Perot factor means uncertainty in stocks

Donald Saltz

June 26, 1992|By Donald Saltz

To millions of American voters, Ross Perot is an achiever who represents their best hope for a change in the way the federal government works. To the stock market, however, he represents uncertainty, and that's the principal reason stock prices will, at best, probably drift for months to come. Should Perot remain strong among the electorate, stock prices stand a good chance of declining over coming months, and into next year if he wins the election.

Uncertainty is a major nemesis for stock prices, even more devastating than a recession and weaker corporate earnings. Investors, therefore, should be more cautious than usual, and a way to achieve that is to avoid most stocks that have high price-earnings ratios. In a declining market, those high P-E companies could fall hard.

The foggy outlook created by Perot comes at a time when a lot of businesses are battling to maintain their market shares in an economic climate that remains weak. Excluding the uncertainty about what's going to happen should Perot, or even Gov. Bill Clinton, win the election, the stock market must digest earnings that are under strong pressure and will probably decline for many companies.

Take, for example, the Hechinger Co., based in Landover. The home improvement firm of 115 stores has reduced prices to meet increasing competition from rival chains, doing this at a time when earnings were already lower.

The firm's relatively low share price of 9 is accompanied by a high price-earnings ratio, and both could decline substantially in the uncertain atmosphere created by Perot.

Giant Food, also headquartered in Landover, is another example of a company trying to hold on to its market share in an increasingly competitive food store arena where price cutting and special offers now abound.

The uncertainty of the Perot candidacy could take its toll on Giant as well as on the other companies. Giant's earnings are already weak and may not support the current P-E of 14, or especially a higher one that would occur if earnings continue to drop.

Merry-Go-Round Enterprises of Joppa, a large fashion store chain, is well down in share price, now about 13, and in earnings, thus creating an exceptionally high P-E of 33. The share price has held relatively well considering the reversal of the firm's earnings trend, but the P-E could fall severely -- as the share price would drop -- during a period of uncertainty.

A company does not have to be in retailing to have its share price adversely affected by uncertainty. The Geico Corp. of Chevy Chase, primarily an automobile and home insurer, is selling at an all-time high of about 54, giving it a P-E of 20, dangerously high in an uncertain period.

The Bethesda-based Marriott Corp. has faltered on the profits front for several years, a situation created by overpowering debt and a very sluggish hotel business. Marriott shares, at 17, are selling for a hefty 22 times earnings, more than ample during the company's better days, and excessive now.

Throw in the uncertainly of a strange political year and there could be a tumble.

The Ryland Group, homebuilders headquartered in Columbia, has been going through a difficult time because of the weakness in home sales, especially in its California operations.

Ryland shares sell for 21 times earnings, a precariously high P-E that would be difficult to sustain if uncertainty is the word of the day.

All of these companies not only have rather high price-earnings ratios but their lines of business are under pressure, making it tough for them without outside influences.

Otherwise, the P-E's might be accepted by the investing public even during uncertain times.

Should President Bush emerge as a solid favorite to win the election, the cloud of uncertainty will disappear.

The market loves the status quo.

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