Some Nasdaq Stocks Hurt by Rate Rise
By David Wilson
bloomberg.com
(Commentary)
Princeton, New Jersey, Feb. 23 (Bloomberg) -- The Nasdaq Stock Market
isn't as immune from the effects of higher U.S. interest rates as its performance
this year would suggest.
Sure, the Nasdaq Composite Index has risen 7.7 percent even as the Federal
Reserve's stance on rates contributed to losses in other stock-market
benchmarks. The Fed raised its target rate on overnight bank loans for the
fourth time since June and signaled that more increases are likely.
Look just below the surface, though, and it's easy to see that the shares of
financial companies listed on the Nasdaq are suffering like their
exchange-traded counterparts.
The Nasdaq 100 Financial Index, composed of the 100 largest stocks by
market value, has tumbled about 16 percent this year. The decline outpaced
the 12 percent drop in the S&P Financials Index, which draws 63 of its 71
members from exchanges.
Among the eight industry group indexes in the Nasdaq Composite, the three
worst performers all have ties to the financial industry. The bank index has
suffered the biggest decline, more than 13 percent.
The ``other financials' index, consisting of brokerage firms, investment
companies and savings and loan associations, has dropped more than 12
percent. And the Nasdaq's insurance index has fallen 8.5 percent.
Some Winners
Higher rates make it more expensive for financial companies and their
customers to borrow money, and tend to reduce the value of their investments
in bonds and money-market securities.
As a result, the Nasdaq financial indexes have followed the lead of
benchmarks such as the Dow Jones Industrial Average, down more than 10
percent so far this year, and the Standard & Poor's 500 index, down 8
percent.
The groups' losses have had little effect on the Nasdaq Composite because
they don't account for all that much of the index.Taken together, they
represent about 4 percent of its value; that compares with almost 53 percent
for the Nasdaq Computer Index, by far the biggest part of the composite.
Additionally, rallies among a number of stocks enabled the financial indexes to
avoid even bigger losses. Many of them rose in response to takeover offers,
or a new-found receptiveness to potential bidders. A closer look at the group
indexes shows how rising rates and other influences have affected their
performance.
Nasdaq 100 Financial
Just two stocks account for about one-fifth of the Nasdaq 100 Financial
Index, based on market value: Fifth Third Bancorp Inc., one of the worst
performers this year, and Northern Trust Corp., one of the best.
Fifth Third has fallen 26 percent, and reached their lowest price since October
1998. Only six stocks in the index have lost more than the Cincinnati-based
bank holding company's shares, representing more than 11 percent of its
value. Northern Trust, a Chicago-based bank with a 9 percent weighting, is
one of only 11 stocks in the index to rise this year. It's up 7.3 percent. More
than half of its revenue comes from asset management and administration,
rather than lending.
Silicon Valley Bancshares Inc., the index's best-performing stock, has risen 31
percent. As its name implies, the Santa Clara, California-based bank holding
company targets businesses built on technology, such as Internet and
biotechnology companies.
Pioneer Group Inc. has risen 9.5 percent, good for second place. Earlier this
month, the Boston-based money-management firm said it hired Salomon
Smith Barney and Merrill Lynch & Co. to look at ways to boost its stock
price, including a sale of the company.
Banking Index
Fifth Third has more company at the bottom of the banking index, part of the
Nasdaq Composite, though it's still among the 25 worst performers. The index
consists of about 650 stocks, and three-quarters of them have fallen this year.
SouthTrust Corp., the worst performer in the Nasdaq 100 Financial Index,
ranks as the second worst in the banking index. The Birmingham,
Alabama-based company's shares dropped 36 percent.
Belmont Bancorp, based in Bridgeport, Ohio, trails the pack with a drop of
54 percent. Last month, the bank holding company said it expected to report
a fourth-quarter loss. Belmont Bancorp then said it would sell five million
shares -- doubling the amount of stock outstanding -- at $2 a share in a rights
offering.
Among the top performers, First Commerce Bancshares Inc.'s shares rallied
after Wells Fargo & Co. agreed to buy the company for $35.95 a share in
stock, or about $480 million. The Lincoln, Nebraska-based company's Class
A shares gained 64 percent, and its non-voting Class B shares jumped 75
percent.
Insurance Index
The insurance index is the smallest of the three measures linked to the Nasdaq
Composite -- not only in the size of this year's loss but also in the number of
members, about 75. Fewer than one-third of those stocks are higher; six have
dropped at least 20 percent.
Superior National Insurance Group Inc., a workers' compensation insurer
based in Calabasas, California, has fared worst. It's fallen 34 percent in the
wake of a debt-rating cut late last year by Standard & Poor's, which cited
concern that reserves may be inadequate, among other things.
On the other hand, Cincinnati Financial Corp. has dropped just 1.6 percent.
The Fairfield, Ohio-based property and casualty company is the index's
largest stock by far, as it singlehandedly accounts for more than 20 percent of
its value.
Safeco Corp, whose 11 percent weighting makes it the second most valuable
stock, has lost 16 percent this year. The Seattle- based company's
fourth-quarter earnings dropped 59 percent as losses on its property and
casualty policies widened.
Other FinancialIndex
Losses among the shares of online brokerage companies, which are spending
millions of dollars to fend off competition from each other and from more
established firms such as Merrill Lynch & Co., have weighed on the index.
Two of the biggest brokers, E*Trade Group Inc. and Ameritrade Holdings
Corp., rank among its five most valuable companies. The shares of the Menlo
Park, California, and Omaha, Nebraska-based companies have dropped 22
percent and 30 percent this year, respectively.
So does Knight/Trimark Group Inc., a buyer and seller of stocks on behalf of
online brokers and other firms, as well as portfolio managers. Shares of the
company, based in Jersey City, New Jersey, have fallen 19 percent.
T. Rowe Price Associates Inc., another ``top five' company, has fallen 12
percent even though it's managing more money. The Baltimore-based mutual
fund company's assets under management amounted to $179.9 billion in
December, 22 percent more than a year ago. Then there's Homestore.com
Inc., the highest-ranked stock at 12 percent of the index. Shares of the
Thousand Oaks, California- based company, whose Web site displays more
homes for sale than any other, have gained 4 percent this year.
Higher interest rates have yet to slow sales of new and existing homes, both of
which rose to records last year. If that starts to happen, the effects of rate
increases on Nasdaq stocks are likely to become more pronounced. |
