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In ’93 Stock Market, Accidents Will Happen

August 1, 1993

NEW YORK (AP) _ Now that the stock market is becoming part of the high-tech ″information superhighway″ of the 1990s, it seems more prone than ever to potholes.

While the Dow Jones industrial average has been setting record highs of late, numerous individual stocks have been hit by dramatic selloffs that can unnerve even the staunchest optimist.

The casualties include such long-time standouts as Philip Morris and Apple Computer, as well as dozens of other lesser lights that have taken sudden tumbles on disappointing news.

Philip Morris trades these days in the mid- to upper 40s, down from as much as 86 5/8 last year after an April nosedive prompted by news of a profit squeeze in the U.S. cigarette market.

Apple Computer has been selling lately around 27, having lost half its market value in just the past two months as the company’s earnings outlook deteriorated.

More recently, all the leading steel stocks came into the line of fire, falling 10 percent to 20 percent in a single session last Tuesday when a government agency struck down some protective tariffs.

″Technically, one of the most troublesome aspects of the market has been the way stocks have responded to news,″ said Stephen Shobin, an analyst at Shearson Lehman Brothers Inc. ″Good news, and the stock might be rewarded with a two-day-old corsage. Bad news, and goodbye knees.″

″The high-expectation stocks are proving major casualties,″ added Michael Metz at Oppenheimer & Co.

″Where high hopes prove justified, stocks don’t provide much upside, since such results have already been discounted. Where disappointments occur, the punishment to ego and to capital is traumatic.

″Obviously, if this correctly characterizes the overall market, the risk- reward ratio is not favorable.″

Neither is the impact on investors’ mood. ″The extreme reactions of individual issues to any disappointment are affecting market psychology,″ say analysts at Standard & Poor’s Corp. in their advisory publication The Outlook. ″A single loser can wipe out gains earned on a number of issues.

″The dumping of stocks that fail to meet expectations is a reflection of the impatience of institutions scurrying to outperform yardsticks, such as the S&P 500, that remain remarkably flat.

″It also may be due to the skittishness of novices who realize that they have taken on more risk than they bargained for with equities.″

In addition, many observers say, the problem appears to be a natural outgrowth of the institutionalization of the market and advances in communications that allow for split-second responses by investors when news of any sort breaks.

On top of all that, large numbers of mutual funds and other pools of money are heavily invested today in growth stocks at price-earnings multiples that don’t leave much room for error.

When anything happens to disrupt confidence about such a company’s growth prospects, the stock in question can quickly receive a painful reappraisal by money managers, none of whom wishes to be the last one out the door.

″We do not take kindly to quarterly earnings disappointments,″ acknowledged Dan Miller, portfolio manager at the $360 million Putnam New Opportunities Fund in Boston.

But Miller said many of the hits taken by stocks these days are indeed overreactions to relatively minor developments, such as the shading of an analyst’s earnings estimate for the next quarter or two.

In those instances, he said, he tries to take advantage of the situation as a buying opportunity.

In the long run, Miller added, the stock of a company that can deliver solid earnings growth will weather all short-term storms.

″That’s the good thing about growth,″ he concluded. ″If we’re buying the right stocks, over time we’ll be rewarded for our patience.″

08-01-93 1456EDT

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