What Makes A Bellwether

11/5/2012


All else being equal, larger stocks are more important than smaller stocks. After all, with a stock-market value of $561 billion, Apple ($593; AAPL) accounts for 4% of the S&P 500 Index's total market value — more than the combined value of the index's smallest 125 members.

But all else is not equal. Some very large stocks don't have much signaling value; and in many cases, smaller stocks can be quite influential. Wall Street calls such companies bellwethers, leaders in industries that matter.

For instance, package-deliverer FedEx ($92; FDX), with operations throughout the world, is a proxy for global business activity. When FedEx raises its earnings guidance, the prices of other stocks that sell into related end markets tend to rise. And with a May fiscal year, FedEx declares about a month before most companies every quarter, providing an early warning system for earnings season. United Parcel Service ($73; UPS) is bigger, but the market pays more attention to FedEx.

When bellwethers move, others will follow. The chart above illustrates one aspect of the bellwether effect; positive news from stocks with heavy analyst coverage can move the shares of their rivals. Below, we present a list of 19 bellwethers, each of which stands out based on at least three of the following characteristics:

Analyst coverage: All of our bellwethers are covered by at least twice as many analysts as the average for their industry.

Industry influence: Each of the bellwethers can, via its own company-specific news, move other stocks in its industry. And outside its industry. Mattel ($37; MAT) is the prime mover in the leisure-products group, but not many companies take their cue from that group. So it's not a bellwether.

Size: Most of our bellwethers have stock-market values above $50 billion. However, size alone does not make a stock a bellwether.

Smell test: Plenty of important stocks did not make our list — and we don't claim to have captured every bellwether in the market, as hundreds of stocks qualify. We required our bellwethers to encapsulate a theme. For instance, Amazon.com ($233; AMZN) reflects investors' long-term view on about e-commerce — and their willingness to pay up for sales growth.

19 BELLWETHERS
-- No. Of Analysts --
Company (Price; Ticker)
Market
Value
($Bil.)
Company
Industry
Average
Quadrix
Overall
Rank
Recom-
mended
Stock?
Industry
FedEx ($92; FDX)
28
25
11.5
61
No
Air Freight
FedEx ships everywhere and has become a proxy for global business.
Deere ($85; DE)
33
22
8.1
72
No
Agricult. Equip.
Deere, the world's leading provider of agricultural equipment, reflects the farm economy.
J.P. Morgan ($42; JPM)
156
24
5.9
95
Yes
Banks
The nation's largest bank by assets reflects the health of the broad financial sector.
Apple ($593; AAPL)
561
43
10.6
96
Yes
Comp. Hardware
Apple is the bellwether for tablets and smartphones, blurring the line between technology and consumer products.
Caterpillar ($85; CAT)
55
22
8.1
72
No
Construct. Equip.
Machinery giant sets the tone in mining and construction equipment and engines.
Visa ($139; V)
73
37
10.5
75
Yes
Data Processing
Investors watch Visa for cues on both electronic payments and consumer spending.
Johnson & John.
($71; JNJ)
195
22
7.8
41
No
Drugs
Size, diversification, and venerable name make J&J the bellwether for drugs.
Nike ($91; NKE)
33
20
6.4
55
No
Footwear
Nike's results and futures orders reflect consumers' willingness to pay for premium goods.
Procter & Gamble
($69; PG)
191
26
10.9
48
No
Household Prod.
Household-products titan is a proxy for global consumer spending and brand power.
Amazon.com
($233; AMZN)
108
24
9.7
22
No
Internet Retail
Amazon reflects investors' views on e-commerce — and willingness to pay up for growth.
Google ($680; GOOG)
177
36
7.8
67
Yes
Internet Software
Google is nearly synonymous for the Internet. When Google suffers, others should beware.
Goldman Sachs
($122; GS)
57
26
6.5
78
No
Invest. Banking
For years, Goldman Sachs was the cream of investment banking. To some, it still is.
Freeport-McMo.
($39; FCX)
37
22
2.9
54
No
Metals & Mining
The largest U.S. miner's results reflect industrial demand for copper.
Disney ($49; DIS)
90
31
10.6
77
No
Movies & Enter.
Disney, with operations from TV to theme parks, is a proxy for the entertainment business.
Schlumberger
($70; SLB)
93
35
9.4
65
No
Oil & Gas Equip.
Schlumberger tends to have success when energy companies are drilling.
McDonald's ($87; MCD)
87
28
9.1
51
No
Restaurants
With more than 33,500 stores, McDonald's is an excellent proxy for the restaurant industry.
Intel ($22; INTC)
110
23
9.7
69
Yes
Semiconductors
Intel sets the beat for companies dependent on personal computers.
Wal-Mart ($75; WMT)
252
32
14.8
79
Yes
Super Centers
Wal-Mart's results offer a key to the rest of retail — are shoppers trading up to boutiques?
AT&T ($35; T)
198
37
4.3
37
No
Telecom Svcs.
Still the biggest, AT&T remains the poster child for the U.S. telecom sector.

Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com