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Pennsylvania Investment Observer

Baby and the Bath Water

by Daniel J. Nestlerode

August 16, 2004

We are nearing the end of this downturn in stock prices. Of course, it is axiomatically true since the start of the decline was some time ago and we are now nearer the end of the decline than we were before. I am presuming that stock prices will rise again, because in my long experience (five decades) stocks (as measured by the stock market averages) have always recovered and gone on to new high prices. Be cautioned that not all stocks go on to new higher prices. General Motors hit an all time high in 1964 at $128 a share. It has never seen this price since then. Bethlehem Steel, one of the former Dow Jones Industrial Average stocks hit its hit price years ago and now the company no longer exists. As a matter of fact, only one stock is still in the Dow Jones Industrial Average that was in the average when it was started back in the late eighteen hundreds. And the answer is (drum roll please) General Electric. And even GE was kicked out the average for a while and later reinstated.

The private sector of the economy is a dynamic affair. Companies are formed, rise, mature and fall from grace. The steel companies have already made most of the round trip. The American automobile industry is clearly in its sunset years. The worldwide automobile industry is very healthy and led at the current time by none other than Toyota. In the current energy crunch, they are selling their hybrid Prius as fast as they can get them out of the door. Meanwhile, General Motors snickered, until very recently, about Toyota’s hybrid efforts. AT & T is on its way to oblivion. Its old and antiquated long-lines network can no longer effectively compete against the newer fiber optic systems. After disastrous forays into cable television, local phone service and cellular phone service, AT&T is a mere shadow of its former self and has been removed from the Dow Jones Industrial Average. So, no investor should hang on to their stocks in a market downturn believing that everything will get better when the market turns. A rising tide does lift all boats, except those with holes in their bottoms.

Now we seem to be reaching the climax of selling in stocks. Even Cisco, one of the premier growth technology companies was pummeled last Wednesday because it was essentially cautious in its outlook for the next two quarters after reporting record sales and earnings. Other great companies such as National Semiconductor, Intel, Dell, International Rectifier and IBM are dropping in price. Clearly the market doesn’t like tech stocks today and hasn’t liked them for some months now. The market is starting to throw out the baby with the bath water. While this activity can go on for a while, it often marks the end of the decline in stock prices. One stock, which I will not name, sells for less than the net cash the company has on hand per share. In this instance, if you could buy control of the company, you could profit immediately by closing the company and taking the cash. Sale of the plant property and equipment would net a larger profit. In this instance, competitors are starting to circle looking to buy the company. This goes under the heading of really cheap.

I’ll go out on a limb and forecast that stock prices will firm by the end of the third quarter and will actually raise in the fourth quarter enough to give us positive returns for the year. Of course, anything can happen, including devastating terrorist activity and serious mistakes by nuclear powers Iran and North Korea. But I believe we’ll get past these possibilities and sail into 2005 without serious problems, with lower oil prices and higher stock prices. Tape this article up on your refrigerator and call me in January. We’ll see if I was right or wrong.

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