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Market Update

The Week in Stocks and Funds

Tech stocks melt in the August heat.

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Not only did the brutal August sun scorch most of the United States this week, but a horde of dreary earnings reports from companies like Cisco (CSCO) smothered hopes of a near-term economic turnaround. As such, the Dow Jones Industrial Average lost 96 points over the week to close at 10,416, while the S&P 500 shed 24 points to finish at 1,190. The Nasdaq Composite index fared the worst, losing 110 points, or 5%, to end at 1,956. 

Fund Category Returns
Specialty-technology funds wilted in this week's heat wave, losing 7.9% on average this week through Thursday. Funds like Berkshire Focus (BFOCX) did even worse than their tech-focused peers by holding duds like Brocade Communications Systems (BRCD), a one-star stock that Morningstar senior analyst Joseph Beaulieu thinks investors would be better off avoiding. 

The average specialty-real-estate fund, on the other hand, beat the heat and gained 1.04% for the week through Thursday. The category had a bang-out year in 2000, rising 26.63%, and so far is this year's second-best-performing stock fund category, with a year-to-date return of 7.93%. 

Before you buy a real-estate fund, there are some points you should consider. For starters, value fund managers, like Wally Weitz, often invest in real-estate investment trusts, or REITs, such Archstone Communities Trust  (ASN). Thus, if you've recently purchased a value fund, you may already have adequate exposure to the real-estate sector. And if you're a tax-sensitive investor, be warned that many real-estate funds hand out big yields--3.82% on average over the past 12 months. 

Sector and Industry Returns
It was a lousy week for the technology sector, and an especially bad one for the wireless-communications industry, which lost 13.29% on average through Thursday. One of the worst-performing stocks in that industry was Nextel Communications (NXLT), which dropped 15.74% for the week, and is now down nearly 73% over the past year. While some tarnished tech stocks aren't worth picking up, Nextel happens to be one of Morningstar stock analyst Todd Bernier's favorites in the wireless sector. In fact, Bernier thinks the stock looks affordable at its current price given Nextel's ability to boost earnings in this lousy environment. That's why it's sporting a four-star stock rating from Morningstar. 

The retail sector was a mixed bag this week. Reports on July retail sales sent Dillard's  (DDS) and Ann Taylor Stores  (ANN) up 9.63% and 5.67% for the week through Thursday, respectively. The arbiter of teenage fashion, Abercrombie & Fitch (ANF), however, plummeted 19.55% for weak July sales. Though Abercrombie may be a little pricey, Morningstar stock analyst Mike Porter thinks the company is poised to rebound once the back-to-school shopping season is in full swing. 

Editorial
Morningstar launched a new star rating system for stocks this week that's designed to help investors find smart investments. Not only does our star rating system help you pick out five-star diamonds in the rough like Flextronics International  (FLEX), but it also helps you weed out one-star stocks we think are seriously overvalued, like Amazon.com  (AMZN). Unlike Wall Street, we don't pull punches.  

Investors have been busy yanking billions of dollars this year from gargantuan mutual funds like Janus Worldwide (JAWWX) and Fidelity Contrafund (FCNTX) due to seemingly dowdy performance. Though some of these funds might deserve to be scorned, Morningstar's director of fund analysis Russel Kinnel points out a few he thinks are still well worth owning

Day-by-Day Coverage 
Monday: Hughes, EchoStar, U.S. Airways, Intel, Advanced Micro.

Tuesday: Conseco, DoubleClick, Broadwing, Global Crossing. 

Wednesday: Cisco, BEA Systems, Microsoft, Cooper, Aetna. 

Thursday: Abercrombie, Sun Micro, Nortel, Openwave, Dillard's. 

Friday: Ameritrade, Rambus, United Therapeutics, BEA Systems, Homestore.com. 

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Frank Stanton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.