Diversify into sectors with better earnings visibility (page 1 of 3)

US Stocks

According to Allen Sinai, chief global economist for PDE (Primark Decision Economics), the United States is going through an upside-down type of slowdown. Housing and personal spending have so far held up well unlike in other downturns. What is dragging the economy down is capital spending from the business sector. Since they react less vigorously to lower rates, there is no guarantee that interest rates alone will work in the traditional way. Expectation of future sales and earnings will determine corporate expenditures, but right now, they do not have much confidence in the economy after it turned the weakest performance in eight years during the 2Q.

Equities have suffered sizable loses during the 2Q earnings season, with widespread disappointing results. With companies in many sectors that cannot provide forward guidance of any kind, all the more reasons to diversify into sectors with relatively better earnings visibility, as I have reiterated through out last week's morning calls:

Tobacco - R.J. Reynolds (RJR $50.25), the stock is down 19% from its recent high. With a dividend yield of over 7%, 10x '02 estimates, the stock is cheap even accounting for the recurring litigation

Biotech - Amgen Inc. (AMGN $60.82), recent weakness stemmed from the delayed approval of its updated version of its best selling drug Epogen over labeling issues. Earnings guidance of low double-digit '01 EPS growth assumes no contributions from US Aranesp sales. The European Commission has already approved the drug; US approval within the year will provide the upside

Energy - Burlington Resources Inc. (BR $43.28), though up 10% since the recommendation, target remain at $49. Inventory build up seems to be peaking with OPEC reducing output. Along with non-OPEC Mexico they have close to 45% of the world's production, they have agreed to stabilize current oil prices. Current output reduction may very well bring about higher prices in the coming winter

Holding Co. - Loews Corp. (LTR $53), trading at a slightly over 6x prospective earnings, the stock is selling at a 41% discount to its value of $90.00 per shares (using sum-of-parts calculation)

Aerospace - Boeing Co. (BA $58), currently locked in a battle with Lockheed Martin Corp. to win a Pentagon contract which will subsequently worth $600 billion in the next 3 decades (including foreign sales & maintenance contracts). BA is touting its low cost and reliability for the joint strike fighter (to be used by the 3 US military services), and the announcement will be made in October. The Pentagon may decide to split the contract among several contractors

Honorary mentions - at current levels the following stocks offer excellent long-term investments:

General Electric (GE $44.65)
JP Morgan Chase (JPM $44.21)
Pfizer Inc. (PFE $39.84)
Countrywide Credit Industries Inc. (CCR $42.74)

And for stocks that offer good value even though they may not be at the bottom of their earnings cycle:

WorldCom (WCOM $15.21)
Corning Inc. (GLW $16.02)

US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index traded flat (closing unchanged at 2029) on volatile sentiment throughout the week.

With only a handful of technology companies reporting results this week, we believe investors will be looking outside the technology arena for trading directions for the week. We expect trading activity to be volatile and directionless as short-term investors react to US economic data releases during the week.