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Stock Analyst Update

Morningstar Market Roundup: Week through 12/15/00

Market anxiety remains after election ends.

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The presidential election is over--finally--but the anxiety hasn't ended for U.S. markets. With no more election worries, the markets found even more opportunities to focus on the usual fodder: poor earnings.

Major indexes posted gains Monday, still pumped up by their fine performance last week. Remember that? Federal Reserve Chairman Alan Greenspan's recognition that the economy had cooled off prompted speculation that interest rates would be cut soon, sending stocks surging.

But profit concerns still haunt the market. The Dow Jones Industrial Average rose toward the middle of the week, ignoring warnings from Eastman Kodak (EK) and General Motors (GM). However, the Nasdaq Composite index fell amid some disappointing financial results from companies like Advanced Micro Devices (AMD), Covad Communications (COVD), and other technology firms.

While the markets were relieved after a Supreme Court decision and Gore's concession formally ended the election, they continued to be scared by the endless stream of companies reporting disappointing quarterly performances. PC maker Compaq (CPQ) said it would miss Wall Street profit expectations, and that led the tech sector down Wednesday. Chase Manhattan Bank (CMB) and J.P Morgan (JPM), which plan a merger, issued warnings Thursday, hitting all three major indexes. The losses continued Friday after Microsoft (MSFT) cut its earnings and revenue goals for its December quarter.

For the week, Nasdaq lost nearly all that it had gained last week. It fell 9% to 2,653.24, while the Dow fell 2.6% to 10,434.96. The S&P 500 index dropped 4.1% to 1,312.15.

By Style Box
Large growth stocks gave the worst performances.

Earlier this week, Qualcomm (QCOM) announced that the International Court of Arbitration ruled against it regarding royalty payments it must make to a Korean partner to fulfill past development agreements. Morningstar.com's Todd Bernier said the decision will force Qualcomm to take an $80 million charge against earnings, about $0.07 a share after taxes, in the current quarter. He noted the company faces many risks despite a promising future. For the week, Qualcomm stock fell 23% to $79.56.

Another large-growth stock, drugmaker Abbott Laboratories (ABT), dropped 5.8% to $48.81 for the week, though it announced an attractive acquisition. The company plans to buy BASF's (BF) pharmaceutical unit, which will give it rights to BASF products like anti-obesity drug Meridia and thyroid-disorder drug Synthroid, notes analyst Amy Arnott.

Other drugmakers, however, managed to rise for the week. Pfizer (PFE) gained 4.5% to $45.44 after it said it will meet analysts' earnings estimates for the year. SmithKline Beecham (SBH) rose 3.7% to $64.44 after announcing that its long-awaited merger with Glaxo Wellcome (GLX) is expected to occur on December 27. Glaxo shares also rose, up 4.6% at $57.13.

Faring best this week were small-growth stocks. Several tech companies like Red Hat (RHAT) and MicroStrategy (MSTR) were in the mix of top gainers, along with utility and energy companies TNPC (NPW) and Marine Drilling (MRL), and auctioneer Sotheby's Holdings (BID).

By Sector
The services sector topped all others this week, gaining the most.

Among the most prominent stocks was media giant Time Warner (TWX), which gained approval from the Federal Trade Commission for its merger with Internet portal America Online (AOL). Analyst George Nichols noted that a second approval, from the Federal Communications Commission, could occur quickly. He added that Time Warner and AOL shares are attractive, and the fundamentals at both companies are strong. Time Warner shares were up 4.9% at $72.72 this week, while AOL shares rose 4.4% to $48.96.

Other names in this sector weren't so lucky. Stocks of United Parcel Service (UPS) and FedEx (FDX) fell 9.8% and 16.6% respectively to $57.44 and $39.20 after they warned they would miss profit expectations. The companies blamed the earnings shortfall on sluggish Christmas shopping and a slowdown in U.S. corporate shipments. Still, investors shouldn't abandon UPS and FedEx stocks since earnings were a result of the economic environment, not problems specific to each company, said analyst Corey McElveen.

Meanwhile, retail continues to suffer. While the sector managed to make some gains a few weeks back as some stores reported a strong start to holiday sales, it's at the bottom this week. With consumers spending less and stores forced to make heavy discounts to attract shoppers, retail sales haven't been very rosy. Even discount kings like Wal-Mart (WMT) and Target (TGT) are down this week.

Some retail stocks gained, though earnings results revealed the difficulties confronting them this year. Morningstar.com's Mark Sellers noted that Costco Wholesale (COST) continues to suffer from higher transportation costs because of rising oil prices, as well as competition from Wal-Mart and other stores. Costco's first-quarter operating profits of $0.28 a share met Wall Street estimates. But earnings basically were flat from the same period in 1999. Still, Costco stock gained 4.9% to $34.88 this week.

Electronic-products store Best Buy (BBY) matched the already lowered third-quarter earnings estimates of $0.27 a share and reported a 5.9% increase in sales at stores open at least a year. But Richard Schulze, Best Buy's founder, chairman, and chief executive, said slower consumer spending and new-store opening costs cut profits. Analyst Sellers noted that despite the slow sales, Best Buy remains a good holding for investors willing to endure economic ups and downs. Its stock posted a weekly gain of 12.1% to $25.

By Industry
Shoemakers were the best performers among the industries this week. Hiking bootmaker Timberland (TBL) and athletic shoemakers Reebok International (RBK) and Nike (NKE) posted some of the group's biggest gains. Even stocks of some shoe stores like Shoe Carnival (SCVL) and Payless ShoeSource (PSS) were up in the past five days, though for the year, many are struggling in a tough retail environment.

At the bottom were computer storage companies. While this industry had survived the tech wreck of 2000 largely unscathed, concerns over a slowing economy and weaker demand for computer-related products have hit it from time to time. EMC (EMC) and Network Appliance (NTAP), among this year's top-performing stocks, posted losses for the week.

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