Is Big Blue a bellwether?

Herb Greenberg

March 22, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

IBM's stock took a drubbing the other day because of disappointing earnings news, and the rest of the market fell in sympathy. That revived talk about IBM being a market bellwether, but isn't that kind of talk getting stale? Calls to a dozen analysts show that most still think of IBM as a bellwether (a leader on both the upside and the downside) until they start talking and realize that, until last October, it had been a laggard. Then, for the first time in years, Big Blue led a market rebound with conviction. Now it appears that rebound, and the market's as well, may have been based on too much optimism.

People would ask their brokers why the market was up, and the response would be: "Big Blue." But the recent disclosure that IBM's earnings won't meet analyst expectations, in part because of the sluggish economy, shows that the rally in IBM "was based on hot air," says Charles LaLoggia of Rochester, N.Y.-based LaLoggia's Special Situations Report.

He doesn't think of IBM as a bellwether in the traditional sense. "It's only a bellwether in the sense that the market doesn't always know what it's doing."

One veteran trader I know notes that on the day the gulf war started IBM rose 6 percent to 115 while the Dow jumped 4 percent to 2,580. Yesterday IBM was at 111 7/8 (after having risen to 140), while the Dow finished at 2,855.45. And, while the Dow was making its steady march to the vicinity of 3,000 for the better part of 1989 and 1990, IBM was actually falling.

Miners need shovels: Biotech stocks have soared in recent weeks, and the consensus is that, despite some rough spots, they're likely to go much higher during the next few years. But there's also considerable risk since, for every Amgen or Genentech, the two biggest biotech hits to date, there are sure to be dozens of others whose products may never make their way to market or wind up with only a small niche.

Another way to catch the industry's updraft, with less risk of getting whipsawed, is to invest in suppliers. "Rather than bet which gold miner will strike it rich, we can bet that some will, and all of them need shovels," says Dan Seiver, a Miami University economics professor who publishes the Oxford, Ohio-based PAD System Report and is the author of the book "Outperforming Wall Street."

The shovel-makers in the biotech industry are the companies that sell equipment and supplies to laboratories. All biotech companies operate labs. The shovel-maker strategy applies to other high-risk, high-growth industries as well, and Seiver used it successfully in the early days of semiconductors.

"I used to own a company that made wafer-steppers for semiconductor-makers, rather than betting directly on a company like Advanced Micro Devices or Intel," he says. "They had to buy wafer-steppers, so I bought a company that made them. When the industry went through an expansion period, the stock exploded." (Don't ask what wafer-steppers are; it's too complicated.)

The risk is that equipment-makers become volatile once the industry becomes cyclical. "In biotech," he says, "you have four or five years more before you have to worry about that, because a number of firms are still growing rapidly."

His favorites among the biotech suppliers are Gaithersburg, Md.-based Life Technologies, Hercules, Calif.-based Bio-Rad Laboratories, and Applied Biosystems, which is based in Foster City, Calif. Like the biotech companies they supply, all Seiver's picks have turned in enormous gains in recent weeks, to the point where most of the stocks are expensive. In fact, Life Technologies is getting to the point where Seiver might sell it.

He wouldn't be surprised if all stocks related to the biotech sector retrench soon under profit-taking, in which case he would buy more. "You take an industry that gets slammed because Wall Street gets mad at it," or because of a widespread market correction, Seiver says, "and that indiscriminate slamming means that good companies will become tremendous bargains."

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