Something Big Is Afoot; Some Say It’s Market’s Bulls

Waiting for a selloff so that you can pick up stocks cheap? Two of Wall Street’s most outspoken bulls say you’ll wait in vain.

The bulls say a powerful change in sentiment is propelling stocks to new highs, as shown by the 49.57-point surge in the Dow Jones industrials Tuesday to a record 2,870.49. But the change is occurring only gradually, and so it likely has much further to run.

“This is not the final capitulation (of the bears),” says Glenn Cutler, editor of Market Mania newsletter in Pacifica, Calif. “This is just the recognition of the recognition.” Meaning: It’s just dawning on investors that something big is afoot.

A key signal that the market’s rise is only beginning, rather than ending, is trading volume, Cutler said. Tuesday, New York Stock Exchange volume totaled just 137.7 million shares. That shows that a lot of traders continue to fight the rally, refusing to participate in it.


Many potential buyers want to get in at lower prices, Cutler said. But “the market has not been giving those people a chance to get in,” he notes. His conclusion: “It’s going to get wilder"--a Dow of perhaps 3,100 before things calm down.

Another raging bull is Elaine Garzarelli, analyst at Shearson Lehman Hutton in New York. She was right on target calling the start of this rally in late April. She says her technical market indicators still point to a Dow peak of 3,280 before a major correction comes.

Relative to earnings and interest rates, stocks are fairly valued at about 2,850 on the Dow, Garzarelli said. But when the market gets momentum on its side, as it has now, “we usually peak at 25% to 30% above fair value,” she said.

The bulls see the economy, interest rates and corporate earnings trends on their side now, Garzarelli notes. “There just aren’t any sellers,” she said, which usually means we’re going higher.

Tandon’s Leap of Faith: Few stocks have achieved the move of Moorpark-based Tandon Corp. this year. The personal computer company’s shares have jumped from 81 cents in early January to $2.81 on Tuesday--a gain of 250%.

Tuesday was itself a red-letter day for Tandon: The stock rocketed 44 cents, or 18.4%, on heavy volume of 2.4 million shares. That made Tandon the second-most-active over-the-counter stock.

A trader at New York-based brokerage F. N. Wolf, one of the smaller firms that make a market in Tandon shares, said he saw considerable buying by individual investors. “But I have no idea where they’re getting their information,” the trader said.

In fact, Tandon isn’t a new story on Wall Street. The firm has been profitable for three quarters, after bleeding barrels of red ink. In the quarter ended March 31, Tandon earned $7 million, or 11 cents a share. Revenue totaled $105 million, up 13% from a year earlier.

Tandon is a notorious example of boom-and-bust technology investing. In the mid-1980s, it was a profitable maker of computer disk drives, devices that store and retrieve data. The stock traded as high as $35.25 in 1983. Then, competition in the drive business intensified, and Tandon collapsed.

From 1985 to 1988, Tandon had only one profitable year (1987). But while it struggled, Tandon slowly found its niche: selling complete personal computers in Europe, where small-business demand for PCs was blossoming.

Tandon’s success in Europe isn’t owed to machines that are technically far ahead of the competition. Rather, analysts say, the firm has flourished by concentrating on two keys: reliability and availability. Indeed, a long courtship of some 3,000 independent European computer dealers has been a central factor in Tandon’s comeback. Now, 95% of Tandon’s revenue comes from Europe; the firm has only a small U.S. presence.

Tandon’s European business should be strong enough to produce earnings of 40 cents a share this year, according to San Francisco-based Pacific Growth Equities, one of the few research houses tracking Tandon. “I think the fundamentals are getting recognized by Wall Street,” said Paul Pollack, president of Pacific Growth.

Ranjit Sitlani, Tandon’s executive vice president, said European sales in the current quarter “are running along pretty much as we expected. There’s no slowdown that I can see.”

So if Tandon can earn 40 cents a share this year, the stock--at $2.81--is priced at just 7 times earnings. Shouldn’t it trade a lot higher?

On paper, it’s cheap. But Tandon’s long decline in the 1980s has left it (and CEO and founder Jugi Tandon, who is traveling in Europe this week) with a severe credibility problem: Wall Street isn’t fully convinced that Tandon can avoid stumbling again.

Sitlani insists that the firm operates with “a single goal now: to be profitable every quarter.”

Last fall, Tandon considered selling itself. Now, it plans to remain independent. If earnings in the current quarter come in strong, a lot of investors watching from the sidelines are likely to conclude that the turnaround is real, and the stock could easily move to $4 or more, some analysts say. Just remember: Some folks paid $35.25 for Tandon in 1983. This is not a widows-and-orphans stock.