Buying after the dust settles

Herb Greenberg

April 19, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

If you're not a long-term investor, markets like these can drive you crazy. Over 3,000 one day, under 3,000 the next. Market timing has always been a dangerous sport, and the last year has proven that it can be deadly (just ask the people who have been bearish for the past four months). What makes this environment even more disconcerting is what happens if corporate earnings collapse later in the year, in which case reality will clash with fantasy, causing gravity to take over.

Based on fundamentals, "I'd find it hard to buy almost anything," says money-manager Alan Lafer of Lafer Equity Investors in New York.

But, for active traders like Lafer, markets like these create unusual opportunities, regardless of fundamentals. Lafer's strategy has been to "wait until the dust settles" to buy quality big-cap stocks that have been clobbered by 15 percent in a single day after reporting bad news. Buying them when they're down by that much assumes that "either these stocks are terribly mispriced or the stock market is terribly mispriced," Lafer says.

When MCI took a hit in December on bad earnings news, Lafer loaded up at 18 and sold the stock a month later at 25. Ditto for Hercules Inc., whose stock plunged 19 percent after a Titan missile exploded at its plant. Lafer's bet is that the explosion won't hurt Hercules' bid to remain part of the Titan missile program and that the stock will rebound by mid-May.

As you might expect, he's taking a close look at Apple Computer, which dropped 13 percent the other day after reporting disappointing earnings. But the air is still too dusty for him to make his move.

FROM THE BEAR CAVE: If you have a tendency to get caught up in the euphoria of market milestones, keep in mind that the higher the Dow goes, the louder the bears will growl. Who knows whether they'll be right! But they can't be casually dismissed, since their evidence has at some time or another been proven right.

Take corporate-insider trading. Insider buying last year proved a strong bullish indicator. But now, the trend is toward insider selling, with insider sales exceeding buying by a ratio of more than 2.2 to 1 in the past four weeks. Such a high ratio is generally regarded as a strongly bearish signal.

"Our best guess," says longtime bear Charles LaLoggia of the Special Situations Report, "is that corporate insiders do not share Wall Street's optimism for corporate earnings, and they're using the market's misguided optimism to reduce their exposure."

SHORT POSITIONS: Forbes columnist Ken Fisher of Fisher Investments in Woodside, Calif., a champion of small stocks, shared the podium the other night with noted short-seller Tom Barton of Feshbach Brothers, the country's largest short-sellers, who are down by more than 40 percent so far this year.

Fisher, who correctly called the turn in small-stock prices late last year, argued that "most stocks in America are very cheap," and that stocks are merely on the first leg of a prolonged bull market. Barton, as you might expect, didn't agree. "The ones that they'll juice the most," he said referring to the way many small stocks are soaring, "are the ones they should juice the least."

Short-sellers borrow shares, then immediately sell them in hopes of purchasing them back later at a lower price for a profit.

DANCING WITH DEBT: Big last few weeks for Kohlberg Kravis Roberts & Co., the leveraged-buyout firm. Demand last week for newly offered shares in Safeway and RJR Nabisco was so strong that the underwriters boosted the number of shares issued. The week before, a Memphis, Tenn., auto-parts maker, AutoZone, went public at 23 and now trades in the 30s. While Safeway and RJR are the best-known of the three, KKR insiders are telling friends that the big winner could be AutoZone. So much for the public's concern over too much debt.

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