<FONT COLOR="#000000" SIZE=5>As Summer Rally Wanes, Lighten Up on These Stocks: John Dorfman

<FONT COLOR="#000000" SIZE=3>Boston, July 28 (Bloomberg) -- Here are three reasons why you should probably lighten your stockholdings in August.   

According to technical market analyst Stan Weinstein, the summer rally has probably ended. From June 19 to July 17, the Dow Jones Industrial Average advanced 7.2 percent. In the following five trading sessions, it declined 4.3 percent. Meanwhile, Weinstein says, the balance between advancing stocks and declining ones, as well as the balance between new highs and new lows, is in ''horrid shape.'' He says there are many more new lows and declining stocks than you would expect when market averages have been setting records.   

Weinstein could be wrong, as anyone trying to predict the market often is. But I've been following his commentaries for 11 years now, and find them often on the mark.   

Historically, autumn is the stock market's weakest time of year. September is the worst month for stocks, on average, says Ned Davis Research Inc., of Nokomis, Florida. In the average September from 1900 through 1995, the market fell at an annual rate of 12 percent. October has been a small loser over the years, and also the month in which most market crashes have occurred.   

According to most valuation measures, today's stock market ranks with or above the most expensive markets in history: those of 1929, 1962 and 1987. Stocks, as measured by the Standard & Poor's 500 Index, are at about 28 times earnings, six times book value (corporate net worth) and 73 times dividends. Normal levels (the averages over several decades) are about 14 times earnings, 1.6 times book value and 25 times dividends.    

Time to Trim      

Together, I think these points add up to a compelling case for doing some portfolio pruning in August.   

If you have an asset allocation plan -- that is, a planned division of your assets among stocks, bonds, cash and other investment alternatives -- you may be allocating 55 percent, 60 percent, or 70 percent of your portfolio to stocks.  Whatever the allocation, chances are that this year's strong stock market, on top of the runaway bull market of the past three years, has left your actual stock holdings higher than your planned allocation. The coming month, usually a quiet but favorable one for the stock market, would be an excellent time to trim your holdings back to match your original plan.   

In general, I'd suggest lightening up on your stocks that have price/earnings ratios (stock price divided by the past four quarters' per-share earnings) above 30, stocks in companies whose business plans no longer make sense to you or have become unclear, and (for tax reasons) stocks in which you have a loss. Losses can be used to offset gains dollar-for-dollar at tax time.   

Here are a few specific stocks that I'd consider selling in toto, or at least trimming back.    

GE to Lucent      

Among the stocks with the highest market value, I'd consider unloading some shares of General Electric Co., Microsoft Corp., Coca-Cola Co. and Lucent Technologies Inc.   

General Electric recently reported another excellent quarter, but at 34 times recent earnings, I think the stock price amply reflects the company's able management and good results.   

Microsoft is afflicted by investor overconfidence. When it tussles with the Justice Department, people make cracks about how the U.S. government is outmatched. This is dangerous thinking, verging on hubris. At 63 times earnings, 26 times sales and 20 times book value, the stock reflects just about everything good that can happen in the next few years.    

Coke 'The Indefensible'      

Coca-Cola is a few points off its high, but is still up about 25 percent in 1998. Famed investor Warren Buffett is a big owner of Coke, but the stock's valuation calls to mind his name for his corporate plane: ''The Indefensible.'' It sells for 54 times earnings, 27 times book value and 11 times sales, and carries a puny dividend yield of 0.7 percent.   

Lucent, formerly the manufacturing arm of AT&T Corp., didn't make money over the past 12 months. Analysts surveyed by First Call Corp. expect it to earn $1.68 a share in the fiscal year that ends in September. If so, the stock is selling for 56 times fiscal 1998 earnings. The stock has more than doubled in 1998. It would be prudent to take some chips off the table here.   

Among stocks that have soared in 1998, I'd consider jettisoning some of the Internet darlings such as CMG Information Services Inc., Amazon.com Inc., Infoseek Corp., America Online Inc. and Yahoo! Inc. These stocks are up 150 percent to 400 percent this year based on hopes that the Internet will be not only a gee-whiz toy, but also a commercial gold mine. Maybe it will, but a funny thing happens when companies in a promising young industry start to have actual earnings. The stocks, paradoxically, often go down, because investors suddenly start to do nitty-gritty financial analysis instead of building castles in the sky. If you can't bear to part with your Internet stocks, perhaps you might consider selling half, or selling enough to cover your initial cost in the stock.   

Among stocks that have fallen in 1998, and on which you might have tax losses (depending on when you originally bought), I would part with Sunbeam Corp. and Cendant Corp. shares. Both are afflicted with accounting messes that will take a while to straighten out. But (as regular readers of this column know), I would keep my oil service stocks and other energy stocks, even though they continue to get bloodied on a regular basis.  

11:27:28 07/28/1998
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