Defense stocks bully the bears


The shorts are losing their shirts on defense stocks, especially McDonnell Douglas and Northrop -- two companies that have been mentioned recently in this column as being vulnerable to serious financial troubles.

FTC Wartime euphoria has acted like a rocket booster to McDonnell Douglas, which is up more than 20 percent in the past few days; it now trades at about 35. Northrop, meanwhile, has gained about 10 percent since the conflict began, to its current level of about 20.

But short-sellers argue that the war hasn't changed the fundamentals that attracted them to McDonnell Douglas and Northrop in the first place, and many are trying to short more stock.

WARTIME WILLIES: Short-sellers aren't the only ones urging investors to avoid having an Iraq attack stock-buying spree. A number of defense-industry analysts, from mutual funds and brokerage firms, also say investors should think twice before throwing money at the group.

"When people say this will be one of the first wars fought out of inventory, they're not kidding," says Greg McCrickard of T. Rowe Price, the Baltimore-based mutual-fund company. "I've been talking to people in Washington in the past week who say that they're able to fight a war against the Soviet Union for many months without a resupply. And Iraq isn't the Soviet Union.

"My guess is that if someone had been shrewd enough to be throwing money at some of these companies in advance of the war, this would be an ideal time to sell it."

Even the small sub-sub contractors, whose sales and profits are largely dependent on electronics, artillery or other wartime goods, aren't necessarily safe. The stocks of many have moved up in recent days, and Phil Robinson of Seidler Amdec in Los Angeles adds, "My conclusion is that it's a minefield out there. You've got to know what you're picking. . . . My guess is that it's going to cost people money before six months is over."

BROKERAGE BONANZA: The steady stream of reports of layoffs on Wall Street continues -- most recently including such names as Merrill Lynch and Goldman Sachs -- as the brokerage industry remains in the pits. But some smaller firms that didn't get caught up in the 1980s expansion craze are taking advantage of their competitors' crunch.

One of the most aggressive is New York-based Gruntal & Co., which ranks 31st in size in terms of capital and is actively adding to its base of 800 brokers and 33 offices in six states. "People are now available who were never available," says chairman Howard Silverman. He's referring not only to brokers, but to analysts, traders and others who once snubbed the smaller firms in favor of the big-name companies.

Is Silverman crazy to expand when industry profits are down and his own firm only broke even last year? He notes that he sold Gruntal to Home Insurance Group in August 1987 -- two months before the stock market crash -- at a lofty 2.3 times its book value. Today, most securities firms are being valued at a discount to their book value. "Our timing on the sale was terrific," he crows. "Now our timing is on the acquisition side."

SINGLE-DIGIT MIDGET? Back in August, short-seller Joe Feshbach of Palo Alto-based Feshbach Brothers was predicting that L.A. Gear would post a loss in the fourth quarter. At the time, most analysts were still predicting a profit, and the stock was 20. (It had been as high as 50 in May.)

A few days ago, the Los Angeles-based sneaker maker conceded (surprise! surprise!) that it would lose 20 cents to 30 cents a share in the fourth quarter and that it might be in violation of a loan agreement. The stock has since slid about 20 percent -- it now trades at about 10 -- and Feshbach thinks it's going lower.

Says he, "It looks like a single digit midget to me."

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