Barrons:
February 15, 1999
As Enthusiasm Ebbs, Stocks End the Week on a Sour Note
By ANDREW BARY
Vital Signs
Stocks endured another tumultuous week, ending with a sharp selloff. The
culprit for Friday's fizzle was Dell Computer. Investors suddenly started to
worry that this technology bellwether will soon experience setbacks at the
hands of its rivals in the personal-computer business.
After the dust settled Friday afternoon, both the Dow Jones Industrial
Average and the Standard & Poor's 500 Index finished the week with modest
losses, but the technology-heavy Nasdaq looked far more battered, having
dropped 2.2% on the week, to close at 2321.
Sentiment on the technology stocks last week swung widely from one day to
the next. The Nasdaq plunged 94 points Tuesday in its third-largest point loss
ever, then rallied 96 points Thursday in its biggest point gain in history. On
Friday, it plunged 83 points, or 3.5%. Dell led the charge downward, falling
12 points to 89 7/8 on heavy volume of 66 million shares.
The action in the Dow Industrials and S&P 500 Index was more subdued.
The Dow lost 88 points Friday to close at 9274, off 30 points, or 0.3%, on
the week. The S&P 500 dropped 0.7% in the five sessions to 1230, and now
is virtually unchanged so far in 1999. The Dow has risen 1% in 1999, while
the Nasdaq is ahead by 5.6% because of its huge January gain.
Elsewhere, the situation is worse. The Russell 2000 index, the small-stock
benchmark, fell 3.4% last week and now is down 5.6% for the year. Many
thought small stocks would finally shine in 1999 after five years of trailing their
larger brethren, but they continue to disappoint. Mid-sized companies are
faring even worse, as evidenced by the S&P 400 Mid-Cap index, down 8%
in 1999.
Reflecting weakness
in the bond market,
the Dow Jones Utility
Average also has
fared poorly. It fell
2.4% last week and is
off 8.3% this year.
Many electric
companies have
dropped 12% to 14%
in 1999, including
Southern Co., which
fell 1 1/8 to 24 7/8
last week, leaving it
just above its
52-week low. The
Dow Transports, hurt
by losses in the airline
and trucking stocks,
dropped over 4% last
week and now have
lost 1.6% in 1999.
Energy stocks have
had a lousy 1999,
too. Food stocks
generally are lower, as
are most cyclical
issues.
All this suggests that
the market's strength
continues to be
concentrated in the
largest companies.
Warning signals have
been sounded by a
variety of technical
indicators, including
the number of
advancing stocks
relative to declining
stocks, and the ratio
of stocks hitting new
highs to those hitting
new lows. During
Thursday's sharp rally,
for instance, there
were five times as
many new 52-week
lows set on the Big
Board as new highs.
"I don't see a lot of upside to the market," says Charles Pradilla, strategist at
SG Cowen. "What troubles me is that we already had a huge move in the
fourth quarter. I also feel that price-to-earnings ratios can't get much higher,
given the rise in rates."
Indeed, the bond market suffered a sharp setback Friday as the yield on the
benchmark 30-year Treasury rose to 5.42%, its highest level in nearly six
months. Federal Reserve policymakers left key short-term rates unchanged
last week. But interest-rate futures markets now are suggesting a 30% chance
of a Fed rate increase by June. As recently as late January, the markets were
anticipating a rate cut. The fear in the bond market is simply that the U.S.
economy will continue to barrel along and that Asian economies will rebound.
Part of the weakness in the bond market stemmed from rumored heavy short
sales by some large hedge funds, which also are said to be shorting S&P 500
futures in a bet against stocks.
The Dell debacle Friday wasn't spurred by any momentous announcement by
the company. What happened was that an analyst at BancBoston Robertson
Stephens, Daniel Niles, put out a note saying that Dell had a "soft" finish to its
latest quarter, which ended January 31. The result, Niles predicted, was that
Dell's revenues would total $5.2 billion for the three months, below his original
expectation of $5.5 billion.
Niles left his fourth-quarter profit estimate unchanged at 31 cents, but his
concerns about "intensified" competitive pressure in the personal-computer
market jolted Dell's stock. Dell has risen ninefold in the past few years, not
because it makes demonstrably better PCs than Compaq Computer or IBM,
but because of its highly successful direct sales approach. But with Compaq,
IBM and Hewlett-Packard now gunning for Dell and seeking to emulate its
selling style, Dell's edge may be dulling.
Dell stock is vulnerable to any evidence of an eroding competitive edge
because of its high multiple. Before its drop Friday, Dell was trading at 100
times estimated profits in its just-concluded fiscal year and at 72 times
projected 1999 earnings. For the week, Dell was off 11 1/2 to 89 7/8, but
it's still up 22% in 1999. The Dell drama should resume Tuesday when the
company is due to report its quarterly results.
The Internet stocks got a cold shower last week when Lycos, the portal
company, reached a complex merger agreement with Barry Diller's USA
Networks that left 'Net fans unhappy.
The Internet stocks have inhabited a charmed world in which their valuations
were based on huge multiples of revenues, and not on their minimal or
nonexistent profits. But when 'Net companies combine with firms like USA
Networks that are valued based primarily on cash flow, an admittedly crude
measure of earnings, investors are no longer willing to value the combined
entities using just revenues.
Lycos fell 37 1/2 to 99 1/2 . Its boosters believe the company is worth $165,
or almost 40 times projected 1999 revenues. The Lycos/USA Networks
merger may not occur because of reservations about the deal expressed by
Lycos' largest shareholder, CMGI. Yahoo was off 21 3/4 to 151, and
Amazon.com dropped 11 3/8 to 104 1/2 .
Mary Meeker, Morgan Stanley Dean Witter's influential Internet analyst,
wrote last week that the stocks "should take a rest here, and a 25%-ish
correction could be healthy." She added that she remains bullish long-term on
the sector but that "only a handful of companies" will excel. Her favorites
include Amazon, eBay and Yahoo. She warned that many of the recent
Internet IPOs amount to "public venture capital," meaning the companies
aren't far along in developing their businesses. Yet the development-stage
aspect of these new 'Net firms hasn't dampened investor interest in their IPOs.
If anything, it seems to have heightened the frenzy.
The Trader, Part 2
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