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Stock Analyst Update

Morningstar on the Market: Week through 08/18/00

Which stocks are hot, which stocks are not

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Investors digested more company earnings this past week. For those in the retail sector, the earnings hurt, and it showed as key companies such as J.C. Penney (JCP) saw their stocks slip.

Meanwhile, the interest-rate picture remained generally positive. Many investors believe that the Federal Reserve will not raise rates when it meets Tuesday. But the markets turned cautious at the end of the week, as the meeting drew near. On Friday, the Dow Jones Industrial Average ended 0.1% lower, at 11,046.48, and the technology-laden Nasdaq Composite index slipped 0.3%, to 3,930.34. The S&P 500 index also fell 0.3%, to 1,491.72.

The Fed has raised rates six times since June 1999, and there have been indications that the hikes have worked to keep inflation under control. Most government data released this past week continue to support beliefs that rates will not rise any time soon. For example, the Consumer Price Index, the broadest gauge of inflation, edged up only 0.2% in July, lower than June's 0.6% rise, and home and apartment construction in July fell for the third consecutive month.

By Style Box
Medium-blend stocks led the pack of gainers for the week. Especially notable were Cabletron Systems (CS), a phone- and network-equipment company, and Incyte Genomics (INCY), which jumped 25.3% and 25%, respectively. Also among the best performers were energy companies such as Unocal (UCL) and PECO Energy  (PE), which rose 7.2% and 5%, respectively.

At the bottom were large-value stocks. Poor performers for the week included retailer Target (TGT), which fell 12.4%, one of several retail stocks that suffered amid disappointing earnings. Ford Motor (F) also was among the underperformers, dropping 8.3%. Ford's light trucks were affected by a recall of tires manufactured by Bridgestone/Firestone.

Despite the category's disappointing weekly performance, some large-value stocks did well. Agilent Technologies (A), a maker of test and measuring equipment, ended the week with a 43% gain. The company, formerly a part of Hewlett-Packard (HWP), reported that July-quarter net income rose to $0.33 a share from $0.29 a year earlier, easily beating company-lowered expectations of $0.20. Morningstar.com analyst Jay Ritter noted that Agilent is a high-quality, diversified technology company with good growth potential.

By Sector
The energy sector continued to power ahead last week. Apart from good performances by Unocal and PECO Energy, the sector was helped by gains in companies such as Texaco  (TX) and Enron (ENE).

In need of some energy this past week was the retail sector, which posted a loss.

Discount retailer Wal-Mart Stores  (WMT) was hit by selling earlier in the week, after it announced expectations of slower earnings growth. Department-store chain J.C. Penney has been struggling to make its stores more profitable following poor earnings resulting from slow sales and markdowns. Morningstar.com analyst Mark Sellers pointed out recently that Wal-Mart's continued growth and profitability may make its shares, now trading at less than $50, attractive to buyers. But he recommended that investors hold off on J.C. Penney until they see evidence of a turnaround.

Financials also finished the week near the bottom, despite a positive interest-rate outlook. This sector inched up just 0.2% for the week.

By Industry
Data showing a slowdown in July home construction hit stocks of home-supply stores. Notable among them is Home Depot (HD), which is down 11.6% for the week. Sellers noted that Home Depot remains the top home-improvement store. But because of the stock's high valuation, he recommends that investors wait until the price drops below $50.

Meanwhile, the tobacco industry remained on top for the week, seeing a jump of 19.7%. Major cigarette makers Philip Morris (MO) and RJ Reynolds Tobacco Holdings  (RJR) gained 18.9% and 12.5%, respectively.

Also among the top performers were semiconductor companies, up 7.1% for the week. The industry benefited from favorable comments by analysts. On Friday, Merrill Lynch (MER) provided upwardly revised global revenue-growth estimates for the semiconductor industry and recommended investors consider companies such as Texas Instruments (TXN) and Cypress Semiconductor (CY). Just after Texas Instruments reported strong earnings last month, Morningstar.com analyst Jeremy Lopez noted the company's outstanding outlook. At about $69, its stock isn't cheap, but the company's strength may justify the price.

Odyll Santos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.