Investors’ Flight to Stability Marks First Quarter Trading
By KATE BERRY
Staff Reporter
Investors fled risky, speculative stocks in the volatile first quarter and ran back into the arms of stability: banks, brokerages and homebuilders.
Despite predictions that a stronger economy would continue to lift the stock market this year, the reverse has happened. Stocks generally are weaker. Interest rates remain low. Sectors that were strong last year have fallen on hard times, while those that were weak have rebounded.
If there’s anything to glean from the local winners and losers of the first quarter of 2004, it’s that investors, filled with uncertainty, are rotating into higher-quality stocks in search of safer returns, a sign that corporate earnings could decelerate this year.
“My fear is that when the economy finally does recover, money will rotate into large cap growth stocks and out of smaller names,” said Richard Eckert, an analyst at Roth Capital Partners, which focuses on the small-cap universe. “Small banks, in particular, have been the safe port in the storm.”
Five of the 10 best performers of the LABJ 200 Stock Index in the first quarter were small banks or large financial services stocks such as Countrywide Financial Corp., the giant mortgage lender that outlined an aggressive growth strategy last week. Countrywide shares rose 26.4 percent in the first quarter, to close at $95.90.
Three others were “turnaround” apparel manufacturers, including Skechers U.S.A. Inc., up 60.9 percent, Guess Inc., up 49.4 percent, and Vans Inc., up 29.7 percent.
By contrast, in the fourth quarter of 2003, six of the 10 best performers were small-cap technology stocks or financial service stocks that traded for under $10 a share riskier ventures that have since gone out of favor.
Long-term view
Guess, Vans and Skechers “have had bad and uneven results over the last couple of years including losses and they are turning around their businesses and are starting to be profitable, so they’ve been on fire the past several months,” said Michael Pachter, an analyst with Wedbush Morgan Securities in Los Angeles.
He added that companies showing signs of slower growth, such as retailer Hot Topic Inc., “were valued very high and they’ve backed off a bit.”
City of Industry-based Hot Topic turned in one of the worst performances in the January-March period, with shares dipping 10.2 percent, to $26.45. Last year, the stock rose 70 percent.
Jeffrey Van Sinderen, an analyst at B. Riley & Co., believes a quarter-by-quarter breakdown of market trends fails to take into account longer-term performance.
“In the last year, a number of companies have seen their business improve,” he said. “In the apparel sector, for example, most of those companies have had fairly appreciable increases in their stock prices, so looking at the first quarter performance is not a great indicator.”
Because Los Angeles is home to many small- and middle-market companies, local stocks appear to have held up.
Overall, the LABJ 200 Stock Index outperformed the nation’s major indices with a 3.5 percent increase for the first quarter ended March 31. That compares with a 1.3 percent gain by the Standard & Poor’s 500, a 0.5 percent drop on the tech-heavy Nasdaq, and a 0.9 percent drop in the Dow Jones Industrial Average.
Some investors have tapered their outlook for earnings growth this year to the single digits, compared with the 25 percent gain posted by companies in the S & P; 500 during the fourth quarter of 2004. With a slow economy, the thinking goes, companies will have a hard time surpassing the robust earnings growth posted in the second half of 2003.
While the stock market’s final figures weren’t much changed from the beginning of the first quarter to its end, they did whipsaw in between, first surging in January, then falling sharply in February and March before recovering some in the final week of the quarter.
With interest rates falling and the overall economy lackluster, investors moved into sectors that benefited, such as banks and financial services companies.
“When you have low interest rates, you tend to have mortgage business doing fine with rising equity values and people tapping into it to refinance their loans,” said Steve Marascia, an analyst at Anderson & Strudwick in Richmond, Va., who covers Countrywide and other financial services stocks.
