2nd Quarter Review With Sam Stovall, Chief Investment Strategist at Standard & Poor's
Friday, June 29, 2007PAUL KANGAS: The close of trading today marked the end of the second quarter of the year on Wall Street, so tonight Sam Stovall, the chief investment strategist at Standard & Poor's, joins me to review the quarter's winners and losers. Welcome back to NBR, Sam.
SAM STOVALL, CHIEF INVESTMENT STRATEGIST, STANDARD & POOR'S: Happy to be here, Paul.
KANGAS: Let's cut right to the chase. The major indices had a strong quarter, all posting nice gains. We see the Dow up 8.5 percent, Standard & Poor's 500 up nearly six and NASDAQ up 9.1 percent. So what happened to the old expression, sell in May and walk away?
STOVALL: Well, I think it became the swoon in June because certainly we had a very strong performance in April and May. I think the market was acting like Robert E. Lee, had its blood up and was ready to charge. The old high on the S&P 500 and despite higher oil prices, the stronger dollar and the prospects that the Fed will cut rates in 2008, not '07, did not deter it and we got a new record May 30.
KANGAS: Let's move straight to the Dow's big quarterly winners, and we see Intel at the top. Who would have thunk that would have done so well?
STOVALL: That's right. It seems as if Intel is turning around. It regained its technological lead over AMD through better chips and process technologies.
KANGAS: General Motors did very well, even though Kirk Kerkorian's Tracinda Corp. sold all their stock.
STOVALL: It did. GM's been benefiting from the anticipation of benefits from coming contract negotiations or in other words, the weaker they look, the more contract concessions they are likely to extract from the unions.
KANGAS: How did Honeywell do so well?
STOVALL: Well, Honeywell benefited from strong international demand in its automation and control systems and aerospace segments.
KANGAS: All right, let's have the worst performers in the Dow for the second quarter, lead by of all things, Procter & Gamble.
STOVALL: It seems as if no investor really cares about consumer staple stocks these days. In the second quarter, investors preferred energy and tech issues.
KANGAS: And this is interesting, two big financials, Citigroup and JPMorgan Chase, very very small movement at all and yet they were among the worst of the Dow. That Dow average did pretty well, didn't it?
KANGAS: Let's have the worst performers in the Dow for the second quarter, lead by of all things, Procter & Gamble.
STOVALL: It certainly did. Citigroup was hurt by the rise in interest rates, but also Prince al Waleed (ph) recommended the company not be broken up, thus dampening breakup enthusiasm.
KANGAS: Let's move on to the Standard & Poor's 500 and by far the best performer there, amazon.com, almost 72 percent rise.
STOVALL: Well, I wish I had owned it. Analysts thought it would take much longer than it has to realize operational improvements from infrastructure investments.
KANGAS: And Dow Jones we know why that had the big gain, thank you, Rupert Murdoch and your $60-a-share bid.
STOVALL: That's right. It's much to do about Murdoch and certainly the increased optimism about the takeover.
KANGAS: Let's have a look at the S&P's two worst. Dean Foods (DF), what happened there?
STOVALL: It's down primarily because it paid out a special dividend in April but to a much lesser extent, the company gave guidance twice that disappointed investors.
KANGAS: And LSI just yesterday said they're going to have a $0.03 per- share second quarter loss and the stock was down a buck then and it's off a little more today, but a big percentage on the quarter.
STOVALL: It's experiencing a weaker macro environment and also the company is having issues integrating its recent Agere (ph) acquisition.
KANGAS: Ah-ha. Let's have a look at the big winners on NASDAQ 100 and there you see it, amazon.com (AMZN) again.
STOVALL: Well, that's right. Well, nothing more that I can say, again, other than it's really doing much better sooner than anticipated.
KANGAS: And Research in Motion (RIMM) out yesterday with fantastic earnings and the stock ran up sharply.
STOVALL: It did. It also bumped out Invida as the second-place performer but basically RIMM posted May earnings that were better than expected on a $1.2 million increase in subscribers.
KANGAS: And on the down side, the NASDAQ's 100 worst, Network Appliance (NTAP). What was the story there?
STOVALL: The revenues came in weak because of lower enterprise spending and they also increased hiring ahead of their operating plan.
KANGAS: And Starbucks (SBUX), nobody likes coffee?
STOVALL: I guess this is grounds for concern.
KANGAS: Oh, boy!
STOVALL: But the chief concern being that increased competition from premium coffee offered by the likes of McDonald's, Wendy's, and Dunkin' Donuts.
KANGAS: OK. Very interesting stuff, Sam, very interesting indeed. Now that the second quarter is over, what's going to drive the market in the coming quarter, earnings, M&A activity or is it going up or down?
STOVALL: I think certainly that earnings will be the primary focus heading into the third quarter. It will be second quarter reporting season. It will be the third quarter of decelerating operating earnings and I think investors are going to be a little bit cautious. Seasonally this is a very weak period for the market. It's typically flat versus more than 2 percent advancements for the other quarters. So I think investors are going to focus on consistent earnings growers.
KANGAS: What are your two favorite sectors to invest in?
STOVALL: I would focus on the health care group. We're expecting about a 17 percent increase in operating results for the full year and consumer staples, I guess and a time when things are rough, people end up focusing on the food, beverage and tobacco.
KANGAS: A little defensive there. OK.
STOVALL: That's right.
KANGAS: Sam, I want to thank you as always for joining us.
STOVALL: Thanks, and happy 4th, Paul.
KANGAS: And the same to you and yours. My guest, Sam Stovall, chief investment strategist at Standard & Poor's.
