Buying Stocks in a Slowing Economy

How you can make money in any market

have not been raised fast enough by the analysts, and further increases are likely over the next few months.

“The energy companies have performed well because inventory for gasoline and heating oil is low, but demand is high,” says Hill. Earnings for the energy sector rose 192% in the first quarter, 146% in the second quarter, and are expected to rise 93% in the third quarter, up from an April estimate for that quarter of 24%. “The major oil stocks are benefiting,” says Hill, “as well as the stocks of the companies that explore for oil and natural gas.”

Energy stocks, sectorwide, have performed well: Exxon Mobil Corp. (NYSE: XOM) and Texaco Inc. (NYSE: TX). The stocks of oil producers that have performed well include: Kerr-McGee Corp. (NYSE: KMG), Transocean Sedco Forex Inc. (NYSE: RIG), and Ensco International Inc. (NYSE: ESV).

“Gasoline gets all the publicity, but demand is just as great for heating oil and natural gas,” Hill says.

Another sector Hill is bullish on is technology: “Although the valuations of the tech stocks have dropped some lately, they’re getting near good valuations for the longer term.” Profits for the group rose 44% in the second quarter, and are expected to rise 34% in the third quarter, 27% in the fourth quarter, and 25% in first quarter of 2001.

Among the reasons are the introduction of new technology, mainly products tied to the Internet and wireless communications. Earnings of companies that make semiconductor chips and fiber optic products should continue to do well. “Even if expectations are not met, the sector will generate above-average earnings growth,” said Hill. His picks for communications and semiconductor stocks: Cisco Systems Inc. (Nasdaq: CSCO), JDS Uniphase Corp. (Nasdaq: JDSU), Texas Instruments Inc. (NYSE: TXN), Motorola Inc. (NYSE: MOT), Vitesse Semiconductor (Nasdaq: VTSS), and Triquint Semiconductor (Nasdaq: TQNT).

“Still, if the Fed’s rate increases are successful and the economy experiences a soft landing, technology won’t be impacted as much because new product enhancements for new applications will continue,” he says.

The utilities sector is what Hill calls the “sleeper and big surprise of this year.” The sector’s most recent quarterly results beat analysts’ estimates by 13% with a gain of 27%. Bets are that analysts’ estimates could be wrong again going forward. They’re predicting a 7% gain for the third quarter and 8% in the fourth quarter.

“Deregulation among utilities is making it tougher for analysts to accurately predict future earnings,” notes Hill. “And predictions can no longer be just based on expected rate increases or seasonal demand for power to gauge their profitability. This is one sector I’ll be keeping my eye on.”

An attractive investment option might be stocks that already have lower price-to-earnings ratios.

Johnson says, “There are many value stocks available, although much of the focus has been on existing technology and other fast-growing stocks.” He also says that many stocks that pay higher dividends may also fall into the value class and offer lower volatility than the stocks of fast-growing companies. Johnson suggests investors consider some foreign stocks

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