A Momentum Moment?

Investors know that picking stock sectors now is especially hard because the bull market has run so long and prices are so relatively high.

With everyone concerned that the market is at or near its apex, it’s a lot trickier figuring out which sectors will keep performing well and which will fall back. (Not that it’s ever easy.)

After all, the benchmark Standard & Poor’s 500 index has soared another 28.7% so far this year despite the massive sell-off Oct. 27 (though it’s been flat since summer). That means the index has produced an average total return of about 28% a year for three years running--an exceptional performance that many analysts believe simply can’t be extended for another 12 months.

But here’s one option: Stick with the sectors that spent 1997 easily outpacing the general market, because, in the opinion of analysts at Standard & Poor’s, the “momentum” those sectors enjoy should carry well into 1998. It’s what Wall Streeters call “relative strength”--i.e., these sectors have been outperformers relative to the general market.

“It’s like the old adage ‘Don’t fight the tape,’ ” said Sam Stovall, S&P;’s sector strategist in New York. “Momentum tends to have staying power.”

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To be sure, it’s a controversial tactic. There’s a group of professional traders known as momentum players who follow the same idea: buying stocks simply because the shares are rising and are expected to climb further.

They don’t pay much attention to a stock’s fundamental business outlook, and typically bail out as soon as the stock stalls. Hence, if you own one of their stocks and it stops rising--even if nothing has changed with the company’s prospects--you might get hammered because the momentum traders are racing for the exits.

But Stovall said there are reasons he thinks his favorite sectors will keep their momentum.

Some of the sectors with the greatest momentum are financial services, led by investment management and securities brokerage shares. Also near the top are regional commercial banks and savings and loan stocks.

(By definition, stocks in S&P;’s sectors must be members of the S&P; 500.)

The financial stocks naturally “ride on the profits of the markets,” which have been exceedingly profitable over the last couple of years. And despite all the hand-wringing about whether the stock market is ready to top out, S&P; sees the markets continuing to show enough strength that they’ll further reward brokers, bankers and other providers of financial services.

Stovall’s picks include two mutual fund stocks that have soared over the last year: Franklin Resources Inc. (ticker symbol: BEN), which runs the Franklin/Templeton family of funds, and Eaton Vance Corp. (EV).

The regional banks are still attractive because their segment of the banking industry is still seeing rapid consolidation. “Big banks are gobbling up smaller banks,” and the trend will only accelerate next year, Stovall said.

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A similar trend is occurring among the S&Ls;, with even relatively big thrifts now vulnerable to being acquired. Indeed, Great Western Financial was bought earlier this year by Washington Mutual Inc. (WAMU).

Now, “Golden West Financial [GDW] and H.F. Ahmanson [AHM, the parent of Home Savings of America] are two potential takeover candidates,” Stovall said.

Airline stocks should keep gaining altitude because they will keep benefiting from a stable economy--which keeps passenger traffic strong--and a slight decline in fuel prices, he said. Stovall’s two picks there: Delta Air Lines (DAL) and US Airways (U).

Others are more cautious. Airline analyst James Higgins of Donaldson, Lufkin & Jenrette Securities agrees that airline stocks should keep outpacing the market into early 1998, but then the carriers’ prospects “will become more challenging as the market focuses on especially tough first-quarter earnings comparisons.”

OK, all those sectors were strong in 1997. But are there any that only recently began showing they have momentum?

“Broadcasting stocks have gained momentum since this summer,” Stovall said, noting that S&P;’s broadcasting sector has jumped 20% in the last three months. “Once [Microsoft Chairman] Bill Gates committed $1 billion to Comcast Corp. (CMCSA) and another billion to US West Media Group (UMG), investors began to take notice.”

Another favorite on Wall Street: CBS Corp. (CBS), the former Westinghouse Electric Corp. Its fans include Lehman Bros. analyst Tim Wallace, who rates the stock a “buy” in anticipation of “strong results next year,” including revenue from its coverage of the Winter Olympics in February.

Then there’s the wild technology sector, which has gotten beaten up in recent weeks by fears about the Asian economic slowdown and where investors have shown time and again that they have zero tolerance for any tech company whose growth doesn’t meet Wall Street expectations.

The Nasdaq composite index, which is heavy with tech stocks, is down 9% for the last three months, while the S&P; 500 is virtually unchanged.

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Yet some market watchers aren’t giving up on technology. Except for the Asia-Pacific region, “demand for technology still appears robust,” said Jeffrey Applegate, Lehman’s U.S. market strategist. “Fundamentally, we still view technology stocks as the premier growth stocks of this business cycle.”

Stovall agreed. “I would use this time as a prime buying opportunity” to buy the tech stocks “that should be core holdings in your portfolio,” no matter what the outlook is, he said.

Core holdings? “Cisco Systems (CSCO), Applied Materials (AMAT), Intel (INTC) and Microsoft (MSFT),” he said. For long-term investors, “it’s a mistake not to have them in your portfolio,” because of their respective strengths and long-term growth trends, he said.

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If playing momentum stocks isn’t your bag, there’s another strategy for ‘98: Go for “defensive” stocks.

It’s an oft-relied-on technique at times when fears of a market top prevail. But Merrill Lynch & Co. says the strategy could really pay off now because these sectors also provide a haven from the current economic turmoil in Asia that’s battering so many U.S. multinationals and exporters.

The sectors include food, computer services, drugs, utilities, selected health-care firms, real estate investment trusts, retailers and the regional banks, Merrill Lynch said in its monthly letter to individual investors. All have “relatively small exposure to emerging markets,” it says.

Among its picks: Sara Lee (SLE), Tenet Healthcare (THC), Barnes & Noble (BKS) and Bristol-Myers Squibb (BMY).

Times staff writer James F. Peltz can be reached at james.peltz

@latimes.com

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

1997 Sector Leaders, Laggards

Here is the performance of 90 stock industry groups within the Standard & Poor’s 500 index, from Jan. 1 through last Wednesday. The S&P; 500 itself was up 26% in that period. The “+” indicates that S&P; currently recomends a group for purchase; a “-” indicates a negative rating. Ratings are based on both price momentum (relative strength) and industry fundamentals. Where neither mark appears, the recommendations is neutral.

TRUCKERS*: +132.79%

INVESTMENT BANK/BROKERAGE: + 65.43%

SAVING & LOAN: 64.76%

AIRLINES: + 58.10%

BROADCAST/MEDIA: + 54.70%

HOMEBUILDING: + 52.93%

DRUGS: + 49.28%

MANUFACTURED HOUSING: 49.09%

NEWSPAPER PUBLISHING: 48.20%

MULTI-LINE INSURANCE: + 46.99%

PUBLISHING: - 46.59%

APPAREL RETAILERS: + 45.80%

FINANCIAL-MISC: + 43.46%

GENERAL RETAILERS: - 43.31%

OIL-WELL EQUIP & SEERVICES: + 41.88%

REGIONAL BANKS: - 41.15%

DRUG STORE CHAINS: 39.94%

LONG DISTANCE TELECOM: - 39.28%

HEALTH CARE (DIVERSIFIED): 38.69%

ENTERTAINMENT: - 38.64%

HARDWARE & TOOLS: 37.80%

SPECIALTY RETAIERS: + 37.68%

PERSONAL LOANS: + 36.86%

ELECTRICAL EQUIPMENT: - 36.25%

PROPERTY-CASUAL. INSURANCE: 35.42%

HEAVY TRUCKS & PARTS: - 34.90%

HOUSEHOLD PRODUCTS: - 34.33%

COMPUTER SYSTEMS: + 34.16%

PACKAGED FOODS: - 33.88%

INSURANCE BROKERS: - 33.67%

FOOD DISTRIBUTORS: + 33.63%

TELEPHONE UTILS.: - 33.26%

OFFICE EQUIP. & SUPPLIES: + 33.06%

HOTEL-MOTEL: + 31.09%

SPECIALIZED SERVICES: 31.00%

MANUFAC. (DIVERSIFIED): - 27.65%

FURNITURE & APPLIANCES: 25.96%

TOYS: 25.45%

MONEY CENTER BANKS: - 25.06%

MACHINE TOOLS: - 24.44%

SOFT DRINKS: 24.23%K

TRANSPORTATION (MISC): 23.58%

GROCERY STORE CHAINS: + 21.98%

AUTOMOBILES: + 21.94%

COMPUTER SOFTWARE: 21.46%

COSMETIC: 21.42%

OIL & GAS DRILLING: + 20.43%

MACHINERY (DIVERS): + 20.12S

LIFE INSURANCE: - 18.48%

INTERNATIONAL OILS: - 18.20%

DEPARTMENT STORES: 17.92%

ELECTRIC UTILITIES: -17.09%

MEDICAL PRODUCTS: 16.38%

TOBACCO: - 16.20%

CHEMICALS: 16.17%

SPECIALITY CHEMICALS: - 16.01%

AUTO PARTS & EQUIP.: 15.82%

MISCELLANEOUS: 14.56%

COMMUNICATION-EQUIP.: 14.48%

DOMESTIC OILS: - 12.32%

LEISURE TIME: + 11.97%

NATURAL GAS: - 11.62%

ELECTRONIC INSTRUM.: 11.60%

BUILDING MATERIALS: - 11.49%

HEALTH CARE (MISC): + 10.07%

RAILROADS: 8.05%

CONGLOMERATES: 6.05%

HOUSEWARES: 5.80%

SPECIALTY PRINTING: + 4.90%

CLOTHING MAKERS: 4.27%

SEMICONDUCTORS: 3.99%

PAPER & FOREST PROD.: - 3.24%

HMOs: + 2.90

RESTAURANTS: + 2.36

CHEMICALS (DIVERS): 1.83%

AEROSPACE/DEFENSE: + (-1.11%)

POLLUTION CONTROL: - (-1.23%)

DEFENSE ELECTRONICS: + (-1.86%)

ALUMINUM: (-2.69%)

ALCOHOLIC BEVERAGES: - (-3.32%)

STEEL: (-5.99%)

PAPER BAGS/BOXES: - (-6.55%)

CAN/BOTTLE MAKERS: (-8.47%)

OIL EXPLORATION & PRODUCTION: - (-16.37%)

HOSPITAL MANAGEMENT: - (-18.83%)

PHOTOGRAPHY/IMAGING: - (-27.02%)

SHOES: (-33.81%)

GOLD MINING: - (-33.90%)

METALS (MISC): - (-35.36%)

ENGINEERING & CONSTRUCTION: - (-39.21%)

*The trucks category has only one member, Caliber System.