Risky Stocks Have Brokers Reining in Margin Buys
Palm Inc. is almost too hot to handle at online brokerage DLJDirect. And so are a lot of other stocks in this volatile market.
Palm, maker of the top-selling Palm personal organizer, went public March 1 and promptly joined DLJ’s list of stocks--319 and rising--that the firm thinks are too risky to be purchased with borrowed money.
If customers want to buy these shares, they must use their own cash--not money borrowed from DLJDirect, a unit of Donaldson, Lufkin & Jenrette Inc.
Other brokers have worry lists too. Charles Schwab Corp. joins DLJDirect in considering Palm, VA Linux Systems Inc. and Cobalt Group Inc. too risky for “margin” buying. DLJ’s cash-only list also includes K-Tel International Inc. and Broadcom Corp., while Schwab’s list includes Ariba Inc., which makes software to handle online orders.
Brokers are protecting themselves after a boom in margin trading--that is, buying on credit--that has accompanied stocks’ decade-long rise. The swelling ranks of “non-marginables,” as brokers call these stocks, suggests Wall Street firms see growing risk in the market for Internet and technology shares.
“You want to buy it, you put up all the money in cash,” said David Whitmore, a spokesman for Datek Online Holdings Corp., a Web brokerage that keeps its own list of cash-only stocks.
Brokers have another list of stocks for which investors must keep more than the typical 35% cash as collateral in their accounts. Schwab, for example, requires customers to keep 70% as collateral for Yahoo Inc. and 80% for Priceline.com Inc. These lists have also been growing.
By some measures, borrowing for stock purchases is running at its highest level since 1974, a situation Federal Reserve Chairman Alan Greenspan has warned may prove dangerous for investors and the firms lending to them. This week’s 8% plunge in the Nasdaq composite index before Friday’s recovery underscores the risk.
Many non-marginables, of course, have swung wildly of late.
Palm, spun off by 3Com Corp. at $38 per share, soared as high as $165 on its first day of trading before closing at $95.06. It closed Friday at $44.88.
VA Linux, which zoomed as much as tenfold in its December debut--the hottest ever--has tumbled 81% from its intraday peak.
Given such market swings, online brokerages--whose customers often focus on the tech sector--are probably the most active in cordoning off stocks.
Two years ago, No. 1 online brokerage Schwab earmarked just 25 stocks for cash-only purchases; today, it refuses to lend money to customers buying “hundreds” of stocks, said spokesman Dan Hubbard, declining to elaborate.
Online brokerages, whose appeal to individual investors helped fuel stocks’ rally, have reason to rein in margin trading. If stocks decline, investors may be unable or unwilling to repay their margin loans, and the brokerages would be stuck with slumping stocks worth less than their original loan.
“In this type of market, the potential for overextending yourself through these transactions is very high,” DLJDirect Chief Executive Blake Darcy said.
* HANDSPRING IPO PLAN: Palm’s rival filed to raise $300 million. C2
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Sweaty Palms
Brokerages are increasingly preventing volatile stocks such as Palm Inc., which has fallen 53% from its peak close, from being bought on credit. Daily closes and latest:
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Friday: $44.88
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Source: Bloomberg News
