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Stock Analyst Update

Morningstar on the Market: Week through 08/11/00

Which stocks are hot, and which are not.

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Light summer trading couldn't mask the importance of a series of earnings reports that came down the pike this past week. Many investors have recently focused on the earnings picture, especially now that another interest-rate increase seems unlikely. As a result, a number of the larger technology names ended the week on the downside, as questions over high valuations and possibly lower earnings took their toll. The Nasdaq Composite index barely stayed above water, edging up only 0.05% on the week.

But a tame inflation picture and defensive investing strategies gave a boost to blue-chip issues this week. The Dow Jones Industrial Average closed Friday up 119.04 points, or 2.4%, at 11,027, above the 11,000 mark for the first time since April 25.

Still, much of the market last week was driven by the old standbys: merger news, earnings reports, and analyst opinions. Prime among these was Philip Morris (MO), which enjoyed a gain of 17% for the week after jumping Friday on a research report from securities underwriter Goldman Sachs (GS) that offered a positive outlook for the tobacco industry. Shares of the tobacco giant have staged a strong turnaround of late, gaining 63% since hitting a 52-week low of 18 11/16 on February 15. Tech bellwethers Cisco Systems (CSCO) and Dell Computer (DELL) held down the important earnings-news slots this past week, each reporting profits that beat expectations. Meanwhile, shares of Phone.com (PHCM) and Software.com (SWCM) surged in the wake of their merger announcement; each gained more than 30% at one point on the news.

By Style Box
Problems within the retail and drug sectors weighed heavily on the
large-blend section of the Morningstar style box. Popular clothier Gap (GPS) almost single-handedly pulled down the retailing sector in the wake of its poor quarterly earnings report and a warning about problems in the second half of the year. Retailing giant Wal-Mart Stores (WMT) experienced its share of difficulty, lowering investor expectations for the current period while beating expectations for the July quarter. Shares of Wal-Mart ended the week down 1.5%.

The large-blend sector also suffered. A number of drugmakers were pulled down by news Eli Lilly (LLY) would lose patent rights to the popular antidepressant Prozac two years earlier than expected. Schering-Plough (SGP) and Bristol-Myers Squibb (BMY) fell 4.9% and 2.7%, respectively, on the week.

On the upside stood the exact middle of the style box, medium-blend stocks. Investor enthusiasm over business-to-business stocks found a strong example in Freemarkets (FMKT), up 7.2% on the week. Second-quarter earnings that beat expectations boosted ICN Pharmaceuticals (ICN), leaving shares 1.7% higher by Friday.

By Industry
The positive outlook sounded on Friday placed a torch under some already-smoking
tobacco stocks and helped turn that industry into one of the week's best performers. Along with Philip Morris, shares of RJ Reynolds Tobacco Holdings (RJR) and Gallaher Group (GLH) lit up the charts, turning in gains of 14.5% and 6.1%, respectively.

Strong market reaction to the merger of Phone.com and Software.com helped turn the software industry into a winner this week. And a strong week from network-software provider Citrix Systems (CTXS) didn't hurt, nor did better-than-expected earnings from J.D. Edwards (JDEC).

As mentioned earlier, it was not a good week for pharmaceuticals or retailers, particularly department stores. In addition to troubles with Wal-Mart and Gap, Ames Department Stores (AMES) reported a widened July-quarter loss and ended down 4.9% on the week. Not even a strong five days for Barr Laboratories (BRL), the winner in the Eli Lilly patent case, could save the pharmaceuticals from ending lower.

By Sector
As you might expect, troubles among the pharmaceutical stocks meant the health sector landed near the bottom of the 10 Morningstar sectors this week. Problems with some household names weighed down the consumer-staples sector as well, with soapmaker Dial (DL) falling on news it was likely to miss full-year profit estimates. Clorox (CLX) struggled in the face of troubles in integrating its First Brands acquisition. The bleach maker fell to last place among consumer staples by losing 12.6% for the week.

Cycling to the top of the sector list were stocks of industrial cyclical companies. Strong weeks by Dow components General Electric (GE), Caterpillar (CAT), and Alcoa (AA) helped power the blue-chip barometer to its close above 11,000.

A benign inflation picture helped financial stocks finish the week on an up note, despite the implosion of Unumprovident (UNM) on Thursday. Shares of the insurer fell 10.5% that day in the wake of disappointing earnings and ended the week down 6.1%.

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