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Stock Analyst Update

Morningstar on the Market: Week through 08/04/00

A look at which stocks are hot, and which are not.

With the peak of the latest earnings season over, merger activity slowed, and no torrent of economic data coming down the pike, the stock market this week regained some of the previous week's losses.

Nevertheless, investors remain concerned about a number of bigger questions, such as the future of interest-rate policy and whether the economy is slowing appropriately.

Such issues feed into another, potentially larger concern: the continued high valuations of a number of technology stocks despite sell-offs this year. The tech-heavy Nasdaq Composite index is up nearly 50% in the last 12 months notwithstanding a series of brutal declines this year. And the number of stocks trading at more than 200 times forward earnings, for example, remains high, with companies such as fiber-optic equipment maker JDS Uniphase (JDSU) and hand-held computer provider Palm  well above that. Should the economy slow substantially, earnings are likely to grow more slowly or even fall, making high stock prices that much more difficult to justify.

For the most part last week, assets rotated between defensive sectors of the market such as energy and utility stocks and sexier issues such as biotechnology firms and software suppliers.

By Style Box
For the most part, it was a difficult week to be a large-growth stock. That's not to say there were no winners to be found in the upper-right corner of the Morningstar style box, but a large number of the stocks under selling pressure this past week were the large-cap tech stocks that dominate the category. Companies such as Network Appliance (NTAP) and JDS Uniphase bore the brunt of the selling by investors worried about valuations. Retailers such as Kohl's  (KSS) and telecommunication providers such as Deutsche Telekom   didn't escape the fire either, but good earnings news helped boost entertainment giant Walt Disney (DIS), a member of the Dow Jones Industrial Average.

Overall, a happier picture was painted among mid-cap value stocks. Computer-networking giant 3Com , for example, gained 39.1% on the week after a sell-off following the completion of its spin-off of Palm. And shares of energy companies such as New Century Energies  and Edison International (EIX) posted strong gains.

By Industry
The best-performing industry of the week by far was
security services. This decidedly unglamorous industry benefited mostly on news of a 62% premium offered for shares of Burns International (BOR) by Swedish firm Securitas AB in its buyout bid. The possibility of further consolidation in the industry helped shares of Pittston Brink's  join in pushing the industry higher.

A number of other seemingly mundane industries ruled the roost as assets sought a haven from tech volatility. Oil and gas services, electric utilities, and tobacco stocks saw gains, while investors looking for more exciting fare focused on biotech stocks such as Isis Pharmaceuticals  and Immunogen (IMGN).

By Sector
Not surprisingly, the technology sector
didn't provide many fireworks last week. But shares of many retail companies fared even worse following the release of July same-store sales figures. Despite overall growth in sales for the month, many investors focused on news that the growth was mostly a result of seasonal clearances as stores prepared for shifts in product lines. Adding to the concern for the sector was the possibility of a slowing economy, which many investors and industry observers believe could hit retailers especially hard if consumers slow discretionary spending. As a result, well-known names such as Gap (GPS) and Nordstrom (JWN) took a hit, continuing the slide these shares have seen over much of the past year.

On the upside, financial and utility stocks fared well last week. With Federal Reserve interest-rates hikes believed to be at or near their end, investors are centering positive sentiment on financials. Companies such as brokerage house Bear Stearns  and Firstar  bank enjoyed rallies.

Rounding out the upside on the sector watch are shares of health-care companies. In addition to overall strength in biotech firms, good earnings news from Chiron , which provides treatments to fight diseases such as AIDS, hepatitis, and cancer, and Gilead Sciences (GILD), which is expected to introduce a promising flu drug, helped boost the sector.

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