Even Loyal IBM Investors Are Singing the ‘Big Blues’

When IBM’s stock was soaring at around $175 a share just before the 1987 crash, there were undoubtably more than a few Monday morning investors who wished that they had bet the house on Big Blue.

IBM shares have been trading under $100 a share recently, and those same investors are probably wondering if Big Blue (which can now appropriately be called Big Black-and-Blue) is still worth the gamble.

“We don’t think it’s the stock to own,” says Rick Martin, the analyst who follows IBM for Prudential-Bache Securities. He thinks that it will take years before IBM cleans up its act.

Only two months ago, it seemed unfathomable that IBM’s stock would be as cheap as $100 a share ever again. The last time the company’s shares had sunk that low, after all, was in 1984. And even after the 1987 crash, IBM managed to stay $4 above the century mark.

But the stock has fallen faster than anyone would have guessed, mainly because of disappointing corporate earnings that are expected to haunt the computer giant for a while.

Martin thinks that IBM will earn just $9.50 a share this year, which is down substantially from the $9.80 that it earned in 1988. That $9.50 estimate is also substantially below the $10-a-share profit that Martin previously predicted for IBM this year.

Martin is not the only one down on IBM. With the company’s acquiescence, analysts have all been reducing their forecasts.

Even so, isn’t IBM at $100 a share a mighty attractive investment? Sanjiv Hingorani, IBM watcher for Salomon Bros., is telling clients to hold onto whatever shares they already own but not to buy any more.

“This is a different company” than the one that everyone loved through much of the 1980s, Hingorani says. For one thing, IBM hasn’t been able to sustain the 15% revenue and earnings growth that people had come to take for granted. Growth is now around 6%.

Analysts say some important decisions will have to be made by the management of the Armonk, N.Y., company in the next couple of years. For one thing, it will have to decide if it wants to aggressively price its new Summit mainframe computer that analysts expect to be introduced in 1991. “It will set the tone for pricing in the whole company,” Martin says.

IBM won’t even acknowledge that it is working on a new mainframe, much less discuss pricing.

Industry experts say IBM has lost ground in the computer business these past few years because it hasn’t been pricing its products low enough. And the company abandoned its aggressive pricing practices, they say, because its costs got too high. That was mainly the result of IBM’s practice of expanding its work force and refusing to lay off workers when they were no longer needed.

Something has to give, analysts say. Either IBM will be forced to reduce prices to improve its revenue and profits, or it will have to cut costs--and people (maybe up to 50,000)--from the payroll.

Either way, Wall Street thinks that investors should be spectators instead of participants, as IBM sorts things out--even if the stock is singing a siren song.

Santa Claus Is Coming, So You’d Better Cash In

Is the stock market getting you down? There’s hope--in about a month. That’s when the market often goes into what one observer calls the “Santa Claus” rally.

In 24 of the past 37 years, stock prices have risen significantly--between 0.9% and 1.7%--in the last five trading days of the year and the first two days of January, according to Yale Hirsch, the unofficial keeper of market trivia.

Hirsch believes that the market rallies because any stock purchased during this period wouldn’t show up on a professional’s performance record until the new year.

Seven times over those 37 years the market gained small amounts during those seven trading days and in six years it declined.

But you’d better hope that Santa is good to investors this year. Bear markets followed the six years that the Santa Claus rally failed to develop, Hirsch says.

Time for a Portfolio That’s Lean and Mean

If you don’t want to commit financicide--which I’ll define as the mortal wounding of your assets--it’s time to whip your portfolio into shape for 1990. You can start by ridding yourself of some of the shares that got flabby during the binge of the past decade, and put yourself on a strict diet of lean, up-and-coming stocks.

And before it’s too late, you’d better start locking in today’s interest rates by buying some long-term bonds. Bonds may not be as attractive as they were earlier this year, but today’s rates are likely to be the best you’ll see for a while.

I recently called a number of financial experts--the chief investment officer of Merrill Lynch, a top-rated money manager, a demographer, a tax planner and others--for suggestions on what investors should be doing as the last decade of this century begins.

Here’s what Charles Clough, chief investment strategist for Merrill Lynch & Co., had to say. “We are in an environment where interest rates are likely to go lower,” says Clough, who adds that America is entering the biggest slowdown in borrowing since World War II. And with fewer Americans buying cars and homes, Clough says, the Federal Reserve won’t be able to keep interest rates up at current levels even if it wants to.

So what’s an investor to do? “Get out of your certificate of deposit. Each quarter you go to roll that over, the bank is going to give you less interest,” says Clough. “The first thing an investor has to do is lock in the nearly 8% he can get in long-term Treasury bonds.”

Clough advises investors to keep 50% of their money in bonds and the rest in stocks. But pick the stocks carefully: That slowdown in consumer borrowing is going to hurt a lot of companies and industries.

“The stock market is finally coming to grips with the big negative--earnings are falling,” Clough says. He’s worried about auto stocks and the businesses that feed the car industry, like steel and textiles.

Clough also sees red flags for retailing and the defense industry, as well as real estate and its associated industries, such as home appliances and home furnishings. He also doesn’t like real estate investment trusts and the financial services industry.

So, what’s left? “There is tons of stuff,” Clough says. He likes utilities, for instance, which will prosper no matter what happens to the economy. And he likes regional telephone companies, whose earnings are sheltered even during a recession; energy companies; health-care management firms, and engineering/construction concerns that will be in the driver’s seat when America needs to upgrade its industrial base after the upcoming economic downturn.

Clough doesn’t advise holding a lot of cash. And he has one more piece of advice. “Individual investors should be long-term investors. They shouldn’t be looking at the paper every day.”

Marc Heilweil, a highly respected investment adviser from Atlanta, is also telling clients to be cautious about the stock market right now. “Individuals investing for the 1990s should wait for the maturation of the oncoming bear market before getting heavily into stocks,” says Heilweil, whose firm is called Heilweil, Hollander & Jacobs.

Once stocks do drop in price during the bear market that many experts believe is already under way, Heilweil says, investors should buy into companies that are well-managed, conservatively financed and have predictable growth records. And they should hold onto those stocks for the long haul, despite any short-term volatility.

In other words, go back to the old-fashioned way of investing that predated the takeover-crazy 1980s. “People should buy shares of at least one company they know and admire, and then put its certificate away in the back of the safe deposit box,” Heilweil says. He emphasizes the “back” of the safe deposit box--so the temptation to sell won’t be great.

Some companies that Heilweil personally admires are SCI Systems Inc., which supplies the raw material used in the manufacture of computers and telecommunications products; Lawson Products, which distributes fasteners and other supplies to manufacturing companies; Air Products & Chemicals, a supplier of industrial gases, and Lubrizol, the largest independent producer of motor oil additives. All of these companies have been building their businesses for the future, Heilweil says.

“We are going to see something that is a mirror-image of the 1980s. The desirable companies for investors are going to be well-run, niche companies, as opposed to asset-rich companies that are ripe for breakup or restructuring,” says Heilweil.

And now some tax advice for those considering a New Year’s make over for their portfolios.

All the chatter out of Washington about a possible reduction in the nation’s capital gains tax has created a unique worry for investors this year. People are asking themselves: Should I sell stock now, or wait until 1990, when I might be able to pay less tax on the gain?

“It may be the time to hedge some of your bets,” says William J. Goldberg, national director of personal financial planning for KPMG Peat Marwick, the giant accounting firm. “Take some of your gains while you are sure you still have them. And let some of them ride.”

Goldberg and others warn investors not to let tax considerations cause them to make bad financial decisions. In the tax business, that’s called “letting the tax tail wag the investment dog.”

Texas billionaire Harold Simmons is now about $70 million in the hole on his investment in Lockheed. Simmons owns nearly 11% of the outstanding shares in the aerospace company, which recently said it may have to take a $300-million charge against earnings because it blundered when bidding for a government contract. Wall Street last week was counting on Simmons to take some aggressive action to get Lockheed’s stock moving higher once again. The betting is that he will. Simmons took a step in that direction last week when he told Lockheed that he might increase his holdings to 15%. Simmons wasn’t answering telephone calls last week.