Posted on: Saturday, November 13, 2004

Experts high on growth in energy stocks

By Meg Richards
Associated Press

NEW YORK — The resolution of the presidential race gave Wall Street a surprising boost, helping equities gain more than 8 percent over the past three weeks. Now, with the end of the year in sight, it's a good time to take stock of your portfolio's sector allocations, analysts say.

Looking over the 10 broad sectors of the Standard & Poor's 1500 Supercomposite, Liz Ann Sonders, chief investment strategist at Charles Schwab, favors energy, health care and telecommunications, but is neutral on financials, technology, industrials and materials.

Sonders recommends underweight exposure to the consumer discretionary, consumer staples and utilities sectors.

Schwab remains bullish about the long-term fundamentals for energy, which has been the best-performing sector year-to-date by a wide margin. Sonders sees opportunities for higher returns in the biggest oil companies, as well as those that specialize in exploration and production. Regardless of short-term volatility, she thinks crude prices are likely to remain at above-average levels, buoyed by robust expansion in China.

David Chalupnik, head of equities at U.S. Bancorp Asset management, agrees there's still room for growth in energy stocks, especially in oil services. The Philadelphia Oil Service index has been on a steady upward trend for some time, and has yet to match the price peak it reached in the third quarter of 2000.

The profile for utilities is different, however. Given the strong performance of the sector so far this year, most analysts recommend taking profits and going underweight.

At the other end of the performance spectrum lies health-care, the most beaten-down sector of the market. Problems with various drugs, concerns about thin pipelines and the possibility that new regulations may dent future profits have pressured the whole sector.

Although caution is certainly warranted when it comes to drugmakers, it may be a good time to look at related industries such as healthcare distributors and facilities, as valuations for many of those stocks have sunk to attractive levels.

The telecommunications sector also may deserve a closer look. Sonders notes that this group can effectively be split into two categories — the wired side, which includes the old-school Baby Bells, and wireless, which is where she sees the best opportunity for investors.

With interest rates rising, most investors are taking a cautious approach to the financial sector, but the Federal Reserve's measured pace of tightening creates unusual circumstances, which warrant a neutral rather than negative view, according to Schwab.

There's also good reason to take a neutral posture on technology stocks, as the pace of economic growth slows. If you're looking to invest in this sector, Sonders recommends a focus on data processing and outsourcing stocks.

Sonders is of the opinion that the classical cyclicals — energy, industrials and basic materials — are going through a long-term upward trend.

But with energy outshining the rest of the market, she recommends only a neutral weighting for industrials and materials, with some bias toward transports, metals and mining.