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MARKET > Commentary Wednesday, June 06, 2001
by: PJ Mitchell
Research Analyst

Stocks Crumple Under Weight of Warnings

The Sun (NASDAQ:SUNW +0.59) tried to shine on the market this morning, climbing $1.06 to $18.08 in pre-open trading. Analyst Laura Conigliaro at Goldman Sachs said that a recent meeting with management leads her to believe the worst is over for Sun Microsystems. Her recent checks with a large U.S. distributor suggested that U.S. business was stabilizing with a slightly positive up tick. Sun shares managed to hang on to some of those gains today, adding 3.5% to $17.61.

But news deteriorated during the day. Apparently, inventory levels at Intel Corporation (NASDAQ:INTC +0.09) may not be as lean as investors think, according to Analyst Joe Osha at Merrill Lynch. He believes that it will be "tough" for the company to hit even the low end of the $6.2 billion to $6.8 billion revenue range set by Intel. Watch for Intel's mid-quarter update after the close of trading tomorrow.

Hewlett-Packard (NYSE:HWP -1.34) and J.P. Morgan Chase (NYSE:JPM -1.66) gave cautious outlooks, i.e., warnings, which by all accounts ended four-day winning streaks for the Dow Jones Industrial Average and Nasdaq Composite. The two companies together are responsible for roughly 20% of the Dow's loss. The Dow stumbled 105.6 points, or 0.9%, to 11,070. Of course, with Hewlett-Packard being a computer maker, the tech-heavy Nasdaq Composite could not shrug it off. The Nasdaq dropped 15.9 points, or 0.7%, to 2,218 while the Standard & Poor's 500 Index shed 1.1%. Trading volume was decent, although a touch less than yesterday, at 1.06 billion on the NYSE and at 1.77 billion on the Nasdaq Stock Market. Market internals were quite negative, with decliners outpacing advancers by 19 to 12 on the NYSE and by 22 to 16 on the Nasdaq. At least new 52-week prices highs beat new lows by 173 to 20 on the NYSE and 124 to 30 on the Nasdaq.

A positive pre-announcement from Citrix Systems (NASDAQ:CTXS +4.25) kept the lone software sector out of the red today (GSO, up 1%). Before the bell, the company said it expects financial results for the 2Q to be better than previously forecast due to "modest acceleration" in the growth of its core business. Shares gained a more-than-modest 18% to $27.96. Other winners in the software group included small-caps such as Talx Corporation (NASDSAQ:TALX +1.85), up 4.8% to $40.33, Verity Inc. (NASDAQ:VRTY +1.02), up 5.7% to $19.05, Watchguard Tech (NASDAQ:WGRD +0.64), up 10.5% to $6.74, Seachange International (NASDAQ:SEAC +1.15), up 5.8% to $20.86, Red Hat Inc. (NASDAQ:RHAT + 1.49), to 5.6% to $28.24, and Lightbridge (NASDAQ:LTBG +1.71), up 10% to $18.71. Some bigger-name winners included I2 Technologies (NASDAQ:ITWO + 0.66), adding 3% to $22.96, Check Point Software (NASDAQ:CHKP +1.40), up 2.9% to $49.19, and Siebel Systems (NASDAQ:SEBL +1.82), up 3.7% to $51.15.

A.G. Edwards Inc. (NYSE:AGE +2.58) declined to comment specifically on rumors that it might be a takeover candidate, but said today that they "continue to believe that it's in the best interests of our shareholders, clients and employees that we remain independent." Just last month, Chief Executive Robert Bagby told Barron's newspaper that the company's goal was to stay independent. The stock price rose to an intraday high of $47.25, up $3.14, as the April takeover rumor was revived. Day traders did not mind at all, as options activity picked up nicely. The stock ended up 5.9% to $46.69, on volume of 2.5 million shares, more than five times the normal trading volume.

After the Bell

One of the small-cap software sector winners today, Carreker Corporation (NASDAQ:CANI +0.87), reported net income of $1.3 million, or 6 cents per share compared with earnings of $1.5 million, or 8 cents per share, in the similar period a year earlier. That earnings per share number matched expectations the company outlined in May, but missed the consensus estimate of 9 cents per share. Revenue rose to $25.4 million from $22.1 million a year earlier. The company increased its 2001 revenue target to $175 million, with earnings per share of 95 cents, to take into account its Check Solutions acquisition. For fiscal 2002, the company sees revenue of $245 million and earnings per share of $1.33. Shares are trading up to $14.88 after hours. That is a 32% rally from the close.

Has anyone else made this mistake? Wells Fargo (NYSE:WFC -0.93) will take a 2Q one-time charge of $1.13 billion, or 65 cents per share, to write down bad investments, particularly in the telecommunications and technology industries. The write-downs have been primarily in the venture capital portfolio and concern public and private companies. Still, the company's recent returns on their venture capital and equity investments were significantly above historical averages.

How is it looking for the retailers? American Eagle Outfitters (NASDAQ:AEOS +0.22) reported that comparable store sales for May increased 0.2% above the same month last year. Total sales increased 30 % to $80.7 million compared with $62.1 million. Nordstrom's (NYSE:JWN -0.09) May same-store sales fell 2.2% compared to last year. Total preliminary sales increased 3.6% to $43.9 million. Hot Topic (NASDAQ:HOTT +1.82) reported May comparable store sales up 1.5% compared with May of 2000. Total sales increased 35% to $19.3 million from $14.3 million, with sales increasing each week during the month. The company's inventory is on plan heading into the summer selling season. Hot Topic sells teen-oriented clothing in the malls, by the way.

Looking Ahead

Economic reports for tomorrow include wholesale inventories, consumer spending data, and the weekly unemployment claims. Bear, Stearns and Company expects an increase of 11,000 in initial jobless claims to 430,000, partly based on the traditional seasonal adjustment in the days just after Memorial Day.

The CBOE Market Volatility Index (VIX) picked up about a point to 22.4, while the Nasdaq Market Volatility Index (VXN) added less than a half point to 54.3. Both numbers still indicate complacency in the marketplace. I have never seen such neutral closing ticks (+9 on the NYSE and -8 on the NASDAQ Stock Market) and hence, no guidance for tomorrow's open. The late-day downtrend in major indices could be used as your guide for tomorrow's open. The near term all depends on earnings warnings, and whether or not the market decides that any bad news items are already priced into a given stock or sector. Be extra nimble, and even quicker, in your trades. Best of luck to you.

PJ Mitchell
Research Analyst


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