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November 9, 2001

Don't Chase Technology; Buy Utilities

Right now we're in the middle of a huge market rally -- especially in technology stocks. The main motivation is that people are looking for the quickest way to recover the huge losses they've incurred over the last 18 months. Tech looks like the fast track.

There are two flaws in this reasoning. First, you don't have to make your money back in the same investments in which you lost it, and second, technology stocks are still overvalued -- particularly after this rally.

At this point, the technology rally is still a self-fulfilling prophecy. The belief that tech is the place to be is drawing new money into the sector which is driving the stocks up -- which is making people believe that tech is the place to be. This trend can go on quite a while; that's what caused the last bubble. The question is: Do you want to try to ride that wave of momentum, hoping you're quick enough and smart enough to know when to jump off? Or, would you rather catch the next wave -- one that is based on more rational valuations?

Income is King

I can see where that next wave is forming. With bonds and money market rates at decades low yields, and with the market getting ever more turbulent in a very cloudy (at best) economy, people are going to be looking for investments that show a definite return. That investment right now is the utility sector. A couple of years ago when you could make 30% returns by speculating on anything with a dotcom on the end, no one was interested in stocks with a 4% yield and good long-term total return. Now, however, more folks are seeing the light, and still more will after a few months, when they again get burned in the current tech rally.

Adding more fuel to the utility story is the fact that brokerage firms have been anticipating demand in the sector by buying up shares while prices were depressed. Now the major brokers are putting on a big push to sell utilities, since they already have a big inventory of shares purchased at low prices. It's basically a wholesale-to-retail business.

Get in at the Beginning

Usually I'm saying don't buy what the brokers are trying to sell you, because they're driving up the price as they unload it on you. But in this case, the stocks are still low enough, and still have attractive enough dividend yields, that the price is right. Moreover, if you buy them now, you can ride the wave up, as more and more investors seek the shelter and security of dividend paying stocks.

I'll be recommending two utility stocks in my Insiders PLUS newsletter this week. Both have good yields and a solid operating base from which to earn steady profits, regardless of whether the recession worsens. That's the kind of security we all need in this kind of market.



Copyright 2001 by Jack Adamo. All rights reserved.