BUSINESSWEEK ONLINE : OCTOBER 16, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY No Mercy in This Market Stocks that disappoint get walloped Investors who thought they'd seen the worst of Wall Street this year have been ill-prepared for this quarter's brutality. In the last few weeks, dozens of companies--including Intel ( INTC), Apple ( AAPL), Kodak ( EK), Alcoa ( AA), Gillette ( G), and the Gap ( GPS)--have issued warnings about problems with third-quarter earnings. What's taken market watchers by surprise is the speed and the depth that these companies' stocks have plunged as a result. Indeed, some shares have simply been bombed. Apple Computer Inc. lost 52% of its value in one day after warning it would scale back future earnings estimates by one third (page 58). Eastman Kodak Co.'s stock dropped 25% when it announced a surprise 15% drop in profits. And Oracle Corp. ( ORCL) fell 13% on Oct. 3 and 4 on an analyst's fears that sales problems might be ahead. ''What's amazing is how severely the market is punishing anything that's not in line with expectations,'' says SG Cowen Securities Corp. market strategist Charles Pradilla. Indeed, such swift retribution has sent the market swooning: Since Sept. 1, the Nasdaq index has slid 16.7%, while the Standard & Poor's 500-stock is off 5.6%. What's behind it all? A key issue is the worsening economy. In the past, companies that missed their quarterly earnings estimates tended not to be chastised so severely because the economy was soaring, interest rates were low, and executives could often convince investors that they could quickly recover. In May, 1997, Intel Corp. said weak demand in Europe would cut profits by 15%. Its stock sank just 7%, and quickly bounced back. But this quarter's earnings warnings are coming against a much worse backdrop. The world economy is slowing, and U.S. interest rates are high. Investors who had been willing to pay a premium for rapid growth now doubt that any company signaling weakness will be able to get back on track. This time, when Intel announced on Sept. 21 that profits would fall short by just 7%, its stock shed 22% and has yet to recover. MISSING FLOOR. Meanwhile, companies that were slow growers but still held some investor interest, such as Gillette and Kodak, now may have several more quarters of disappointing results. They've been sold off even more severely. ''The problem is that there are questions about the long-term growth prospects of many of these big companies,'' says John Laupheimer, director of research at MFS Investment Management in Boston. So what happened to the floor under many sold-off stocks? Value investors who might have stepped in to prop up some of these beaten down shares are still facing high prices for many tech names. Despite the sharp decline in the Nasdaq index this year, the average price-earnings multiple of the top 100 Nasdaq stocks is still 56 times estimated 2000 earnings. While down sharply from its peak in March of 86, it's still well ahead of the 24 p-e ratio for S&P 500 stocks. Consequently, investors have been steering clear of Nasdaq and the bigger names, erstwhile stars of the S&P 500, and moving instead into cheaper sectors with more stable growth prospects, including energy and health care. ''A lot of mid-size companies are growing revenues much faster now than some of the jumbo caps, and any chink [mid-caps] have has less of an impact on the top line,'' says Mark Baribeau, a large-cap manager at Loomis, Sayles & Co. in Boston. Through Oct. 3, the S&P 400 Midcap index is already up 19.2%. Wall Street insiders cite others factors behind the selling. Timothy M. Ghrisky, senior portfolio manager at Dreyfus Corp., says newly-enacted Securities & Exchange Commission regulations that limit what companies can disclose to the public has stymied them from detailing their problems. ''Companies aren't giving out much information, and it's creating a heightened level of uncertainty,'' Ghrisky says. Goldman, Sachs market strategist Abby Joseph Cohen says another factor is at work: tax-fueled trading by mutual funds. Fund managers are trying to balance the year's tax gains and losses by the end of October, so some managers are selling losers to offset gains, she says. Bulls such as Cohen argue that the worst of the earnings preview season is behind us. That may be true. Still, any stock that has even a whiff of bad news is likely to be a disaster. By Geoffrey Smith in Boston _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS No Mercy in This Market CHART: Investors Are Running Scared INTERACT E-Mail to Business Week Online

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