (KMG ), 2
Integrated Oil & Gas 31% -0.2% Murphy Oil (MUR ), 1
Construction & Engineering 15% -0.9% Insituform Technologies (INSU ), 2
Oil & Gas Equip. & Services 31% -2.7% Baker Hughes (BHI ), 3
Food Retail 31% -3.8% Great Atlantic & Pacific (GAP ), 2

As I have always said, treat history as a guide and not gospel. Maybe many of these leaders and laggards will not exhibit their usual performance patterns during this quarter, but you may find it helpful to be aware of their tendencies.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 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) as of Nov. 7, 2003.

Industry/Sector Company S&P STARS* Rank
Communications Equip./Info. Tech. Cisco Systems (CSCO ) 5 STARS
Computer & Electronics Retail/Consumer Discretionary Best Buy (BBY ) 4 STARS
Computer Storage & Peripherals/Info. Tech. Storage Technology (STK ) 4 STARS
Consumer Electronics/Consumer Discretionary Harman International (HAR ) Not Ranked
Diversified Metals & Mining/Materials Phelps Dodge (PD ) 3 STARS
Gold/Materials Newmont Mining (NEM ) 4 STARS
Homebuilding/Consumer Discretionary D.R. Horton (DHI ) 5 STARS
Internet Retail/Info. Tech. eBay (EBAY ) 3 STARS
Internet Software & Services/Info. Tech. Yahoo! (YHOO ) 3 STARS
Semiconductor Equip./Info. Tech. Applied Materials (AMAT ) 4 STARS
Semiconductors/Info. Tech. Intel (INTC ) 5 STARS

* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).

Stovall is chief investment strategist for Standard & Poor's

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