MARKET BUZZ
Bottom-Fishing When It's Not There Yet
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Bottom fishers beware: You may be trawling in risky waters.
That's the view of Brian G. Belski, U.S. sector strategist for Merrill Lynch. Belski warned that investors who are reeling in low-priced financial and consumer discretionary stocks may be casting a line too early. The worst may not be over. Certainly, these sectors have performed far better than the Standard & Poor's 500-stock index since it bottomed March 10. For instance, thrift and mortgage finance shares are up 27.5 percent through Monday; consumer finance stocks are up 25.6 percent; shares in textiles, apparel and luxury goods have gained 15.4 percent. The S&P was up 9.5 percent in the same period.
But while the shares have been climbing, Belski pointed out, the earnings estimates for the companies have been plummeting. Analysts have sliced their 2008 earnings projections for thrifts by nearly 400 percent since the beginning of the year. "We have cautioned for a while that we believe it is still too early for these sectors and the right time will be apparent when fundamentals turn the corner," Belski wrote in a report last week.
Even though consumer discretionary stocks are rising, Belski said that consumers were increasingly pinched by rising costs for necessities such as food, medical care and energy -- and that those expenses would force people to tighten their belts on other types of spending.
Belski pointed investors away from bottom-fishing in the beat-up sectors and instead recommended defensive stocks that have underperformed since March 10 but that have a stable or improved earnings outlook. These include electric utilities, up 8.2 percent; food products, up 8 percent; beverages, up 0.5 percent; and tobacco, down 3.2 percent. "We find it . . . odd that investors would be avoiding defensive strategies with sound fundamentals and an optimistic growth outlook," Belski wrote. "We would urge investors to use the relative weakness in these industries as an opportunity to add exposure."
