The wealth and feel-good factor being generated by Wall Street are feeding through into the general ...
The wealth and feel-good factor being generated by Wall Street are feeding through into the general economy. The continual rise of new economy companies is having a positive effect on the less fashionable market sectors.
One side effect is a positive outlook for lumber companies, according to Grant Wilson, US fund manager at Martin Currie. He says that rising prices on existing property has meant an increase in the number of cheaper houses being demanded. Wilson adds: "Although the Federal Reserve has been increasing interest rates the yield on 10-year Treasuries from which mortgage rates are calculated has not changed , holding at 6.46%."
Wilson favours Weyerhaeuser, a lumber company, which is on a P/E of 11.9 times and is anticipated to grow by 12%pa in dollar terms. The earnings of the company, which recently bought McMillan a Canadian lumber business, should grow by 35% this year and 46% in 2001, according to market forecasts. As well as benefiting from the domestic environment the company should also benefit from the recovery in Asia and Japan, according to Wilson. He says: "The Japanese favour using good quality wood in their house-building and US lumber companies suffered when the Japanese market weakened so it should now benefit from the recovery."
Another attraction of the company is its good cashflow, according to Wilson, on 23 February it announced 5% buyback of stock. Last year the share price peaked at $73 but now stands at $53. Over the long term he does not regard construction or basic materials as a good theme as the sector usually experiences only short term bounces.
If demand in the US and overseas is picking up then this could have a knock on effect on basic industrials as well. The best performing stock in the Dow Jones Industrial index last year was Alcoa, the aluminium company, which went up some 120% in dollar terms as demand for the material rose, against a 27% gain for the index.
Henderson Investors has a holding in Alcoa but is underweight basic industrials as it has concerns about the impact of the internet on the chemicals sector. Tim Day, fund manager at Hendersons, says: "The chemical prices are being squeezed by internet business-to-business auction sites. In addition a $30 oil price is not helping companies' costs.' Day regards aluminium as a more consolidated industry and so one which is less threatened by internet auction sites. Last year Alcoa announced it was taking over Reynolds Metals and Alcan is in merger talks with two European aluminium companies. Day says: "Alcoa is cheap and has good earnings it is also the lowest cost producer in its sector."
Gartmore also has a position in Alcoa believing the company has bought supplies up well. Robert Siddles, head of US equities at Gartmore, says: "Basic industrials is a difficult area to invest in. The management has the habit of upsetting shareholders by making acquisitions. International Paper bought Shoreood a value-added packaging company, investors were disappointed that the acquisition decreased the company's strategic focus rather than increase it. The purchase also has the potential to dilute shareholder value."
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