For companies in harsh times, it is survival of the fittest

Investors go conservative, seek the big and sturdy, strong balance sheets

Dollars & Sense

October 14, 2001|By Steven Syre and Charles Stein | Steven Syre and Charles Stein,BOSTON GLOBE

Charles Darwin would recognize what is going on right away. In the harsh economic environment that has developed, the weak of the corporate world are dying off while the strong are surviving and even thriving.

Since the Sept. 11 disaster, a series of troubled companies have decided to throw in the towel. Midway Airlines, already operating in bankruptcy, shut down for good the day after the attacks. Shortly afterward, Las Vegas' Aladdin casino filed for bankruptcy. Reliance Insurance and Mademoiselle magazine said they would go out of business. All were in bad shape before the tragedy. All concluded that they could not make it.

But the news has not been all bad. Wal-Mart Stores Inc., the nation's largest retailer, has announced plans to open as many as 325 stores and enlarge another 115, despite the fact that the retail climate is bleak. And Dell Computer Co., the leader in the personal computer industry, told Wall Street it would meet lowered earnings estimates for the current quarter as it takes market share away from weaker rivals. One of those weaker rivals, Gateway Inc., said it would record a larger-than-expected loss.

"It's a classic flight to quality," said John Spooner, a money manager with Salomon Smith Barney in Boston. Hard economic times always favor big, established players, those with the wherewithal to stay in business even when business is rotten. The best of the breed use the rough patches to buy up rivals, widen their lead over the pack and position themselves for the next expansion.

The question for investors is: How do you play this trend? Do you buy blue-chip companies, figuring they will prosper in the coming months? Or do you venture further on the risk spectrum, taking a chance on less-than-stellar companies whose prospects are less certain?

Chuck Clough has seen his share of recessions. The president of Clough Capital Management in Boston was on Wall Street during the difficult years of the 1970s and the early 1980s. He has seen companies fail. He expects to see plenty more fail over the next nine months. He points out that during the boom days of the late 1990s corporations took on mountains of debt. When the economy turned down last year, that debt became a crushing burden, leading to a major drop in corporate profits.

"There is your dynamic for failure," Clough said.

The companies with strong balance sheets will do fine, according to Clough. And if they do need to borrow money, they will be able to take advantage of some of the lowest interest rates in 30 years.

Hard times give rise to a general conservatism that also favors the big and sturdy. "Customers want the security of dealing with a company that they know will be there," said Marc Klee, manager of the John Hancock Technology fund. Especially in the technology world, customers want to know that the vendor will be around to provide service in the future.

Bob Atkins says that conservatism is putting a damper on innovation, another trend that favors the establishment. "Big companies aren't the first ones out with the hottest technology," said Atkins, an executive with Mercer Management Consulting in Lexington.

So what is an investor to do? Naturally there is a difference of opinion among money managers, but most seem to believe this is a time to go with the names you know. "Whenever you are in a tumultuous down market and traumatic times, the best thing to do is upgrade your portfolio," said Thomas O'Neill, managing director at Navigator Asset Management in Boston. Blue-chip names that may typically be too expensive become available at reasonable prices, O'Neill said.

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