Joe,
This is from WSJ. Thought interesting to read. I sold sunw
after doubling last week. Now wish I held them for longer...
July 28, 1997
Price Targets Escalate
In a Booming Market
By SUZANNE MCGEE
Staff Reporter of THE WALL STREET JOURNAL
Have investors forgotten how to pull the trigger?
As stock prices march steadily higher, money
managers seem increasingly reluctant to take
their profits off the table, even though shares may
long since have broken through price targets. And
research analysts aren't exempt from this
phenomenon: They themselves concede that it
takes a greater will to downgrade a stock or
refrain from boosting price targets.
"This is Wall Street, where seldom is heard a
discouraging word," says Robert Farrell, senior
investment advisor at Merrill Lynch & Co. "When
the market is in a long advance, investors start
acting differently, upping their price targets and
trying not to get in the way of the momentum."
What's clear is that the environment is
encouraging for stock investors. Interest rates
continue to fall even as corporate earnings and
the economy continue to grow with nary a sign of
inflation.
"The stock market is going up for all the right
reasons, reflecting a very strong economic
picture, a good inflation outlook and profitable
fundamentals," says Mickey Levy, chief economist
at Nationsbank. "What's not to like?"
Even Federal Reserve Chairman Alan Greenspan
appears to have climbed on the stock-market
bandwagon, however reluctantly. Not once in his
testimony before Congress last week did he voice
any concern or urge caution about highflying stock
prices. Although emphasizing the Fed would act
promptly to combat inflation, he told lawmakers
that the economy's recent performance had been
"exceptional."
"When you have the Fed chairman telling you that
everything looks good, however baffled he is,
what more can anyone ask for?" says Ned
Collins, head of U.S. stock trading at Daiwa
Securities in New York. "Maybe this is a bubble,
and maybe it will burst, but bubbles can last a long
time."
Certainly, few investors or analysts are willing to
be publicly bearish amid such a bullish scenario.
"There's a lot of what I call 'fear-of-regret' thinking
going on," says Fred Taylor, chief investment
officer at U.S. Trust. "That's the fear that if I sell the
stock when it hits $10, and it goes to $12 and then
$15, I'm going to be very, very, very regretful."
Portfolio managers are quick to acknowledge that
their discipline has been challenged, if not
eroded, by the stock market's relentless climb.
Once, it was an unbroken rule that stocks were
sold as they approached their price targets.
Today, it sometimes takes a reminder from a
chief investment officer before a price target is
set. Once reached, usually much more quickly
than anticipated, the target is simply raised,
sometimes several times.
Barbara Marcin, senior equity-portfolio manager
at Citibank Global Asset Management, says she
and her fellow fund managers stopped
automatically selling stocks that had hit their price
targets last summer. Today, most have their
targets raised at least once.
"We've had to make mental adjustments to the
way we look at prices and valuations in order to
hold onto good stocks," she says. "Anyone who
owns anything today, who doesn't want to end up
completely uninvested, has to take a much more
flexible, relative approach to prices and valuations
than they did a year or two ago."
Ms. Marcin says Citibank managers now try to
look at how expensive the stock is compared with
its peers, or to the Standard & Poor's 500-stock
index, the benchmark against which most
institutional investors are measured.
"If everything good that we thought would happen
has happened, and it looks fairly valued relative to
the rest of the market, we'll sell it," she says.
That's what happened to Citibank's stake in
Advanta Corp., which was sold when the stock hit
$34 a share. (It closed Friday at $35.125 a
share.) But she has hung on to her stock in
Lehman Brothers Holdings even after it broke
through her original target of $42 a share,
because she believes the company can improve
its returns to shareholders. That goal was revised
upward to $60 a share; the stock closed Friday at
$49.8125 a share, up $1.875.
A similar trend is evident at the research
departments of major Wall Street firms.
Strategists and economists are boosting their
forecasts for total corporate earnings and for
market indexes. And while it has never been easy
for individual stock analysts to issue a "sell"
recommendation, these days they gripe it has
become almost impossible even to issue a
downgrade.
"The market has had a tendency to bail people
out when they've been overoptimistic, but not
when they've been pessimistic," says Kevin
McCaffery, deputy head of research at Smith
Barney Inc. "And you risk the frustration of money
managers who need to have their cash invested
and hate being told something is less attractive
than it used to be."
Faye Landes, Smith Barney's apparel and
footwear analyst, discovered that investor
frustration firsthand last spring, when she
downgraded Nike to a "neutral" from
"outperform." Peppered with skeptical questions
about her call, she stuck to her guns and less than
two months later Nike warned of disappointing
earnings, sending the stock skidding lower.
There are some investors bucking the trend.
Robert Freedman, chief investment officer at the
John Hancock Funds, says he tries to ensure that
his portfolio managers have a target price in mind
when they buy a stock, and stock positions aren't
left to expand indefinitely.
Ron Stribley, who oversees the management of
$2.5 billion in stocks at Freedom Capital
Management Corp. in Boston, doggedly sticks to
his quantitative approach to investments. In his
strategy, stocks are sold automatically when they
fall below certain relative valuation measures. (Mr.
Stribley, who joined Freedom last month, beat the
S&P for five consecutive years during his tenure
as a portfolio manager at Glenmede Trust in
Philadelphia.) The 43 John Hancock U.S. stock
funds posted an average return of 21.72%, while
the S&P returned 28.83% in the three-year period
ended June 30. "Sure, the stock I sell may do
even better than the stock I buy, so once it's sold I
don't pay attention any more," Mr. Stribley says. "I
try not to fall in love with a piece of paper. That
way lies disaster."
Merrill's Mr. Farrell acknowledges that being a
contrarian hasn't worked very well in the past few
years. Pointing out that cyclical stocks, such as
home-building companies and heavy-equipment
makers, are beginning to attract new investment
dollars, he adds that this kind of new breadth to
the market is likely to reinforce investors'
conviction that stock prices usually only go up.
"People who've sold have gotten beat up by
watching the stuff they sold go higher; and now
they're less likely to second-guess big gains," Mr.
Farrell says. "Ironically, that probably means that
it's time to question how long that momentum can
continue. I don't want to join the guys raising their
estimates right now."
Friday's Market Activity
Stocks ended Friday's thinly traded session with
modest losses, the first all week. It was also the
first time during the week the Dow Jones Industrial
Average failed to set a record.
The Dow
Jones
Industrial
Average slid
3.49 points
to 8113.44,
leaving the
blue-chip
index with a
gain for the
week of
222.98
points, or
2.8%.
General Motors fell 1 1/2 to 57 7/8 . A strike at
one of its transmission plants has forced the auto
maker to stop production at five car-assembly
plants, idling 18,000 workers, and threatening to
hobble much of the company's production.
Silicon Graphics posted a fiscal fourth-quarter
profit that exceeded analysts' projections by 65%,
and said it anticipates "mid-teens" percentage
revenue growth in fiscal 1998. Several brokerage
firms raised their ratings on the firm, which saw its
stock climb 2 1/16 to 25 5/16.
Gateway 2000's stock fell 2 11/16 to 40 1/2,
although second-quarter profit met analysts'
expectations; analysts said that Gateway lowered
its inventory turnover in the second quarter,
compared with year-earlier levels.
Centex surged 4 9/16 to 51 13/16. Smith Barney
raised its rating on the home builder and
mortgage provider and boosted 1998 earnings
projections after the company posted
better-than-expected earnings Thursday.
Columbia/HCA Healthcare dropped 5/16 to 35
15/16. The beleaguered health-care provider said
its top executives, Chairman and Chief Executive
Richard L. Scott and President David T.
Vandewater, resigned amid a federal
investigation of the company's Medicare billing
practices and home health-care operations.
Quaker Oats continued its winning streak, rising 1
7/8 to 49, as Donaldson, Lufkin & Jenrette
Securities raised its rating on the food company
and increased its 1997 and 1998 earnings
projections. Quaker Oats Thursday reported
stronger-than-expected second-quarter results.
The Standard & Poor's 500-stock index
relinquished 1.51 points of its recent gains,
retreating to 938.79 but leaving it with a gain of
23.49 points, or 2.6%, for the week. The Nasdaq
Composite Index bucked the trend Friday, rising
0.45 to 1569.58 for a weekly gain of 21.63, or
1.4%, while the Russell 2000 small-stock index
rose 0.35 to 408.54. On the New York Stock
Exchange, 1,399 stocks advanced, 1,379
declined, while volume reached 519.6 million
shares.
The bullish sentiment created by Federal Reserve
Chairman Alan Greenspan's Congressional
testimony spilled over from the bond market into
stocks, and was bolstered through the week by
the release of unexpectedly strong second-quarter
corporate earnings. When the flow of earnings
news slowed Friday, so did the buying, although
the falloff in new stock purchases didn't trigger a
bout of profit-taking.
regards,
BPP |
