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Sector Madness
We
have all heard in the media that a certain analyst has upgraded
or downgraded such-and-such sector.
But is this real world?
Let’s take a second look at the sectors and industries
that are frequently thrown at us. Officially Sectors
are broken down into Industries, but frequently the terms
are used in reverse where Industries are broken down into
Sectors. And then to confuse things more both terms are used
to simply refer to a segment of the market or a group of stocks.
No
matter which way you use the term it is almost crazy to make
an earnings downgrade or almost any other blanket statement
applicable to a broad group of companies.
Generalizations
don’t work.
If an analyst speaks of a downturn in the restaurant
sector is he talking about a stock like McDonalds (NYSE: MCD)
where people might eat more often in a soft economy or an
upscale Morton’s Restaurant Group (AMEX: MRG) where it’s tough
to get out the door for less than $50 per person.
Yet analysts
will sometimes make grandiose wide-sweeping statements about
a sector.
To speak of the Auto Sector is to lump the high-end
offerings from Mercedes (NYSE: DCX) with the likes of Ford
(NYSE: F).
To do so is utter foolishness.
In a soft economy Toyota or Honda may see more customers
than Mercedes-Benz or Porsche, but to make a general statement
about all stocks in a sector makes little sense.
Probably the most misused term is the “Technology Sector.”
We are all guilty of using it.
It’s certainly convenient.
But it’s a misnomer.
The characteristics of the broad range of stocks in
the “Technology Sector” are as different as night and day.
What does wireless Internet have to do with storage
technology?
What does networking have to do with chip equipment
manufacturing? What does the prospects of a global positioning
satellite equipment manufacturer have to do with a medical
equipment manufacturer?
But they are all lumped into the “Technology Sector”.
One company’s products may be in high demand while
another’s is piling up in a warehouse.
The “Chip Sector” is way too broad to make any generalization
about.
Is a chip makers products going into networking products,
personal computers, handheld PDAs, cell phones, car dashboards,
game stations, or talking dolls?
Most sectors are comprised of companies that run a
spectrum.
Very well managed companies contrast poorly managed
companies.
Companies with well-developed state-of-the-art technologies
eclipse companies cranking out generic versions of last year’s
dying technology.
All these companies
are tossed together with very little differentiation, yet
it is those unique differences between companies’ products,
management, culture, research, and marketing that make them
who they are.
The good news is as pundits generalize criticism about
an industry or sector there are good companies drawn down
with the bad, and in that lays the opportunity for observant
investors to go bargain hunting.
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