Heard on the Street:
Speculative Fever? Yesterday's
Hotshots
May Leave Investors in the Cold --
Again
----
By E.S. Browning
Staff Reporter of The Wall Street Journal
They're back.
Remember Iomega? Presstek? Amati Communications? They were among the
"story stocks" that soared in the spring of last year, only to come crashing to
earth in the summer.
Now, as the blue chips stumble, some of these once-battered stocks are
showing new signs of life. Investors again are piling into small, fast-growing
stocks or the "aggressive-growth" mutual funds that buy them.
Speculative froth, which had abated, seems to be on the rise again. Consider:
Iomega and Presstek have nearly doubled since early spring. Internet
companies, which had crumbled, are roaring back: Yahoo! has tripled, Excite
and Lycos have quadrupled and Amati Communications has doubled. And a
new breed of highfliers has emerged, with names including Jabil Circuit and
NS Group, both up 1,000% since mid-1996.
Presstek, whose printing technology, according to its fans, still stands on the
verge of big things, now trades at 136 times its earnings for the past 12
months. Iomega, whose data-storage devices still elicit cult-like adoration,
trades at 45 times trailing earnings. So does temporary-employment company
AccuStaff. Zoltek, whose carbon fibers are used in aerospace applications,
trades at 83 times trailing earnings.
"I call them the highfliers that crashed and relifted," says Michael Moe, who
follows fast-growing young stocks for Montgomery Securities in San
Francisco. He has begun to worry that too many stocks are being pushed up
again based not on proven performance but on hopes and dreams. He fears
that, this time as well, things could end badly for some.
"All the ones that are being promoted as `tomorrow stocks' are in the
limelight," he says. "But when investors turn pessimistic and focus on the
glass-half-empty, their stars can turn dark pretty quickly."
Of course, interest in these stocks isn't based entirely on some fantastic future.
Many are posting strong earnings growth because of links to hot businesses,
such as personal computers, oil drilling or the Internet. Iomega's Zip drives,
for example, are being installed in more and more PCs made by most
manufacturers.
And just as in 1995 and 1996, many of these stocks are being hyped in
Internet chat groups or by brokers, who tell individual-investor clients they
have nowhere to go but up. The gambling mentality that helped push such
stocks to nosebleed heights last year is showing signs of a resurgence.
"I get more calls from retail brokers and retail investors than I can shake a
stick at," marvels analyst Kevin Slocum, who follows emerging
communications stocks, including Amati, for SoundView Financial Group in
Stamford, Conn. "This is a real creature of the retail world."
With some notable exceptions, professional investors generally aren't buying
stocks such as Amati right now. Mr. Slocum emphasizes that he nevertheless
rates Amati a buy because he thinks its technology, which speeds home
access to the Internet, is starting to catch on. But, he adds, "There will be a
point in time when investors will step back as they did a year ago, when you
go through these reality-check periods."
The Investment Company Institute, a mutual-fund trade group, reports that
aggressive-growth mutual funds pulled in 14.6% of new mutual-fund money in
July, compared with less than 1% in March. Fund companies say such
aggressive-growth inflows continued in August.
Mr. Moe of Montgomery Securities notes that an index he has developed of
500 growth stocks, mainly small- and medium-size, has gained nearly 46%
since April 25, compared with a 14.5% gain for the Dow Jones Industrial
Average.
Some think it is too soon to worry. "I don't see any signs of any really extreme
excesses," insists L. Keith Mullins, who heads research on fast-growing
stocks at Smith Barney.
In June 1996, sensing a mania, he urged investors to pull back a bit and put
some money into cash, which proved good advice. This year, he says, he isn't
nervous yet. But he adds, "The way you make money is investing not so much
in companies with a story as in companies with good long-term growth
prospects."
So far, things haven't gone as far as they had in mid-1996. According to
Baseline, for example, 587 of the 8,652 stocks it follows, or nearly 7%, have
doubled in value in the past year. In June 1996, almost 9% of Baseline's
7,799 stocks had doubled. Back then, 33 stocks had gained more than 500%
in the past year. Today, it is only 10.
Smith Barney's Mr. Mullins also points out that many of the highfliers this time
do have real products and real earnings, as opposed to expected earnings
from coming products.
Jabil, for example, makes circuit-board assemblies for customers including hot
networking companies such as Cisco Systems and computer makers such as
Hewlett-Packard. Jabil says its stock gained after it shifted more heavily
toward supplying Internet-related companies and posted strong earnings
gains.
NS Group, which makes tubular steel and adhesives, has benefited from a
return to profits after six years of losses, and from its sales to the booming
oil-drilling business.
Iomega got a boost from news last month that the hedge funds of renowned
investor George Soros and of former Fidelity Investments star Jeffrey Vinik
both had built Iomega stakes during the second quarter.
Analyst Daniel Kunstler of J.P Morgan Securities has a buy on Iomega, a
company for which J.P. Morgan has done investment banking work. Almost
all major personal-computer makers now are willing to install Iomega's
Zip-drive data-storage systems. Mr. Kunstler says that 10% of Gateway
computers now are being sold with Zip drives, and that Gateway's unit sales
are growing "to the tune of 25% a year."
He is bullish on the overall PC market. But he acknowledges that, "In the
event of a slowdown in PC sales, it is also going to back up to the component
manufacturers, possibly more brutally than to the PC manufacturers
themselves." That's because the first thing PC makers are likely to do in case
of a slowdown is cut back sharply in component inventories.
For all the worries about a return to aggressive-growth mania, analysts do see
some positives in the rise of the smaller companies. They note that bull
markets typically end with a shift toward defensive, large stocks, which then
fade and touch off a broad market decline. This time, although the big
consumer stocks have faded, the small stocks have moved up instead of
following them down. That suggests to some analysts that the bull market has
room to continue.
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