It’s Head vs. Heart When Stocks Defy Strong Earnings
Sudden weakness in once-leading stocks like Intel Corp. and Ford Motor Co. is raising a tough choice for investors: what to do when your heart tells you to hold a stock but its trading action tells you to sell it?
Intel, for example, Monday reported second-quarter earnings up 160% to $1.30 a share, as the boom in computer chip sales showed no sign of slowing. Moreover, the company was unusually upbeat about growth prospects for the rest of the year, thanks in part to higher than expected shipments of its Pentium chip--the much-heralded next generation of computer brains.
Yet Intel stock slipped 37.5 cents Monday and slid $1.125 on Tuesday to close at $54.50. The current price is 10% below the all-time high of $60.625 reached in March.
Though the stock has recovered from an April dive to $42.75, some analysts have given up on it. The trading action is telling you there’s no possibility of a significant rally in the near term, these analysts say. In the parlance of “technical analysis”--the market discipline of watching a stock’s trading pattern for clues to its next move--Intel has become dead money for now.
How can that be, when the company’s earnings are rocketing? The short answer is, only the market knows for sure. Technical analysts don’t try to divine why the market suddenly turns on a stock. They merely study the share price and trading volume on charts and take note when sellers begin to get the upper hand over buyers. The idea is, don’t just focus on what people say about a stock--watch what they actually do.
In Intel’s case, “this has definitely been a stock that meets a lot of supply (meaning, selling)” when it nears $60, says Ralph Acampora, technical analyst at Prudential Securities in New York.
For whatever reason, a large group of Intel shareholders don’t believe that the firm’s earnings explosion can carry into the next few quarters. Perhaps these owners expect surging computer sales to taper off soon, cutting chip demand. (The computer business, after all, remains subject to ebb-and-flow sales patterns.) Rising competition from Intel wanna-bes, such as Advanced Micro Devices, also may disturb Intel owners.
In any case, many technical analysts believe that Intel stock has peaked for the time being and is more likely to make a big move down before it makes another big move up. The trading action “suggests we’re working on some semblance of a top in the stock,” says Mark Cremonie, analyst at Foxhall Investment Management in Washington.
Similarly, many analysts fear that Ford stock has lost the momentum that carried it through 1992 and into this spring. It peaked at $56.50 on May 4 and has been struggling since.
Ford is a good example of a stock whose technical signs turned negative well before investors began to worry about the fundamentals. Although Ford’s second-quarter earnings report (due later this month) should be its best quarterly showing in three years, analysts have in recent weeks cautioned that Ford is losing sales momentum to General Motors and Chrysler.
Salomon Bros. analyst Jack Kirnan on Monday removed Ford from Salomon’s recommended list, urging investors instead to shift into GM. And in fact, money has unquestionably been moving into GM shares at Ford’s expense since early June.
Ford stock, at $50.625 on Tuesday, is perilously close to falling into a severe downdraft, some analysts now warn. They perceive that risk based partly on the severity of the selling on the stock’s recent bad days, contrasted with the strength of the buying when the stock tries to snap back.
“If Ford breaks $48, I’d sell every share, because the market would be saying something’s wrong,” says technical analyst Stan Weinstein, editor of the Professional Tape Reader in Hollywood, Fla.
But would that advice apply to long-term investors or just short-term traders? If you expect the global economy to improve in 1994, there may be no reason to sell Ford now, many analysts say, because the auto cycle hasn’t played out in full--and therefore, Ford’s earnings haven’t yet peaked. A short-term selloff of Ford within the larger bull-market cycle wouldn’t be unusual; last year, the stock plunged from $48 in June to $35 by October before resuming its rally.
So while technical signs suggest that both Intel and Ford are vulnerable to selloffs, that doesn’t mean they’re finished for the ‘90s--because longer-term expectations for American auto and computer sales remain compelling. As always, the key question Ford and Intel owners must ask is, “Why did I buy this in the first place?”
Shifting Gears
In a classic example of market “rotation”, money has been moving out of Ford Motor Co. stock and into General Motors Corp. over the last few weeks.
Weekly closes except latest
Ford: Tuesday: $50.63
GM: Tuesday: $46.88
