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Stock Analyst Update

Morningstar Market Roundup: Week through 12/08/00

A memorable week for tech thanks to Mr. Greenspan.

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Federal Reserve chairman Alan Greenspan gave stocks, especially tech stocks, a shot of enthusiasm this week. Sure, the markets got some support from expectations (since proven incorrect) that the election saga will soon end, with Texas Gov. George W. Bush as the victor, but it was Greenspan's speech that gave stocks a memorable boost.

Speaking before New York bankers on Tuesday, Greenspan noted that the economy is cooling off and that the sharp drop in stocks could signal excessive cuts in consumer and business spending. To many Wall Streeters, that meant the Fed, which has raised interest rates six times since last year, could cut those rates early next year.

That thought led the Nasdaq Composite index, heavy with downtrodden tech stocks, to soar more than 10% Tuesday, its largest one-day gain and its largest percentage gain ever. The Dow Jones Industrial Average and the S&P 500 index followed, with sizable gains.

While earnings warnings from the likes of Apple (AAPL) and Bank of America (BA) on Wednesday and Motorola (MOT) and Intel (INTC) on Thursday eroded those gains, major indices managed to hang on.

For the week, Nasdaq jumped 10.2% to 2,915.57. The Dow gained 3.3% to 10,712.92, while the S&P 500 index added 4.1% to 1,369.54.

By Style Box
Large-growth stocks scored the heftiest gains this week, with technology companies like storage-systems manufacturer Network Appliance (NTAP), semiconductor maker PMC-Sierra (PMCS), hand-held device maker Palm (PALM) and fiber-optics firm Ciena (CIEN) among the top performers.

The big deal in this group, however, involved PepsiCo (PEP), which announced Monday it will acquire cereal and sports-drink maker Quaker Oats (OAT) for $13.4 billion in stock. PepsiCo was the winner on its second try for Quaker after suitors Coca-Cola (KO) and France's Groupe Danone (DA) walked away from deals. What is the attraction for PepsiCo? Quaker's Gatorade sports-drink brand, which will give the snack and beverage company a dominant 25% share of the noncarbonated U.S. beverage market. Morningstar.com's Aaron Westrate noted PepsiCo faces the challenge of keeping the Gatorade brand growing through overseas expansion. PepsiCo also has to find a way to boost sales at Quaker's cereal division. PepsiCo stock gained 12% to $47.44 for the week, while Quaker shares rose more than 6% to $94.31.

The large-value group also was higher for the week, but it posted the smallest gain. Automakers Ford Motor (F) and General Motors (GM) were among those that saw their stocks rise. German-American auto company DaimlerChrysler, which has been troubled by the poor performance of its U.S. Chrysler unit, also ended the week higher. Its stock gained 8% to $42.63. Chrysler demanded a 5% price reduction starting January 1 from its car-parts suppliers, a move that should help the unit improve its profits. Analyst Travis Pascavis said the price cut could be bad news for car-parts suppliers, which already have seen their profits squeezed. He didn't rule out the possibility that Ford and GM could ask for price concessions as they see their profits cut in a slowing economy.

By Sector
The Nasdaq's record gain of more than 10% on Tuesday vaulted the technology sector to the top of the pile, a contrast to its usual spot this year down at the bottom. Networking companies like Ciena, JDS Uniphase (JDSU), and Juniper Networks (JNPR) were up. Also gaining were Network Appliance, EMC (EMC), and other storage firms, as well as computer systems companies like Tibco Software (TIBX) and McDATA (MCDT).

There were, however, some weak spots.

Low demand continues to plague computer makers. Last week, Gateway (GTW) got pummeled after it warned about the impact of slow consumer sales on its earnings. This week it was Apple, which said it would report a loss for its December quarter instead of the profit Wall Street expected. Apple dropped nearly 12% to $15.06 for the week and took Dell (DELL), Compaq (CPQ), and other PC makers with it. Morningstar.com's Joseph Beaulieu thinks Apple shares still are a good buy, though the company needs to return to profitability next quarter, regain its footing in the education market, and continue to introduce products that can match the success of the iMac.

Chipmaker Intel (INTC), which warned of lower-than-expected fourth-quarter revenue growth and earnings, fell Thursday, but bounced back Friday. For the week, however, it was down 0.4% at $15.06. Analyst Jeremy Lopez believes the revenue cut will lead to earnings more than 10% below estimates. He thinks Intel, which faces stiff competition from Advanced Micro Devices (AMD), isn't an attractive buy.

The health sector did the worst this week. It's usually one of the defensive areas investors seek when tech is in the dumps. Two of the sector's companies were in the news.

On Monday, health-product distributor Cardinal Health (CAH) agreed to merge with Bindley Western Industries (BDY) in a stock-for-stock deal valued at $2.1 billion. Cardinal shares fell that day and are down more than 6% at $92.94 this week. But analyst Rob Plaza thinks investors should be buying. He said Bindley's pharmaceutical-distribution business will be a good fit for Cardinal Health.

Meanwhile, United Therapeutics (UTHR) continues to disappoint. After announcing lower revenue targets for its late-stage drug Uniprost and the resignation of two top executives last week, the drugmaker announced Thursday it was discontinuing development of its osteoarthritis drug Ketotop after a Phase III trial failed. Analyst Emily Hall said these developments makes United's stock unappealing. Shares plunged nearly 67% to $15.94 this week.

By Industry
Cable and wireless equipment companies, which have suffered through concerns over a slowdown this year, were among the biggest beneficiaries of the tech rally on Tuesday. Among the winners were digital wireless systems maker Qualcomm (QCOM) and mobile-phone companies Ericsson (ERICY) and Nokia (NOK). Nokia  jumped about 15% to $50.31 for the week after it raised its revenue growth estimate for each of the next three years and announced it will reach its mobile-phone user forecast ahead of schedule. Analyst Todd Bernier noted Nokia is tightening its grip on the cellular-phone market, increasing its market share substantially over rival Motorola.

Posting the greatest loss among industries this week were truck makers, which have been struggling amid higher fuel costs and lower profits. While shares of motor-home makers Winnebago Industries (WGO) and Rexhall Industries (REXL) were up, stocks of diesel-truck maker Navistar International (NAV) and trailer and motorcoach manufacturer Featherlite (FTHR) were down substantially.

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