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SIVY ON STOCKS from CNNmoney.com
October 17, 2001 ******************[ A D V E R T I S E M E N T ]**************** QUICK! If you won $25,000 CASH what would be on your "Best Of" list? Keep thinking because here's a chance to try to win the $25,000 Grand Prize. BONUS: See what else has been selected "Best Of" at money.com and try an issue of MONEY Magazine FREE! Click Here: http://www.money.com/bestof **************************************************************** Surprise me The big surprise this week is that earnings are coming in slightly better than expected. NEW YORK (CNNmoney) - The great thing about unrelenting pessimism is that any surprises are likely to be pleasant ones. That's pretty much the point investors reached after the Sept. 11 attacks. Expectations for third-quarter profits are now so negative that even mediocre reports count as good news. In fact, the results that have come out in the past few days -- particularly for some of the financials and drug companies -- are better than mediocre. I continue to be somewhat more optimistic than many economists. I believe that the Federal Reserve's enormous interest-rate cuts will fuel an upturn in the economy -- and that the rate cuts would already be taking effect were it not for the economic damage stemming from Sept. 11. Fears of further terrorism continue to undermine the market, overshadowing faint signs of improving fundamentals. As a result, the Dow was down 151 points on Wednesday, despite several strong earnings reports. Freddie Mac (FRE: down $0.44 to $66.65, Research, Estimates) reported a 26 percent earnings gain for the third quarter. That follows Fannie Mae's (FNM: down $0.73 to $80.85, Research, Estimates) strong report, which I discussed in Monday's column (see "A lender's market"). Citigroup (C: up $0.47 to $46.56, Research, Estimates) announced a 9 percent decline in third-quarter earnings after expenses related to last month's attacks. Without the unexpected charges, Citigroup would have posted a double-digit gain, and the company projects 15 percent growth in the fourth quarter. J.P. Morgan Chase (JPM: up $0.66 to $34.60, Research, Estimates) announced a 68 percent drop in earnings -- but the results were in line with analysts' reduced forecasts. The strongest sector this fall may well turn out to be pharmaceuticals. Two leading companies reported strong results on Wednesday. Pfizer, the world's leading drugmaker, turned in a stunning 28 percent profit gain for the third quarter, confirming the company's status as the must-own choice in the industry. Blockbuster products such as anti-cholesterol drug Lipitor helped fuel sales, while cost cutting in the wake of last year's Warner-Lambert acquisition bolstered profit margins. Solid but less flamboyant gains were announced by Johnson & Johnson, where third-quarter earnings gained nearly 16 percent. A few bright spots don't add up to a fireworks display, but there are two pieces of conventional wisdom worth keeping in mind right now. The first is that the direction of the market depends on how profit trends compare with expectations. The bad news has already been factored into stock prices. What matters from here on is not whether results are good, but whether they're not as bad as feared. The other fact to remember is the importance of diversification. The greatest upside leverage when the economy recovers will probably be among the big-cap tech stocks. But drug stocks are equally important parts of a well-balanced growth portfolio. J&J's (JNJ: up $1.00 to $57.77, Research, Estimates) 13 percent long-term annual growth rate and broad diversification within health-care makes it an appealing choice for conservative investors. At $58 a share, the stock trades at 26 times next year's projected results. But it may be smarter to pay up a little more for Pfizer (PFE: up $0.55 to $41.65, Research, Estimates). At $41.65, the shares are trading at 28 times projected earnings for 2002. That's not a cheap P/E, but it's a small premium to pay for the No. 1 company in the industry with a core growth rate of nearly 20 percent a year. ### Read all of Michael's columns at: http://money.cnn.com/markets/sivy/ To subscribe or unsubscribe to Sivy on Stocks, go to: http://money.cnn.com/email/ -------------------------------------------------- SPECIAL OFFER - MONEY MAGAZINE PERSONAL FINANCE COACHING SYSTEM Tap the expertise of MONEY for your specific personal finance needs with the help of a one-to-one coach... To learn more and speak to a coaching consultant, call 1-800-748-4056 x5705, or visit our website at: http://money.cnn.com/services/coach/index.html ----------------------------------------------------------- CONTACT THE BIGGEST COMPANIES IN THE WORLD! 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