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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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