Deflated advice leaves poor investors on their own

By John Cunniff
Saturday July 28, 2001

Six months ago, the sages of Wall Street were advising that things couldn’t get much worse, and investors listened. 

Things got worse. And now the advice itself is as deflated as stock prices. 

After viewing the earnings reports of major corporations last week, nobody is sure where the bottom of the current business slump lies. Even company officers, who should know their own markets, concede their puzzlement. 

Those certified accounting statements don’t always help, either. Often they leave you searching through a maze of exceptions to find meaningful figures. It is hardly praise to say that accounting today is creative. 

The situation leaves investors fishing, hoping for indications that there is a future, but they’re getting little guidance. After many misses, corporate chiefs are demurring about making sales and earnings forecasts. 

Some of the other reliable old signs can’t be depended on either, or are meaningless under the circumstances. How do you calculate the price-earnings ratio of a stock without earnings? How do you assess a company’s value when the market it used to lead has just about evaporated? As a result, a good earnings report these days may be one that beats the consensus forecast by a cent or two – even if it loses money, and loses it big, like Corning, the big fiber optics producer. 

Corning’s shares rose last week immediately after it reported a second-quarter loss of $4.7 billion, equal to $5.13 a share. Rose, but on what guidance? There was no worn path of experience to follow as a guide. Significantly, the company declined to offer excuses that executives once routinely offered about the past, and equally routine promises they once made about the future being brighter, etc. After all the failed forecasts, few investors are now inclined to listen to such promises. Instead, many of them are falling back on the same alibi they conned themselves with six months ago — that share prices of major companies are now so low that they can’t dig themselves lower without an excavator. 

To an extent that may be true. Corning fell to under $15 from more than $113 in the past 52 weeks, but it has had plenty of company. Price collapses have been so common they’ve lost their shock effect. While shares of some of the companies with the worst declines are now above their 52-week lows, the dimensions of their dizzying fall are still similar to those you read about in a history of the Great Depression. 

To illustrate, in the same one-year period as Corning’s, Nortel collapsed to just over $7 from nearly $84, JDS Uniphase fell to a low of $8.50 from more than $136, Lucent sank to $5.04 from a 52-week high of nearly $49, and Priceline shriveled to $1.06 from nearly $30. 

But unlike fragile, poorly conceived dot-coms that sank from sight altogether, these are substantial companies of a sort that few investors – and chief executives and option holders – could ever have imagined suffering such a fate. Wary of advisers, having listened to guidance of corporate officials absurdly off the mark, having seen entire markets shrink, and having little direction from history, investors are fishing. 

John Cunniff is a business analyst for The Associated Press