Investors Bail Out of Food, Drugs, 1990’s Golden Stocks
To ring in the New Year, investors have decided to wring out the old--the food and drug stocks that were the market’s few bright spots in 1990.
The Dow Jones industrial average slumped 37.13 points to 2,573.51 on Thursday, following Wednesday’s 23.02-point drop. On both days, the stocks leading the market lower were big-name food and drug issues that had been viewed as safe havens in the bear market.
The selloff of these two previously golden stock groups raises the specter of a new bear market slide that could pull virtually all stock groups to new lows, some analysts say.
While the Dow index has kicked off the year with a 2.3% decline, shares of drug giant Bristol Myers-Squibb have fallen 3.9% over the past two days, to $64.375 from $67. Another drug firm, Abbott Labs, has tumbled 7.5%, to $41.625 from $45. And well-known food producer Ralston Purina is off 6.3%, to $96 from $102.50.
After the Iraqi invasion of Kuwait last August, which sparked the first bear market since the early 1980s, food and drug stocks were the among a handful of stock groups that remained in favor. Because food and medicine are viewed as basic needs that shouldn’t be affected by an economic recession, investors poured into the stocks.
Indeed, four of the five best-performing stocks in the 30-stock Dow index in 1990 were food or drug issues: Philip Morris, Procter & Gamble, Coca-Cola and Merck. All four closed the year near their all-time high prices, helping to limit the Dow’s loss to 4.3% for the year.
Why are the stocks suddenly being dumped? Most analysts offer three chief reasons:
* With the looming Jan. 15 deadline for Iraq to exit Kuwait or face war, some investors are eager to raise cash to be on the safe side. When they look around to find profits to take, investors discover little that they can sell at a gain besides food and drug issues, so that’s what goes, says Larry Greenwald, trader at Sanford C. Bernstein & Co. in New York.
A further incentive for the sellers is that many food and drug stocks sell for a relatively high multiple of earnings per share--a basic measure of stock value. For example, Merck, the leading drug firm, sells for 20 times its most recent four quarters’ earnings. While food and drug companies have long commanded such high price-to-earnings ratios because of their consistent earnings growth, some investors see a chance now to switch to beaten-down stocks selling for much lower multiples, analysts say.
* Profit-taking pressure is being compounded by the fact that many major investors switch money managers at this time of year, notes Jeff Kaminsky, trader at Mabon Nugent & Co. in New York. An investor unhappy with his manager’s 1990 performance may take his business elsewhere, forcing the losing manager to sell stocks to return the client’s cash. Again, the stocks most likely to be sold are those that can yield the most profit.
* Some individual investors who have held food and drug stocks since the mid-1980s are bailing out on the belief that the stocks’ long reign as market leaders may be over.
Laszlo Birinyi, who heads stock research firm Birinyi Associates in New York, notes that the two-day selloff hasn’t been accompanied by high volume in the stocks. That indicates that many of the sellers are small investors, he says. If they decided late in 1990 that they wanted to get rid of their food and drug positions, it made sense to wait for the new year, Birinyi notes, because the taxes on any capital gain now won’t be owed until April, 1992, the filing deadline for 1991 taxes.
Even investors who still believe in the food and drug stocks may feel the smarter bet is to sell now, with the Iraq deadline nearing, Birinyi says. “They figure, ‘If I’m wrong, I can just buy it back cheaper after Jan. 15,’ ” he says.
The danger for the broad market is that, if the food and drug stocks continue to sell off, and investors still feel that it’s too early to buy much else, the market could find itself temporarily leaderless and head into another tailspin.
Kenneth Spence, technical analyst at Salomon Bros. in New York, is convinced that the food and drug stocks now are in the process of topping out, after a long surge that began in the last decade.
What’s happening now is the initial selloff, Spence says. This period will probably be followed by a weak rally. But after that, “you’re looking at significant downside,” he says.
The doomsayers have been wrong about the food and drug stocks before, of course. And even the bears admit that the best stocks in the groups aren’t likely to just wither away for the next few years. But if the market is indeed at a turning point, the food and drug stocks may finally be giving up their key 1980s’ role as market leaders.
Nicholas-Applegate Shift: San Diego-based money manager Nicholas-Applegate Capital, one of the star growth-stock managers of the last decade, announced Thursday that it will convert its $120-million closed-end Nicholas-Applegate Growth Equity Fund to open-end status.
The shift is good news for shareholders of the fund, but it’s an apparent disappointment to Nicholas-Applegate.
Closed-end funds, like their open-end mutual fund cousins, invest in a broad portfolio of stocks. If the stocks do well, so does the fund’s share price.
But an open-end fund continually takes in money from investors, and its share price always reflects the exact underlying value of the fund’s investments. A closed-end fund, on the other hand, takes in money only periodically or only once (when the fund is sold). The closed-end fund’s stock then trades like any other stock--and its price may or may not reflect how the fund’s portfolio actually is performing.
The Nicholas-Applegate fund, launched in 1987, now trades on the New York Stock Exchange for $9.50 a share. Yet the value of its assets is about $10 a share. Because that “discount” to true value averaged more than 5% in 1990, Nicholas-Applegate was obligated by its fund bylaws to convert the fund to open-end status, the firm said.
The conversion, expected in April, will be a plus for shareholders, by raising their stock price to the true asset value. But analysts say Nicholas-Applegate undoubtedly is unhappy to have to make the move. The advantage of running a fund on a closed-end basis versus an open-end basis is that a closed-end fund doesn’t have to contend with constant money flows in and out. The manager can set long-term goals and stick with them, rather than respond to shareholders’ short-term jitters.
Discounted prices for closed-end stock and bond funds have been a major problem over the past year, as the bear market has taken its toll. When the discounts become too large, shareholders often pressure fund managers to convert to open-end status, to get the stock price back up, notes Thomas Herzfeld, whose Miami-based Thomas Herzfeld Advisors is a major closed-end fund investor.
Fred Applegate, one of the Nicholas-Applegate principals, declined to comment on the firm’s announcement. But a major Eastern money manager that holds a stake in the fund agreed that “what they’re doing is in shareholders’ best interest.”
The manager, who requested anonymity, said there is a certain “ego element” involved in closed-end funds: Managers whose funds trade at a discount often feel as if the market is undervaluing their talents as stock pickers, he said.
“There’s no rationality as to why these things trade at a discount,” the manager said.
CASHING OUT OF DRUGS, FOOD The market was led lower Thursday by a big selloff of drug and food stocks--which were two of the strongest groups in 1990.
52-week Thurs. close Stock high/low and change P-E* Abbott Labs 46 3/8-31 1/4 41 5/8, -1 5/8 19 Amgen 63 1/2-21 1/2 60 1/8, -3 5/8 63 Anheuser-Busch 45 1/4-34 40 3/8, -1 3/4 14 Bristol Myers 68-50 1/2 64 3/8, -2 1/4 20 Campbell Soup 62-43 3/4 54 7/8, -2 1/4 -- Coca-Cola 49-32 5/8 44, -1 1/4 16 General Mills 52-31 3/8 46, -1 1/4 18 Merck 91 1/8-67 86 5/8, -2 7/8 20 Ralston Purina 108-77 3/4 96, -2 1/8 15 Warner Lambert 70 3/8-49 5/8 64 1/4, -3 18 S&P; 500 369-295 321.91,-4.54 15
* Stocks price-to-earnings ratio based on most recent 12 months’ earnings per share
