Rumblings abroad favor stocks of companies on the home front
The streets of Tripoli or London or Tokyo are a long way from Wall Street. But air raids, terrorist bombs, and currency fluctuations there are having a palpable effect on stock prices here. Vacations abroad are being canceled. A Smith Barney, Harris Upham analyst, Joseph Doyle, predicts that overseas travel will be off 14 percent or more this year. The anticipation of a ``Discover America'' urge is infusing travel-related common stocks with uncommon strength. Investors expect this to be a profitable summer for hotels, recreation vehiclemakers, restaurants, and resorts.
Stock in Walt Disney has shot higher than the towers of the Magic Kingdom -- up 47 percent in 30 days, 145 percent in the last year. Analysts say that most ``summer stocks'' are now fairly priced. But if more raids on Libya occur or terrorism abroad increases, then prices could go higher.
The bond market was hit by heavy profit taking last week, as it also keyed on events abroad. The sell-off was prompted by concern that the dollar is plunging too quickly in value relative to foreign currencies. It has dropped some 16 percent since September. While this boosts the earnings of United States multinationals, it may be causing overseas investors (which have significant holdings in US securities) to pull out before the dollar falls further.
For example, a Japanese investor who sold his shares of Digital Equipment would see his dollar-denominated profits cut substantially when they were converted back into his home currency. As the yen grows stronger (and the dollar weaker), his profits are eaten up in the currency exchange rate. Also, interest rates have been coming down here, and Japanese investors may be seeking better fixed-income returns elsewhere.
At the seven-nation summit meeting in Tokyo starting Friday, President Reagan is expected to ask US trading partners to stimulate their economies by lowering interest rates. This would slow the dollar's drop and curb the exodus of foreign investment. But so far, West Germany and Japan have not shown a willingness to take such steps.
On this side of the Pacific, investors are concerned that the Federal Reserve may try to stem the dollar's slide by raising interest rates. This past week, the bond selling spree sent yields on 30-year Treasury bonds to about 7.6 percent, up from 7.1 percent just a week earlier.
Not exactly cheered by such developments, equity investors pushed the Dow Jones industrial average down 4.83 points in five trading sessions. The Dow closed Friday at 1,835.57.
Meanwhile, aerospace and defense industry watchers are trying to gauge what the ``Qaddafi effect'' may do to defense spending.
``At this point, the impact is subtle,'' says Morgan Stanley analyst Robert D. Kugel. He sees defense spending as being flat over the next year. But, he adds, ``If the level of violence escalates and requires more responses by the US, it could make it easier for the administration to get higher numbers for defense spending that it could a couple of months ago.''
Paul Nisbet, at Prudential-Bache Securities, says that regardless of sentiment in Congress concerning defense expenditures (which he expects to grow in fiscal 1988), ``there will be at least widespread speculation of repeated US military actions. The depressed defense issues, sensitive to market psychology and cheap relative to fundamentals, will in all likelihood respond positively.''
Mr. Nisbet pegs Lockheed, McDonnell Douglas, and General Dynamics as the most likely to make a short-term move on this speculation. ``Over the last year defense companies have not been very good investments. General Dynamics is selling at $85 per share now. It was at $84 in February 1985.''
Lockheed is selling at 7.8 times 1986 earnings, a 45 percent discount to Standard & Poor's 400, which is at about 15 times estimated '86 earnings. ``That's a very cheap price for a company with earnings likely to be up 20 percent this year, and up 15 percent over each of the next three years.''
Morgan Stanley's Mr. Kugel is also recommending General Dynamics and Lockheed. ``From a trading standpoint, they should move over the next couple of months because their multiples are so low,'' he says.
For the longer term, both these analysts like Boeing. The company received a record $15 billion in orders last year. Airlines are ordering new planes to keep up with growing passenger traffic and to replace planes made obsolete by noise abatement laws.
``Boeing should modestly outperform the market based on relative earnings growth,'' says Kugel. ``The question is whether they can meet or exceed last year's blowout.'' The Seattle aircraft giant has a good start. So far this year, it has $5 billion in new orders. And contrary to 1985 sales, this year the orders are for the larger, more profitable jetliners.
While Morgan Stanley has slightly overweighted the aerospace group in its portfolio, Kugel concedes that ``it's still an area not terribly popular with institutional investors.''
This is because many money managers are expecting a pickup in the US economy and thus they are predicting better returns ahead in economically cyclical issues.