Read this my friends! ; )
America On-Line (AOL)
Message 7034144
Modano : )
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To: sakura (346 )
From: bob Wednesday, Dec 30 1998 2:40PM ET
Reply # of 348
AOL BULLS MUST READ
See highlighted section and kiss the ground.
Analysts Say AOL Shareholders Shouldn't Worry About S&P Inclusion
Dow Jones Online News, Wednesday, December 30, 1998 at 13:54
By Carrie Lee, The Wall Street Journal Interactive Edition
NEW YORK -(Dow Jones)- Some online investors fear that America Online
Inc.'s induction into the Standard & Poor's 500 this week will quash the
stock's highflying returns. That's what happens to the average S&P
newcomer. But AOL - the first Internet stock to join the index - isn't
an average stock.
The fretting emerged on message boards soon after news broke last
week that AOL (AOL) was selected to join the index. "I am long AOL, but
am not ... much excited about [it] being added to the S&P index. I don't
want AOL to behave like [an] S&P fund. I want it to have its own course
of action," wrote one investor on the Silicon Investor
(www.techstocks.com) Web site.
Concerns like this aren't unfounded. According to Merrill Lynch &
Co., stocks placed into the S&P 500 in 1998 gained an average of 3.7%
from the day after their inclusion was announced through the day they
entered the index. But afterwards, they steadily lost ground, and fell
an average of 8.5% just 30 days following their inclusion in the index.
Over the long term, the stocks generally become less volatile, analysts
say.
That action is related, in large part, to the activities of
investment funds - such as index mutual funds - that are designed to
mimic the S&P's performance. This so-called index effect is created when
fund managers buy shares to add the new index components to their
portfolios. Later, the stocks retreat as other investors, who also made
purchases to capitalize on this well-documented index effect, sell to
lock in any gains they've won.
But so far, AOL hasn't followed the typical trend.
For one thing, it has been a much bigger gainer than the typical S&P
500 newcomer. The stock was trading at $122.875 on Dec. 22, just before
S&P, a unit of McGraw-Hill Cos. (MHP), announced plans to add AOL to the
index. It immediately jumped 12%, to $138, on the news, and it has
continued to rally, closing Tuesday at $154 on the New York Stock
Exchange. It was trading around $143.563 on Wednesday.
Not all of the gains are attributable to the index effect. Much of
the recent gains have come amid investors' wild enthusiasm for all
Internet-related stocks. For weeks, Net stocks have skyrocketed as
investors embraced signs that holiday sales at online retailers have
been stronger than expected.
Another big pop - tied to the index effect - may still be in the
offing, just before the stock is added to the index, after the close of
trading on Thursday. "The big action is going to happen on Thursday at
market close. At that point, we're going to see significant trade
imbalances on buying," says Diane Garnick, an equity derivatives
strategist for Merrill Lynch. "Any individuals who want to buy will need
to buy prior to the 31st."
Garnick estimates that a total of about 21 million AOL shares, or
close to 5% of shares outstanding, will be purchased by S&P 500 index
fund managers and individuals. That number will be offset by four
million shares, which will be sold because AOL is leaving the S&P 400
MidCap Index. Some funds are designed to mimic the MidCap index, but the
total value of those funds is far smaller than the value of S&P 500
funds.
Meanwhile, analysts don't expect AOL to suffer much from the selling
that hits many stocks in the aftermath of their addition to the S&P 500.
Analysts believe AOL shares will continue to move in step with
investors' sentiment about Internet stocks, a force that they believe
will be much stronger than the typical index-effect selling.
"The volatility surrounding AOL has swamped the S&P effect," says Gus
Sauter, managing director at Vanguard Group, who runs the Valley Forge,
Pa., firm's equity-index funds. "It will go wherever Internet stocks
go."
"The stock will continue to trade in the patterns, which we've seen
over the past few months," says George Rodriguez, a senior vice
president at Guzman & Co., a Miami trading firm that follows S&P
additions and deletions. Rodriguez says the S&P 500 inclusion will
affect AOL's share price, but says "that's a short-term impact, what's
affecting it more is the appetite investors seem to have for
Internet-related companies."
Arlene Rockefeller, a principal at State Street Global Advisors, a
big index fund manager that is a unit of State Street Corp. (STT), the
Boston bank, says some stocks become less volatile over time once they
are placed in the S&P. But she doesn't think AOL will necessarily follow
that trend, noting that other technology highfliers haven't. "Some of
the ones added in the recent past - 3Com, Ascend, Cabletron and Cisco -
are still relatively volatile. Microsoft has had a tremendous increase."
Garnick, of Merrill Lynch, believes that AOL shares will lose some
value after this week. But she says, "It's very important to note that
being included in the S&P 500, nothing fundamental changes about the
company. The biggest change is that index fund managers have to hold the stock. The people who are attracted to AOL will still be attracted to AOL, they are just gaining an additional investor base."
- Carrie Lee; 201-938-5099
Copyright (c) 1998 Dow Jones & Company, Inc.
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