Market Watch : Some Surprising Selloffs
Everyone agrees that the stock market had good reason to plunge on the Iraq-Kuwait news and rising recession worries. But some analysts are flabbergasted by the destruction that certain stocks are suffering.
Why has Hawthorne-based Mattel, for example, been knocked from $26.375 in May to $18 now, a decline of 32% even while the toy company’s earnings remain very healthy? Why has AST Research, the Irvine computer firm, seen its stock tumble from $25.50 in May to $20 now, a 22% decline, even after reporting record fourth-quarter earnings?
There may be a simpler answer here than many analysts want to admit. Some of the hardest-hit stocks are those that have more than doubled over the past year. Some investors bought Mattel for as little as $9.375 in 1989. AST sold for as little as $6.625 in 1989. If those lucky buyers still have their shares, you can bet they’ve been more inclined to sell lately than to hold, given the rampant fear in the market. After all, no one who was smart enough to buy low wants to watch his big paper profits evaporate. It’s a basic human emotion.
At some point, the selling will exhaust itself. And the stocks that still promise good earnings in the years ahead are likely to find a new herd of buyers waiting to rush in, maybe sooner than later.
Stock Buybacks to the Rescue? In the market crash of October, 1987, many companies helped rescue stock prices by buying up their own shares on the market. A company justified that use of cash by arguing that its stock had fallen too low relative to the true value of the company. So the stock may have been the best investment that the firm could make at the time. Besides, in retiring shares, a company’s future earnings are spread over fewer shares--a bonus for remaining investors.
Could stock buybacks keep the market from crashing this time around? Many experts doubt that companies can be a major prop for Wall Street. For one thing, the crash of ’87 was largely driven by computerized program trading. So many companies felt that the severity of the plunge was unjustified.
“This time, it’s a genuine economic shock” driving stock prices lower, notes one economist. Given that reality, it might be difficult for many corporate treasurers to argue that their stocks are truly worth buying, especially if a firm’s business already is slowing with the economy.
Another reason why buybacks are less likely this time around: Many firms just don’t have the cash. Corporate earnings have generally been weak, in contrast to the robust profit levels of 1987.
Still, some buybacks will certainly occur, the lower stocks go. General Electric last autumn said it would spend $10 billion buying back stock over the next five years. The company won’t say what it does on a daily basis, but “we’re in there virtually every day,” said spokesman George Jamison. Through June 30, GE had spent $1.5 billion to retire 22.9 million shares.
AST Research, mentioned above, recently authorized its treasurer to repurchase up to 1.5 million of the company’s 15.6 million shares. Joel Don, a spokesman, wouldn’t give specifics but said the company was a buyer of its own stock last week, including Friday. AST stock fell as low as $18.875 Friday before rebounding to close up 25 cents at $20.
Using Stop-Loss Orders: To sleep better at night, many investors use stop-loss orders on their stocks. For each issue in your portfolio, you leave standing instructions with your broker to sell automatically if the price falls to a specific level. For example, if you bought a stock at $40, and it’s now at $60, you might tell the broker to stop-loss it at $50, to guarantee at least a 25% profit.
But are stop-loss orders realistic in a free-falling market? For relatively small transactions--several hundred shares or so--brokers say the system does indeed work well for the individual investor. You may not get exactly your stop-loss price if the market is plummeting, but your order should at least be executed at the first bid price under your stop-loss limit.
But stop-loss orders can only be used for New York Stock Exchange stocks and to some degree for American Stock Exchange stocks. There’s no stop-loss system for over-the-counter stocks. The exchanges have individual trading “specialists” who single-handedly keep trading orderly--and determine prices--for each stock on the exchange floor. The OTC system, in contrast, is a network of computer-linked brokers nationwide, all listing various buy and sell prices for individual stocks. The National Assn. of Securities Dealers, which operates the OTC system, argues that there’s no way to adequately execute standing stop-loss orders within that system.
Even with exchange-listed stocks, a stop-loss order isn’t always a smart option. If your stock plunges temporarily, only to rebound later in the trading day, you may end up seeing the stock sold simply because it briefly touched your target price.
Briefly: Another reason why oil stocks probably only have further to rise this year, even if they drop back a bit temporarily: Big money managers still are woefully underweighted in the stocks. Many institutional investors dumped the oils in the late ‘80s, as oil prices plunged. They’ve been slow to buy back into the group. CDA Investment Technologies, which tracks institutions’ holdings, says international oil stocks made up only 4.4% of institutions’ portfolios on March 30. In contrast, the international oils made up 7.2% of the S&P; 500 index value. So just to reach a normal market weighting, institutions need more oil stocks. Likewise, domestic oil stocks made up 3.5% of institutions’ portfolios, versus a 4.2% S&P; weighting. Only in oil services were institutions even with the S&P; on March 30: 1.1%. . . .
Sign of the times on Wall Street: Seat sales on the New York Stock Exchange and the American Stock Exchange on Friday fetched the lowest prices since January, 1985. An NYSE seat changed hands for $330,000; two Amex seats changed hands, one for $117,500, the other for $115,000. A seat represents a brokerage’s membership position on an exchange.
