Tough Choice: Buy on Top Shelf or Discount Bin?
If you can’t resist throwing some money at stocks now, do you buy those that are up or those that are down?
That simple question is confounding more investors--seasoned and novice--than has been the case in a long time.
For weeks, Wall Street has been knocking down many once-high-flying biotechnology stocks, for example, fearing that their run was over. Then, on Wednesday, biotech leader Amgen Inc. announced better-than-expected first-quarter earnings. Amgen jumped $4.50 to $133.75 on Thursday, pulling most other biotech stocks up with it.
In the personal computer business, meanwhile, Wall Street was reluctant to part with stars Apple Computer, AST Research and Dell Computer last week, even though competitor Compaq stunned the market with a forecast of poor earnings for this quarter. Too bad for the holdouts: The rest of the PC stocks finally plunged this week when Apple joined the bad earnings news chorus.
One veteran Southland stock trader, summing up many of his peers’ exasperation with the seesawing market, says, “The fact is, nobody knows what to buy now.” With the market still near record heights, “brokers are looking for product to sell to clients, yet they’re afraid to recommend anything,” the trader says.
But if investors are increasingly unable to decide on the merits of most stocks, they still seem obliviously happy to buy one particular share type: New issues, including fresh stock sold by companies already public and initial public offerings by private companies.
If a broker can say “it’s new,” a stock has a leg up on the competition. A good example here is Pinkerton’s Inc., the Van Nuys-based security services company.
Pinkerton’s, which went public a year ago, sold 2 million new shares Tuesday at $26 each. The firm’s lead underwriter, Wertheim Schroder & Co., was able to boost the size of the offering from 1.75 million shares because demand was so heavy.
Even more surprising was that, on Thursday, Pinkerton’s stock leaped as high as $29.50 and then closed at $28, up from Wednesday’s $27. With 2 million new shares sold this week, Thursday’s price jump suggested that there still was unsatisfied demand for Pinkerton’s stock.
Richard Rieger, an analyst at Ladenburg, Thalmann in New York, said the Pinkerton’s offering was a success largely because “Wertheim did a very good job placing the stock.” In divvying the shares among big investors, Wertheim avoided giving too many to those who might try to sell the stock quickly. By keeping some customers hungry, Wertheim boosted the odds that those customers would try to buy more in the open market after the deal--which is exactly what happened.
Pinkerton’s is just one of many new issues that have roared onto the market in recent weeks. On Thursday, battery giant Duracell International went public at $15 a share. By the end of trading the price was $20.75--a stunning debut.
In the new-issues market, if not the broad market, investors seem to perceive “hot items” wherever they look. The rather basic reasoning here is that “if a company like Pinkerton’s is selling new stock, it must be doing well.”
In fact, Pinkerton’s is doing pretty well, Rieger says. Decent growth from its security-guard business and from acquisitions of smaller security companies should mean earnings of $2.05 a share this year and $2.35 next year, he figures.
Still, when new-issue demand turns this frenzied, investors often end up badly overpaying. Maybe we’re not there yet--but we’re close.
Which brings the focus back to the original question: Is it smarter to buy stocks that are depressed now rather than high fliers?
Consider Irvine-based retailer Wet Seal, which sells casual clothing aimed at young women. Wet Seal has won many kudos for its fashion sense and quick ability to react to consumers’ whims. Yet the stock has been trashed in recent weeks, falling to $12.50 Thursday from $18 in March.
Alan Weinstein, the firm’s chief financial officer, figures that investors are worried about Wet Seal’s dependence on Southern California. Of its 97 stores, 55 are here, and the region’s continuing economic slide has hurt Wet Seal’s sales. At this point, Weinstein admits, “business has been about the same--it just hasn’t gotten any better.”
If the economy turns around in the second half, Weinstein figures that Wet Seal will have no problem earning 85 cents a share this year. Yet even if things don’t improve much, 75 cents a share could still be realistic, he says.
So this isn’t a company that’s in any danger of bleeding red ink.
At $12.50 a share, Wet Seal sells for 17 times the 75-cents-a-share estimate. Maybe the stock still needs to get a bit cheaper. But if you assume that the economy will recover at some point this year, you can also assume money is going to pile back into Wet Seal. It’s just a matter of time.
Moral: If you’re looking for stocks to buy now, it may be safer to bet on those that could earn you 50% over the next six months than those that earned someone else 50% in the last six weeks.
