U.S. Equity Market Radar (December 19, 2011)
The domestic stock market as measured by the S&P 500 Index was lower this week by 2.83 percent. All ten sectors of the index declined. The best-performing sector for the week was utilities which declined 0.21 percent. Other top-three sectors were health care and consumer staples. Energy was the worst performer, down 4.88 percent. Other bottom-three performers were technology and financials.
Within the utilities sector the best-performing stock was PG&E Corp., up 4.55 percent. Other top-five performers were AGL Resources, Inc., XCEL Energy, Inc., Northeast Utilities and NiSource, Inc.
Strengths
- The construction materials group was the best-performing group for the week, up 16 percent, led by the group’s single member, Vulcan Materials Co. This week rival Martin Marietta Materials, Inc. began a $4.8 billion hostile bid for Vulcan.
- The airlines group was the second-best-performing group, up 3 percent on strength in its single member, Southwest Airlines Co. In a media interview this week the CEO said Southwest is focused on eliminating waste and inefficiencies in its operation to bring down costs and re-widen the cost advantage it has against larger rivals. Upgrading the company’s airplane fleet is a key part of the strategy to lower costs.
- The residential real estate investment trusts (REITs) group outperformed, gaining 2 percent. A major brokerage firm published a positive industry report on the apartment REITs, reiterating its view that fundamental factors will continue to drive apartment rents higher.
Weaknesses
- The consumer electronics group was the worst-performing group for the week, down 14 percent on weakness in its single member, Harman International Industries, Inc. The company’s CEO sold 25,000 shares of stock on Friday of the prior week.
- The computer & electronics retail group declined 14 percent. Best Buy Co, Inc. reported third-quarter earnings below the consensus estimate as margins in the period were lowered by promotions and the cost of free shipping for online shoppers.
- The coal & consumable fuels group lost 11 percent, with all three group members declining. In the prior week a major brokerage firm lowered its coal industry rating to neutral from attractive, looking for a more negative demand outlook due to proposed EPS regulations of coal plant emissions, lower natural gas prices in 2012 and 2013, and lower secular demand growth.
Opportunities
- There may be an opportunity for gain in merger & acquisition (M&A) transactions in 2012. Corporate liquidity is high, thereby providing the means to pursue acquisitions.
Threats
- A mid-cycle slowdown in the domestic economy would be negative for stocks.
- An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.
