Ted Allrich is the founder of The Online Investor and author of: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
Bellwether stocks are industry leaders, the biggest and usually, but not always, the best. Investors watch them to get a sense of where that particular industry, or in some cases, the economy is going. Some bellwethers are portfolio anchors while others are good indicators but not necessarily the best stocks to own. Here are some to know.
For a broad economic indicator, watch General Electric Company (NYSE: GE). This company is so large and involved in almost every aspect of the economy that it gives a good reading on how the economy is doing. It finances houses, builds jet engines, sells light bulbs, owns NBC Universal, manufactures major household appliances and consumer electronics, has electrical distribution, generates energy from coal, oil, natural gas, nuclear energy, water and wind technologies, supplies railroad locomotives and management technologies, offers security systems, has water treatment and wastewater treatment, provides healthcare with medical technologies and services such as medical imaging. There isn't much GE doesn't touch in our daily lives. While GE's stock has been in a rather tight trading range (it did break up to $42 a share late last year, but then retreated), it's worth watching as an indicator for the pulse of the U.S. economy. The stock's price has been decidedly down for the last six months.
For technology, two names stand out: Intel and Cisco Systems. Intel Corporation (NASDAQ: INTC) is the undisputed leader of the semiconductor business. Since we're living in the age of technology and semiconductors are the very essence of technology, Intel watchers can see how healthy the technology industry is by focusing on Intel. The other name is Cisco Systems, Inc. (NASDAQ: CSCO) While computers are one indicator of technology health, the other is information that flows through them. Cisco is the carrier that gets information to computers. It makes switches and routers that carry the electrical pulses to their ultimate destinations. If Cisco sees slowing sales, it's a sign that technology in general isn't going to grow.
For the banking industry, it's a little harder. One bank everyone watches is Citigroup Inc. (NYSE: C). But it's so much more than a bank. It's really a surrogate for a large variety of financial services since it has a bank (Citicorp) that offers every type of loan imaginable from mortgages for individuals to bridge financing for businesses as well as deposit and asset management services. It's also very global which dilutes its risk but also makes it harder for investors to use it as an indicator for how well the U.S. economy is doing. Right behind in size and also global is Bank of America (NYSE: BAC). A more pure play on the U.S. economy is Wachovia Corp. (NYSE: WB). While it's the fourth largest bank, it's almost entirely in the U.S.
In the Oil and Gas fields, Exxon Mobil (NYSE: XOM) is the big hitter. It's the world's largest integrated oil company with oil and gas exploration, production, supply, transportation, and marketing worldwide. It provides the fuel that makes almost every economy in the world go.
Of course, there are many more industry leaders and bellwether stocks, but these make a good start for any investor to watch. Again, these may not be the best stocks to own because smaller, more efficient companies may be growing faster and producing better profits. But these giants are the ones most investors follow to get an idea of where an industry is going and/or the economy. That's why when Cisco announced it had a good fourth quarter but saw trouble ahead, the whole stock market went down. Some of these stocks are so much bigger than themselves.
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