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Buy-and-hold strategy questioned

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With many blue chip stocks suffering, analysts worry about their prospects


By Miriam Hill / Philadelphia Inquirer


PHILADELPHIA – This year, the stock market's tried-and-true names tried but couldn't stay true to their history of delivering surefire returns.

Blue chip name after blue chip name – Procter & Gamble, Microsoft, Wal-Mart – have swooned in 2000, calling into question the idea of whether investors can buy certain stocks and hold them forever.

That was the idea a few years ago: Names such as P&G and Home Depot would never let you down. But with many blue chips off 30 percent or more, investors have questioned the futures of these stocks, along with the premise that you can buy and forget.

"You can put your eggs in one basket, but you have to watch that basket very closely," said Alfred Goldman, market strategist for A.G. Edwards & Sons Inc. in St. Louis.

Investors grew too comfortable in the bull market, he said. They forgot that stocks can become unreasonably priced. Then, on just a whiff of bad news, stock prices tumble.

Like every unhappy family, every unhappy stock is unhappy for a different reason.

Here are some of the best-known blue chips, their reasons for decline, and their prospects, according to investment experts.

•Microsoft Corp.

A host of problems have weighed on this stock: the government's antitrust lawsuit, the cost of employee options, the rise of competitors and a variety of companies that sell Linux, an operating system that competes with Microsoft Windows.

But the biggest issue for the Redmond, Wash., software maker is how rapidly the computer industry is changing. Microsoft's profits still depend heavily on people and businesses buying personal computers loaded with its software. Increasingly, though, software is being sold via the Internet. Also, people are using cell phones, pagers and televisions in ways they once used computers.

Patrick Dorsey, chief stock analyst for Chicago researcher Morningstar Inc., thinks Microsoft has gotten incredibly cheap.

"This is probably not a company where you're going to see a 30 percent pop in the next six months," Mr. Dorsey said. "But at $53 per share, it's getting pretty close to no-brainer territory. They are really trying to reinvent the company." Microsoft shares closed at $68.25 Friday.

•Dell Computer Corp.

This company's story is similar to Microsoft's. Chief executive officer Michael Dell made young executives everywhere jealous when he became a billionaire in his 30s.

But now that personal computer sales are slowing from 30 percent yearly growth to about 15 percent, can Dell keep raking it in?

"It's a good speculative stock," Mr. Goldman said. "They've got some near-term earnings problems, and the stock will bounce a little bit. If I had it, I would hold it." Dell closed at $32.56 Friday.

•Home Depot Inc.

This is one of the few down-and-out blue chips that strikes near-universal agreement among many experts. They like it at these prices, which was $41.50 Friday.

When the company announced Oct. 12 that its third-quarter earnings would be about 28 cents per share instead of 31 cents, the market hammered Home Depot. The shares fell 29 percent in a single day. And that was on top of a 22 percent drop for the year.

"For a company of that magnitude to suffer that kind of erosion is amazing," said Marvin Roffman, president of the Philadelphia investment company that bears his name.

Home Depot had been trading at about 60 times its earnings last spring. But now, at about 25 times earnings, shares in the home-improvement store chain look more reasonable, several experts said. And growth prospects remain strong. "I love to buy everything on sale," Mr. Roffman said. "And this stock is down 50 percent from its high."

•Wal-Mart Stores Inc.

After strong sales pushed this stock 70 percent higher in 1999, management's announcements of slower growth kicked it right back down to $47.38 Friday.

It is not easy delivering growth when you are the world's largest retailer, but Wal-Mart is telling investors that its long-term prospects remain strong.

The company said it expected to add about 40 U.S. discount stores and 170 to 180 supercenters – which feature grocery, food and beverage products as well as general merchandise – by February 2002.

That should help Wal-Mart stay on top, Mr. Dorsey said.


•AT&T Corp.

This stock isn't ringing investors' bells these days. Chief executive Michael Armstrong is coping with falling prices in the company's bread-and-butter business, long-distance calls, even as he tries to recreate Ma Bell as a modern telecom business.

"The company is facing more challenges reinventing itself than people thought it would," Mr. Dorsey said. "It's just sort of been muddling along." It closed at $22.31 Friday.

•Procter & Gamble Co.

This was the ultimate defensive stock. People bought it because they believed that, if the market went south, P&G would remain strong. After all, people always need Tide, Crest and Pampers.

But the company's earnings disappointed investors repeatedly over the last two years. In June, chief executive officer Durk Jager was replaced by Alan G. Lafley following news that the company's third-quarter earnings would fall short of estimates. And the stock closed at $68.25 Friday.


Many analysts think P&G will have a hard time returning to its glory days. Competition makes it hard for the company to raise prices, for one thing.


Distributed by Knight Ridder Newspapers


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