Sunday, July 4, 2004

What happened to the fireworks?

Mediocre quarter ends as a dud for many local stocks

By John Byczkowski
Enquirer staff writer

The stock market had plenty to celebrate in the second quarter. It simply chose not to.

In the April-June quarter, corporate profits were good and the economy finally began creating jobs - 1.2 million this year through May. Still, market drifted sideways.

Major indexes posted tiny gains. This comes after a first quarter in which stocks started the year hot, then fell back as investors took profits and reinvested in safer stocks.

"It's not a heck of a lot of return for an awful lot of movement we experienced in the first half," said Sam Stovall, chief investment strategist for Standard & Poor's in New York.

This is the kind of fence-sitting quarter it was:

• The Standard & Poor's 500 index rose just 1.3 percent in the second quarter.

• Of 10 industry groups in the index, five were up and five were down.

• The five groups that rose represent 253 stocks, and the five that fell represent 247 stocks.

• The story was only slightly better among Enquirer 80 stocks: 48 stocks rose, 32 fell, but only 42 beat the performance of the S&P 500.

Earnings growth in the second quarter for S&P 500 companies was expected to exceed 20 percent - the third quarter in a row for that level of performance, said Charles Stutenroth, senior portfolio manager for Fort Washington Investment Advisors Inc. in Cincinnati. "That's very abnormal. Earnings growth has been terrific, margins have been great, and companies are making money."

So why aren't stocks rising? Stutenroth sees the flat market as a sign that investors are taking profits by selling the stocks of the companies they made money with last year, and reinvesting into higher-quality companies with steady - if less than breathtaking - earnings growth.

"Stocks had really run high in anticipation of the earnings that we're now enjoying. And there's a natural consolidation that takes place after periods like that," Stutenroth said.

Solid performances in the quarter were turned in by industrial and energy company stocks, while technology stocks fell.

"What that sort of says is investors are looking toward the later part of an economic expansion, and starting to worry a little bit about higher interest rates as to whether it might accelerate an economic slowdown," Stovall said. The Federal Reserve last week raised its key benchmark interest rate one-quarter point on concerns that inflation is creeping back into the U.S. economy.

He said the investors are in the second year of a bull market that began in September 2002. In 10 bull markets since 1942, the second year has always seen growth in stock prices, averaging 12 percent. That's one factors that convinced Stovall stocks will do pretty well overall this year.

It's the third year of a bull market that can be tricky, and he said that's what investors are preparing for.

"There's reason to be slightly optimistic this year," Stovall said. "It's when you start getting into next year, and I think some investors are starting to scratch their head to say, 'Ya know, the second year of this bull market is coming to a close, if I'm going to make some money, I'd better do so now.' "

Among big gainers locally in the third quarter:

• Shares of Newport-based NSS Group Inc. and other makers of tubular steel for the oil and gas industry continue to gain as investors bet that higher energy prices will mean more drilling activity. NS Group stock rose more than 26 percent in the second quarter.

• Sycamore Township-based laser eye surgery provider LCA-Vision's stock continued a strong performance. The company, which operates 37 LasikPlus centers nationwide and another four with partners in Canada and Europe, has been able to raise prices because of its dominance. For the quarter, the stock increased 24 percent.

• The Midland Co. shares burst out of the doldrums in the last two weeks, surging from a long stay in the $26 range to an all-time high of $29.92 on July 1 - up 19 percent in the quarter, and 25 percent for the year. .

• Alderwoods Group Inc., the Cincinnati-based operator of funeral homes, saw its stock jump more than 17 percent in the second quarter. The company continues to benefit from higher cash flow, in part through assets sales. That will mean lower financing costs when it completes a major debt refinancing later this year.

• Milacron Inc. was one of 2003's biggest losers, because of concerns over whether it would complete a major debt refinancing in March. Milacron got its financing, securing $100 million in new equity from two deep-pocketed European investors, and the stock finished the second quarter up 15 percent.

Among the quarter's biggest local underperformers:

• Multi-Color Corp., the label and packaging supplier, was off 26 percent after it reported higher costs from relocating its shrink-sleeve label printing from Las Vegas to its Scottsburg, Ind., plant, higher regulatory costs for compliance with Sarbanes-Oxley and delays in obtaining a large order from a major customer. Earlier this week, the company cut earnings and revenue expectations for the quarter.

• Cheviot Financial Corp., parent of Cheviot Savings Bank, saw its stock fall 20 percent in the quarter. Cheviot went public in January, and CEO Thomas Linneman said he thinks many of those investors may have sold the stock. He also said some investors may believe rising interest rates and a drop in mortgage business may hurt the bank's profits.

• Hebron-based Pomeroy IT Solutions declined 18 percent as investors apparently were leery of the computer sales and service provider's largest acquisition. Pomeroy expects to complete its $44 million purchase of Illinois-based Alternative Resources Corp. in July.

• Downtown-based drug-testing firm Kendle International's stock was down 15 percent for the quarter, but is still up 20 percent for the year.


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