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Technology Stocks : Adaptec (ADPT) -- Ignore unavailable to you. Want to Upgrade?

To: The Philosopher who wrote (2760)	6/24/1998 11:13:00 AM
From: The Philosopher	Read Replies (1) \| Respond to of 5944

The second installment of Michael Brush's article" Spurred on by strength in tech stocks, the markets closed higher once again Tuesday -- extending a rally that has lifted Nasdaq by more than 7 percent since its recent low on June 15. Other broad indexes -- even the small cap Russell 2000 -- have tacked on 3 percent or more since then. Don't let the overall market strength fool you, though. We are still on the cusp of the season in which companies warn about expected profit shortfalls and then release second quarter results. The "confession" season runs through the first week of July, and most earnings will be out by the end of that month. So over the next six weeks, many a hot-shot momentum stock will blow up as bad news hits the tape. A close look at how these disasters play out shows that more often than not, the rush of momentum investors to the doors does not create good buying opportunities. Well more than half of them underperform for at least a year. But not all momentum stocks that get hammered by bad earnings news are destined to stay in the dumps. So any time a stock tanks on this kind of news, you need to look things over carefully before making a move. Above all, you have to consider company-specific matters. But here are some general tips on how to handle bad earnings news. * If you own a stock that momentum investors flee, it may be better to take a hit and get out as soon as the bad earnings news strikes. The price is likely to continue to erode after the first move downward. One thing to check before deciding what to do is the volume. "If a stock sags on light volume, I might wait till the next quarter," says Louis Navellier, of Navellier Securities. "If it goes down on big volume, I take the money and run." * If downward revisions are the reason for weakness in a stock, look at how much the estimates were cut. A cut of 2 percent or 3 percent might be tolerated, while a drop of 10 percent or more in the consensus earnings can be devastating. * Size matters. Big cap stocks tend to bounce back the fastest. Navellier estimates that mid-cap stocks (those with a market cap between $1 billion and $5 billion) can be weak for two to six quarters. Small-cap stocks (below $1 billion in market cap) can take as much as three quarters to two years. * If you are tempted to bottom fish, you may want to wait until the next earnings report to see if the trouble behind a negative earnings surprise or downward revision was an aberration, or a real change in the company's business, notes Claudia Mott of Prudential Securities. Companies that beat expectations after turning in disappointing news are more likely to outperform. * If a stock slips because of news events that do not cause analysts to cut their earnings estimates, don't rush to sell it. A one-time problem that has little impact on operating earnings -- like a lawsuit - may not be such a bad thing. "But if it is anything that stinks, like accounting problems or the fact that they booked orders too fast or did not deliver, this can really hurt," says Navellier. * How a stock behaves after bad earnings news comes out depends a lot on how well the company communicates with Wall Street analysts. Navellier suggests that a comparison of Oracle (NASDAQ: ORCL) and Intel (NASDAQ: INTC) shows why. Oracle failed to give any warning before it announced bad earnings news last December. Since then, Oracle has come in with positive surprises two quarters in a row. The stock has moved up, but it is still well below its highs. "People still don't trust them," Navellier says. Intel, in contrast, has suffered less, even though it has released its fair share of bad news in recent months. This is because it does a good job of keeping Wall Street informed, says Navellier. "It all boils down to how well they communicate, and whether they come across as being credible." The worst performers: stocks that run up on excessive hype before they collapse on bad earnings surprises. * Also important is the extent to which market makers support a stock, and how widely it is covered. Stocks followed by big houses like Merrill Lynch and Salomon Smith Barney will probably bounce back sooner from damaging earnings news. "At the minimum you want good regional coverage from a firm like A.G. Edwards or Piper Jaffray," says Navellier. "If they are all firms you have never heard of, you are probably in trouble."