Gadget Gains

S&P's analyst thinks there's growth in store for computer and electronics retailers, new to this week's rankings

By Sam Stovall

Last week we had a few changes to the list of industries with six-month relative strength rankings of "5" -- those industries in the top 10% of the 115 industries in the S&P Super 1500 based on prior six-month price performance. (See below for a listing of the top industries as of Nov. 16, 2001).

One group added to the list was the computer & electronics retail industry, which is followed by S&P analyst Tom Graves. With demand for certain electronics products rising in the wake of the September 11 terrorist attacks, he has a moderately favorable investment outlook for the industry in the near term.

Graves rates top industry players Best Buy (BBY ) and RadioShack (RSH ) 4 STARS (accumulate), and has assigned a 3 STARS (hold) rating to Circuit City (CC ). After the tragic terrorist atacks, he looks for revenues at some consumer electronics stores to hold up better than those at other retail businesses, helped in part by increased demand for products such as cell phones and batteries. Graves expects that U.S. consumers will feel that it is increasingly important for them to have readily available means of communicating and receiving information.

Over the long-term, he expects consumer electronics retailers to get further benefits from a shift toward consumers using digital products and services. One caveat: Graves says investors should keep in mind that there can be sharp, and relatively quick, price movements in these stocks.

Graves expects that further development and acceptance of digital products will boost future sales of consumer electronics. As new products are introduced, he sees management of inventories and product mix as becoming increasingly important in determining which retailers are the most successful. Also, we expect that some consumer electronic retailers will be placing a growing emphasis on building service-related businesses.

And in the longer term? Graves expects a growing convergence between computers, televisions, cameras, and telecommunications equipment. He expects that manufacturers will develop increasingly portable and flexible equipment for receiving and transmitting data, video or audio, or some combination of the three. This, in turn, should contribute to new sales opportunities for consumer electronics retailers.

As to the impact of the Internet, Graves says a growing availability of entertainment for downloading from home is likely to hurt long-term sales of prerecorded disks and cassettes at stores. However, he 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.

Sub-Industry Company S&P STARS Rank
Agricultural Products Archer-Daniels-Midland (ADM) 3 STARS
Computer & Electronics Retail Best Buy (BBY) 4 STARS
Consumer Electronics Harman International (HAR) Not Ranked
Footwear Reebok (RBK) 4 STARS
Home Furnishings Mohawk Industries (MHK) 4 STARS
Household Products Procter & Gamble (PG) 4 STARS
Meat, Poultry & Fish Tyson Foods (TSN) 3 STARS
Metal & Glass Containers Pactiv Corp.(PTV) 5 STARS
Personal Products Alberto-Culver (ACV) 4 STARS
Specialty Stores Bed, Bath & Beyond (BBBY) 4 STARS
Water Utilities Amer. Water Works (AWK) 3 STARS

Stovall is senior investment strategist for Standard & Poor's

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