Some Things Just Can't Be Explained--but We Try Anyway

Rowland Schaefer, chief executive of Pembroke Pines, Fla.-based retailer Claire's Stores Inc., did something last week that newspaper companies everywhere can only hope is the start of a trend.

Schaefer bought a quarter-page ad in the Wall Street Journal to say, in essence, that he didn't know why his stock has sunk.

"As you all know," a frustrated Schaefer wrote in an open letter to shareholders, "Claire's Stores shares have suffered a dramatic decline in value during the past two months. . . . We don't know the thinking of the institutions and individuals who have sold Claire's stock during that eight-week period."

Claire's, a retailer of jewelry and accessories for girls and young women, has seen its stock price slide by about a third since mid-September, from $26.625 to about $17 now on the New York Stock Exchange, even though, at least so far as Schaefer is concerned, there has been no change in the business' healthy outlook.

There are, in fact, plenty of stocks that have had much steeper declines this year. Which should cause a ringing in the ears of newspaper ad salespeople everywhere--as in the sound of cash registers ringing. Imagine if other distressed CEOs could be convinced that they, too, need to buy ad space to profess that they don't know why their stocks have done whatever they've done in the short run.

Schaefer should have just saved his company some money. Some market moves have obvious catalysts. Case in point: Friday's wild ride in the wake of Federal Reserve Board Chairman Alan Greenspan's cautionary comments about market speculation.

But often, trying to explain short-term moves in stocks, or even in the market overall, often amounts to trying to explain the unexplainable. There can be a million good reasons why a stock has suddenly declined--or none at all.

Financial journalists and Wall Street analysts, of course, regularly attempt to explain the unexplainable, but that's an occupational hazard in those jobs.

Take last Tuesday's 80-point drop in the Dow Jones industrials, the worst one-day point drop since July. What triggered it?

The Wall Street Journal cited rumors that an unnamed large investment fund was dumping stock index futures in Chicago, a fast way to cash in stock market profits; your Los Angeles Times said a suddenly weaker dollar riled the market; and the New York Times alleged that investors were unnerved by General Motors' report of relatively weak November car sales.


Who had it right? Maybe all of us, maybe none of us. But we have to say something, even though we know it's likely to be a gross simplification of what was behind the collective decision-making by millions of investors on any given day.

For individual stocks like Claire's, as opposed to the market overall, there certainly can be days when a move in the share price is rooted in a specific piece of news.

On Thursday, Irvine-based Oakley Inc., the hip sunglasses designer whose stock traded as high as $27.125 earlier in the year, saw the price crash 24%, to $11.625, after the company conceded that a major retail customer was canceling orders. Not much mystery about why investors dumped Oakley. Lower orders mean lower earnings.

But what about Claire's and so many other smaller "growth" stocks whose earnings prospects supposedly haven't changed in recent months, yet whose share prices have dwindled?

In Claire's case, Schaefer himself might have contributed to the downtrend, though he didn't say so in his letter: He and other insiders in early fall sold some of their stock holdings, a move that always makes investors nervous, even if the insiders are just cashing in a relatively small amount of wealth.

Probably more significant, though, is that at least until the last week or so, many investors have been focused on blue-chip stocks that are perceived to be safer bets compared with more volatile smaller stocks. That attitude was in part a response to lingering nervousness after the abrupt July market pullback.

In that kind of environment, smaller stocks like Claire's can become victims of technically inspired trading games totally unrelated to what's happening with their businesses.

There are, for example, the "price momentum" players, institutional and individual investors who only buy stocks that are rising rapidly.

(Remember Will Rogers' line about how to make money in stocks? "Don't gamble. Take all your savings and buy some good stock and hold it till it goes up. Then sell it. If it don't go up, don't buy it.")

If a stock stalls for too long on the charts, the momentum players get antsy and bail out because they assume the market is telling them something--even though the only message may be that there are no more momentum players left to buy for the time being.

As they jump ship, the momentum players' selling feeds on itself, driving the stock lower and causing true investors to wonder if something is seriously wrong with the company. (Claire's Stores' Schaefer, in his letter, assured shareholders that "there is nothing like that," meaning a business problem. "We have nothing to hide.")


Some institutional investors also periodically make broad-brush choices to be in, or out of, certain industry sectors. If the decision is to exit a segment of the retail industry, for whatever reason, an investor may dump stocks in that sector regardless of their individual prospects. The decision may simply be that the food industry, for example, is more attractive in the near term than the retail industry--so retail shares are jettisoned in favor of food shares.

Particularly in the case of stocks traded on the electronic Nasdaq market, there are games that brokerages can play with the bid and asked quotes that can produce wild swings in prices for no apparent reason. It's actually too bad every Nasdaq stock owner can't spend a day sitting next to a Nasdaq trader. You'd learn plenty about psychological warfare, cat-and-mouse games, bluffing, etc.

How much of this arguably technical trading has buffeted Claire's stock in recent months? Nobody can know for sure. CEO Schaefer surely doesn't, or he wouldn't have bought the ad.

Rather than wax frustrated at the vagaries of the market, Schaefer and Claire's long-term shareholders ought to realize that they might have been given a gift: If Claire's earnings prospects are as good as Schaefer implies, every decline in the share price brings the stock that much closer to being undervalued, in a market where there's not a lot of that going on.

In the long run, stock prices follow earnings--that's irrefutable. But in the short run, stock prices can sometimes make no sense at all.


Oh, Claire

How Claire's Stores shares have zoomed and tumbled this year on the New York Stock Exchange. Closes every other week and latests: Friday: 17.25

Source: Bloomberg Business News

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