Why Up Means Down Lately for Market Leaders

The way things usually work on Wall Street: When a company reports earnings above expectations, its stock price jumps.

The way things work now: Report great earnings, and they’ll kick your stock down --and not just a little.

The latest victims of this trend Tuesday were a host of banking giants, including New York-based Bankers Trust (down $1.375 to $75.75 on the Big Board), Southern powerhouse Nationsbank (off $2.375 to $52.375) and California’s Wells Fargo (down $5.50 to $113.875).

Like many other banks, these companies earned more in the first quarter than most analysts had estimated. Yet many of the stocks’ owners still decided to head for the door on the news.

Were it occurring in a vacuum, the bank selloff could be blamed on simple profit taking. The bank stocks, after all, have been consistently leading this bull market since it was born 2 1/2 years ago.

But the decline in these stocks is just the latest in a string of bellwether-bashing episodes that have wracked the market recently. J.C. Penney, Intel, Chrysler--all were great “story” stocks in the first quarter that have suddenly lost their cachet.

“Every day they’re taking one more major stock out and killing it,” laments Ben Zacks, head of earnings tracker Zacks Investment Research in Chicago. You may not care if you don’t own the victims, Zacks admits. Even so, he warns, Wall Street can’t keep doing this to its leaders and expect the broad market to hold up much longer.

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What particularly disturbs Zacks about the selloff is that first-quarter earnings overall look pretty good. Of 725 major companies reporting so far, he says, 47% have beat analysts’ consensus expectations, 13% have met expectations and only 40% have disappointed.

So why isn’t the market stronger? “I think it’s the outlook,” Zacks says. While first-quarter earnings may be impressive, “investors just don’t see them getting any better” the rest of this year, he says. Blame slowing consumer spending, the Clinton Administration’s proposed federal income tax hikes and the still-depressed outlook for Europe and Japan, Zacks says.

The broad market may also be taking its cue from smaller companies, which often are most sensitive to the health of the domestic economy. So far, reported first-quarter earnings for smaller firms “haven’t been all that great,” says a disappointed Claudia Mott, small-stock analyst at Prudential Securities in New York.

Of the small firms that Mott follows, 23% of the first-quarter earnings reported so far have been below expectations, 20% have beat their targets and the rest have met expectations.

While the 23%-underachievers figure might seem small, it’s still significant, Mott says: The last time small-company earnings disappointments exceeded positive surprises was the first quarter of last year.

There may, in fact, be a message here--which is that the market this spring is looking much like a rerun of last spring.

Last year, the NASDAQ composite index of smaller stocks peaked in midwinter, then fell into a deep slump that didn’t end until late June. Meanwhile, the blue chip Dow industrials continued to surge into April and May of last year before tumbling in June.

So far this year, the NASDAQ index is off 7% from its midwinter peak, while the Dow hit a new high last Friday. “It’s deja vu all over again,” says Peter Schliemann, manager of the Babson Enterprise small-stock fund in Boston.

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But the big question is whether this is just a temporary 10% to 15% pullback in the market--like last year’s--or the start of a bona fide bear market that will hack 20% to 25% or more off stock prices, and last longer than most investors can stand.

Schliemann isn’t ready to throw in the towel. While he hears “a lot of people around me who do feel that this bull market is on its last leg,” he chooses to view the decline in the NASDAQ market like last year’s: as a gift, because it’s cheapening stocks that he wants to buy. “I have as many companies on my ‘attractive’ list now as I’ve had at any point,” he says.

But to commit a lot of money to stocks today, Schliemann concedes, you either have to be a true long-term investor or see some major event on the horizon that will propel the market higher in the second half of the year. Two possible events, of course, are a stronger economy or another worldwide drop in interest rates. The odds of either are still reasonable--but certainly not worth a bet-the-ranch move into stocks.

Dividend Restored: Pacific Enterprises, parent of Southern California Gas Co., said Tuesday that it will begin paying a $1.20-a-share annual dividend on its stock--a 4.9% yield at the current price. The first 30-cent quarterly dividend will be declared after the completion this spring of Pacific’s sale of 7 million new common shares, the firm said.

Pacific omitted its dividend last year because of major losses incurred in divesting failed forays into retailing and oil and gas exploration. The new stock sale will complete Pacific’s financial recovery by providing cash to retire remaining debt from divested businesses, the firm said. The new $1.20 annual dividend is in the range Wall Street expected. Pacific’s stock slipped 37.5 cents to $24.375 Tuesday on the NYSE.

Profit Takers’ Delights These stocks, which had led the market through March, have recently been slammed by profit takers--even though the companies’ underlying earnings trend still looks good.

1993 Tues. Pct. Stock high close drop Coast Savings 18 7/8 14 1/8 -25% Intel 121 1/4 101 -17% Dayton-Hudson 85 74 -13% Chase Manhattan 38 33 -13% Cisco Systems 48 1/4 41 3/4 -13% NationsBank 58 52 3/8 -10% Cabletron Sys. 93 83 7/8 -10% J.C. Penney 90 1/8 81 7/8 -9% BankAmerica 55 1/2 50 1/4 -9% Chrysler 44 40 1/4 -9% NASDAQ comp. 708.85 661.97 -7% S&P; 500 456.33 445.11 -2%

All trade on NYSE except Intel and Cisco (NASDAQ).