East Finally Starts Affecting West
U.S. investors on Thursday finally displayed a little worry about Japan’s continuing market plunge. But the selling that made up the 32.21-point drop in the Dow Jones industrials, to 2,695.72, didn’t appear to include much dumping of U.S. stocks by Japanese investors themselves.
Instead, traders said some U.S. investors simply got itchy fingers and used Japan as an excuse to take some profits. Other investors seemed genuinely frightened. “This has really, finally got some people nervous,” said Jack Baker, trader at Shearson Lehman Hutton in New York.
Overall, though, the decline was far less severe than some investors had expected in Japan’s wake.
Following another horrendous fall in Tokyo’s Nikkei stock index Thursday--a 963.85-point decline to 29,843.34--concern was high at Wall Street’s opening that Japanese investors would begin liquidating investments here.
The reason: Many Japanese investors who tried to unload stocks in Tokyo on Thursday were unable to do so because of the avalanche of sell orders. So if they wanted to raise cash, U.S. markets offered the only real hope. That could be the case for the Japanese today as well.
But Shearson’s Baker said that while he saw “some selling from overseas” Thursday, it was limited.
Likewise, Ned Collins, a Daiwa Securities trader in New York, said Japanese investors “have not been sellers through the Big Four (Japanese brokerages),” which are Daiwa, Nomura Securities, Yamaichi Securities and Nikko Securities.
The flip side is that the Japanese weren’t heavy buyers of U.S. stocks Thursday either. Many analysts expect that Japanese investors ultimately will increase their stock and bond holdings here as they exit their own markets, especially if the dollar rises further. But traders say many Japanese are unwilling to take any new investment positions before the Japanese fiscal year ends next week.
Despite its loss, the Dow rebounded from a drop of nearly 50 points at midday. By the close, the stocks that took the biggest hits were, predictably, those that have been strongest lately--technology issues and industrial issues. In that sense, Thursday looked like good old-fashioned profit taking rather than the start of a severe market crack.
Caution on Wall St.: Two big brokerages--Morgan Stanley and Merrill Lynch--flashed caution lights Thursday, though they didn’t get much credit for the Dow’s fall.
Morgan advised clients to cut stock holdings to 45% of a global portfolio from 55%, raise cash investments to 15% from 5% and keep 40% in bonds. Merrill strategist Charles Clough advised cutting stocks to 40% from 45%, raising cash to 10% from 5% and keeping bonds at 50%.
Morgan cited the Japanese market’s deterioration as one reason for its caution. Clough, meanwhile, said stocks have become overvalued versus bonds and also cited worries about the banking system. Though Clough continues to favor such stock groups as technology and industrial equipment as prime holdings for the ‘90s, he said those stocks have run up too fast in recent weeks. Better wait a bit, Clough advised: “Patience in building positions will be rewarded.”
Is Mattel a Growth Stock? Some gutsy investors have made a fast buck in shares of toy giant Mattel Inc. over the past year. The big question now is whether Mattel can persuade Wall Street that it’s a turnaround story with staying power.
Shares of the Hawthorne-based firm rocketed from $10 early in 1989 to $20 by year-end. After falling back a bit early this year, Mattel is back up to $20.375. The driving force: Renewed optimism about the company’s ability to turn a reliable profit from its rich toy chest, which includes Barbie, Hot Wheels and Disney infant toys.
In the ‘80s, Mattel sometimes looked more like a company run by children than for them: Toy trends went boom and bust repeatedly, and so did Mattel’s earnings and stock. “In the early ‘80s, the mentality was, ‘Let’s get sales volume,’ ” even if earnings were sacrificed, admits Jim Eskridge, Mattel’s chief financial officer. Now, he said, “our objective is consistent profitable growth.”
Last year, Mattel’s operating earnings jumped 113%, to $1.60 a share from 75 cents in 1988. Revenue rose 25% to $1.24 billion.
This week, Merrill Lynch analyst Harold Vogel raised his 1990 earnings estimate to $2 from $1.85, citing strength in Barbie sales and other lines. Kidder, Peabody & Co. analyst Gary Jacobson thinks $2.10 is possible this year.
Rather than chase every new toy trend it sees, Mattel is concentrating on extensions of its core lines, such as Barbie, which have never lost popularity. New this year: Barbie dolls and accessories designed to appeal to a wider age group of girls. Mattel also sees great potential in Europe, where it now is the largest toy maker.
It sounds like a growth company, all right. But Mattel stock’s price/earnings ratio is a mere 10 if Jacobson’s 1990 estimate is correct. So Wall Street clearly still is treating the firm more like a cyclic company than a growth company.
Jacobson believes that attitude will change over time, as Mattel proves that it can deliver solid earnings growth year after year. If Mattel just sold for the same P/E ratio as the average stock--now about 13--the stock price would be near $27 instead of $20. This is one to watch if not own.
