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Market Update

The Week in Stocks and Funds

Biotechs bounce up, and tobacco stocks smoke.

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The markets may have seemed terminally depressed earlier this week, but an unexpected surge in new home sales in July, plus a mildly optimistic forecast from Cisco (CSCO), put the markets in a Prozac frame of mind Friday. For the week, the Dow Jones Industrial Average rose 183 points to 10,423, the S&P 500 climbed 23 points to 1,184, and the Nasdaq Composite closed up 49 points to finish at 1,916. 

Fund Category Returns
Technology funds were in critical condition this week, coming in dead last among fund categories with a loss of 5.16% for the week through Thursday. By comparison, specialty-health funds moved out of intensive care by rising 2.57% over the same period. By far the best-performing funds in that category were those with a hankering for biotech stocks such as Gilead Sciences  (GILD). Gilead's shares jumped 13.28% this week in anticipation of positive research results for its developmental HIV and hepatitis B treatments. As a result, specialty-health funds such as Fidelity Select Biotech  (FBIOX), and T. Rowe Price Health Sciences  (PRHSX), both of whom own Gilead, rose 4.05% and 4.03% this week through Thursday, respectively. 

Biotech funds might look appealing given this week's performance, but investors should bear in mind these funds sport some of the worst returns in the specialty-health category for 2001. Fidelity Select Biotech, for example, is down 28.19% this year, compared with a loss of just 15.19% for the average health fund. That loss, however, looks relatively tame compared with (GENEX). Even though the fund shot up 36.29% in the second quarter, it is still down a painful 40.43% for 2001. It's this hair-raising volatility that makes Morningstar senior analyst Peter Di Teresa's favorite funds in the specialty-health category look that much more appealing. Picks like Vanguard Healthcare (VGHCX), for example, which spreads its bets across a variety of subsectors in the health industry, is down a mere 6.29% this year, and sports the best five-year trailing return, 25.71%, in the category. 

Sector and Industry Returns
With so many dour earnings announcements from tech companies like Lucent  (LU), investors gravitated toward more defensive areas of the market such as tobacco. As this week's best-performing stock industry, tobacco was up 7.3% through Thursday. British American Tobacco (BTI) helped spark the rally by going head-to-head with the European Union over its supposedly heavy-handed restrictions on the manufacture, presentation, and sale of tobacco products. Also during the week, the Vector Group (VGR), which is producing a nicotine-free cigarette from genetically modified tobacco, jumped 14.26% after it was reported that the Icahn Group, led by financier Carl C. Icahn, had upped its stake in the firm from 16.5% to 21.5%. 

Though investing in tobacco stocks poses moral dilemmas for some investors--value maven Marty Whitman, for example, won't touch them on ethical grounds--even growth managers have warmed to the sector given its recent red-hot performance. For investors who want  to trade in a fizzling tech stock for a smoking tobacco stock, Morningstar stock analyst David Kathman still recommends Phillip Morris  (MO), which Morningstar gives five stars despite having already climbed 55% over the past year. 

Because the annual fees Fidelity Magellan (FMAGX) charges investors are performance-based, the fund may have to forfeit a huge chunk of fee-based cash next year.  That's because the fund has been closely hugging the performance of the S&P 500 index instead of tromping it the way it did in past years. Still, Morningstar senior fund analyst Scott Cooley doesn't think you should bet against Fidelity Magellan over the long haul.  

And talking about the long haul, Morningstar's director of stock analysis Pat Dorsey makes a surprisingly bold admission that technical analysis (i.e., stock charts) is good at predicting stock price movements over short time frames. For long-term investors, however, he says, stick to fundamental analysis.  

Day-by-Day Coverage 

Monday: Lowe's, Toys "R" Us, RF Micro Devices, Ford Motor, GM. 

Tuesday: Medtronic, Guidant, Immunex, Target, American Eagle.

Wednesday: Triquint, Intel, Applied Materials, Intuit, Motorola, Capstone Turbine.

Thursday: Ciena, Kmart, Krispy Kreme, Limited, Gateway. 

Friday: Cisco Systems, Lucent, Microsoft, Washington Mutual. 

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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.